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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7667
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SANTA FE ENERGY RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2722169
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1616 SOUTH VOSS, SUITE 1000
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 507-5000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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. Yes [X] No [ ]
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. [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 3, 1997 was approximately $1,357,000,000.
Shares of Common Stock outstanding at February 3, 1997 -- 91,068,871.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Items 1 and 2. Business and Properties .................................... 1
General ................................................................... 1
Santa Fe Excluding Monterey ............................................... 2
Reserves .................................................................. 3
Production and Development Activities ..................................... 3
Exploration Activities .................................................... 7
Drilling Activities ....................................................... 10
Producing Wells ........................................................... 10
Domestic Acreage .......................................................... 11
Foreign Acreage ........................................................... 11
Selected Financial and Operating Data ..................................... 12
Santa Fe Energy Trust ..................................................... 14
Monterey Resources, Inc. .................................................. 14
Reserves .................................................................. 15
Development Activities .................................................... 16
Selected Financial and Operating Data ..................................... 18
Santa Fe Consolidated ..................................................... 19
Reserves .................................................................. 20
Drilling Activities ....................................................... 21
Producing Wells ........................................................... 21
Domestic Acreage .......................................................... 22
Foreign Acreage ........................................................... 22
Current Markets for Oil and Gas ........................................... 22
Other Business Matters .................................................... 23
Item 3. Legal Proceedings ................................................. 28
Item 4. Submission of Matters to Vote of Security Holders ................. 28
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ....................................................... 29
Item 6. Selected Financial Data ........................................... 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results Of Operations ....................................... 32
Item 8. Financial Statements and Supplementary Data ....................... 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 42
Item 11. Executive Compensation ........................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................................ 42
Item 13. Certain Relationships and Related Transactions ................... 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ....................................................... 62
Signatures ................................................................ 99
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PART I
CERTAIN DEFINITIONS
As used herein, the following terms have the specific meanings set out:
"Bbl" means barrel. "MBbl" means thousand barrels. "MMBbl" means million
barrels. "Mcf" means thousand cubic feet. "MMcf" means million cubic feet.
"Bcf" means billion cubic feet. "BOE" means barrel of oil equivalent.
"MBOE" means thousand barrels of oil equivalent and "MMBOE" means million
barrels of oil equivalent. Natural gas volumes are converted to barrels of oil
equivalent using the ratio of 6.0 Mcf of natural gas to 1.0 barrel of crude oil.
Unless otherwise indicated, natural gas volumes are stated at the official
temperature and pressure basis of the area in which the reserves are located.
"Replacement cost" refers to a fraction, of which the numerator is equal to
the costs incurred by the Company for property acquisition, exploration and
development and of which the denominator is equal to proved reserve additions
from extensions, discoveries, improved recovery, acquisitions and revisions of
previous estimates. "Improved recovery," "enhanced oil recovery" and "EOR"
include all methods of supplementing natural reservoir forces and energy, or
otherwise increasing ultimate recovery from a reservoir, such as waterfloods,
cyclic steam, steam drive and CO2 (carbon dioxide) injection and fireflood
projects. "Heavy oil" is low gravity, high viscosity crude oil.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
Santa Fe Energy Resources, Inc. ("Santa Fe") is engaged in the
exploration, development and production of crude oil and natural gas in the
continental and offshore United States and in certain international areas. In
September 1996, Santa Fe announced its intention to separate its heavy oil
operations in California (the "Western Division") from its other domestic and
international operations located in the central United States, the Gulf of
Mexico and abroad. The initial phase of the separation was completed by the end
of November 1996 and involved: (i) the contribution of substantially all of the
assets and operations of the Western Division, which include Santa Fe's
interests in the Midway-Sunset, South Belridge, Coalinga and Kern River oil
fields, to Monterey Resources, Inc. ("Monterey"), a newly-formed subsidiary,
and the assumption by Monterey of all the liabilities and obligations associated
with the Western Division, including $245 million of senior indebtedness; and
(ii) the initial public offering of approximately 17% of the common stock of
Monterey.
At December 31, 1996, Santa Fe owned approximately 83% of the Monterey's
outstanding common stock. As the final phase of the separation, Santa Fe intends
to distribute pro rata to its common shareholders all of these shares of
Monterey's common stock by means of a tax-free distribution (the "Proposed Spin
Off"). Santa Fe's final determination to proceed will require approval of the
Proposed Spin Off by Santa Fe's Board of Directors. Such declaration is not
expected to be made until certain conditions, many of which are beyond the
control of Santa Fe, are satisfied, including: (i) receipt by Santa Fe of a
ruling from the Internal Revenue Service as to the tax-free nature of the
Proposed Spin Off; (ii) approval of the Proposed Spin Off by Santa Fe's
shareholders; and (iii) the absence of any future change in market or economic
conditions (including developments in the capital markets) or Santa Fe's or
Monterey's business and financial condition that causes Santa Fe's Board of
Directors to conclude that the Proposed Spin Off is not in the best interests of
Santa Fe's shareholders. It is not anticipated that the Proposed Spin Off will
occur prior to July 1997.
Following the Proposed Spin Off, Santa Fe's domestic activities will be
focused in the Permian Basin in Texas and New Mexico and in the Gulf of Mexico,
and its international operations will be focused primarily in Southeast Asia,
South America and West Africa. Monterey's operations are focused in the San
Joaquin Valley of California. Following is a description of the business and
properties of (i) Santa Fe excluding Monterey; (ii) Monterey; and (iii) Santa Fe
consolidated with Monterey.
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SANTA FE EXCLUDING MONTEREY
After the Proposed Spin Off Santa Fe will have a balanced base of reserves
with significant development potential, an active exploration program in the
Gulf of Mexico and internationally and a capital structure with low leverage.
The company's production will be approximately one-half light oil and one-half
natural gas. Domestically, the Central Division will focus on long-lived
enhanced recovery properties in the Permian Basin of west Texas and light oil
and natural gas properties in southeastern New Mexico. The Gulf Division is
continuing its exploration and development program in the shallow waters of the
Continental Shelf and is expanding into the deeper water "flex trend" where
the company acquired 89,000 net undeveloped acres in 1996. Internationally,
development activities will focus on bringing discoveries in Indonesia and Gabon
on production in 1997 and 1998 as well as continuing development of its
producing fields in Indonesia and Argentina. Exploration activities will focus
on the company's inventory of prospects in Southeast Asia, West Africa and South
America.
At December 31, 1996 worldwide proved oil and gas reserves totalled 124.3
MMBOE (83.1 MMBbls of crude oil and liquids and 247.2 Bcf of natural gas) of
which approximately 77% were domestic and 23% were foreign. Production in 1996
averaged 27.5 MBbls of crude oil and liquids and 163.4 MMcf of natural gas per
day, a 13% increase from 1995, reflecting a 3.0 MBbl per day increase in crude
oil and liquids production and an 18.7 MMcf per day increase in natural gas
production.
Capital expenditures for exploration and development projects totalled
approximately $181 million in 1996 and are expected to be approximately $214
million in 1997. In 1996 approximately 75% of such expenditures were domestic.
In 1997 International Division expenditures will increase to approximately 35%
of the total primarily due to increased development expenditures in Indonesia.
In 1996 the company participated in the drilling of 75 development wells (48
domestic and 27 international) and 33 exploratory wells (24 domestic and 9
international) of which, 19 exploratory wells and 66 development wells were
successfully completed. In 1997 the company expects to participate in 145
development wells (94 domestic and 51 international) and 47 exploratory wells
(37 domestic and 10 international).
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RESERVES
The following tables set forth information regarding changes in the
company's estimates of proved net reserves from January 1, 1994 to December 31,
1996 and the balance of the company's estimated proved developed reserves at
December 31 of each of the years 1993 through 1996.
<TABLE>
<CAPTION>
INCREASES (DECREASES)
-------------------------------------------------------------
BALANCE NET
AT REVISIONS EXTENSIONS, PURCHASES BALANCE
BEGINNING OF DISCOVERIES (SALES) OF AT END
OF PREVIOUS IMPROVED AND MINERALS OF
PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD
--------- --------- -------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1994:
Oil and condensate (MMBbls)...... 64.6 5.3 1.3 5.5 (0.7) (8.9) 67.1
Natural Gas (Bcf)................ 251.2 (5.6) 0.9 36.2 (5.2) (48.5) 229.0
Oil Equivalent (MMBOE)........... 106.4 4.3 1.5 11.5 (1.5) (17.0) 105.2
1995:
Oil and condensate (MMBbls)...... 67.1 8.5 2.4 4.4 6.2 (8.9) 79.7
Natural Gas (Bcf)................ 229.0 1.4 0.2 36.9 18.0 (52.8) 232.7
Oil Equivalent (MMBOE)........... 105.2 8.7 2.5 10.7 9.2 (17.8) 118.5
1996:
Oil and condensate (MMBbls)...... 79.7 5.7 -- 2.2 5.6 (10.1) 83.1
Natural Gas (Bcf)................ 232.7 22.2 -- 41.9 10.2 (59.8) 247.2
Oil Equivalent (MMBOE)........... 118.5 9.4 -- 9.2 7.3 (20.1) 124.3(a)
</TABLE>
DECEMBER 31,
----------------------------------------
1996 1995 1994 1993
------- ------ ------ ------
PROVED DEVELOPED RESERVES (MMBOE).... 103.2 95.0 82.7 83.2
- ------------
(a) At December 31, 1996, 4.3 MMBOE were subject to a 90% net profits interest
held by Santa Fe Energy Trust. See "-- Santa Fe Energy Trust."
Historically, the company has utilized active development and exploration
programs as well as selected acquisitions to replace its reserves depleted by
production. The company has increased its proved reserves (net of production and
sales) by approximately 76% over the five years ended December 31, 1996.
Ryder Scott Company ("Ryder Scott"), a firm of independent petroleum
engineers, prepared the above estimates of the company's total proved reserves
as of December 31, 1993 through 1996.
PRODUCTION AND DEVELOPMENT ACTIVITIES
CENTRAL DIVISION
The Central Division's producing properties consist primarily of long-lived
enhanced recovery properties in the Permian Basin of west Texas and light oil
and natural gas properties in southeastern New Mexico. Central Division
production averaged 15.9 MBbls of crude oil and liquids and 44.1 MMcf of natural
gas per day in 1996, a 13% increase from 1995. During 1996 the Division spent
$49.7 million on development projects and acquisitions. The Division
participated in 41 gross (19.9 net) development wells, 34 (17.1 net) of which
were successful. The acquisition of three enhanced oil recovery properties in
west Texas for $20 million added production of approximately 1.0 MBOE per day.
The company is engaged in development activities primarily through the use
of secondary waterfloods and tertiary CO2 floods on its properties in mature
fields in the Permian Basin of west Texas and the development of producing
properties discovered or acquired by the company. The company has extensive
experience in the use of waterfloods, which involves the injection of water into
a reservoir to drive hydrocarbons into producing wellbores. Following the
waterflood phase, certain fields may continue to produce in response to tertiary
EOR projects, such as the injection of CO2 which
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mixes with the oil and improves the efficiency of the water flood. The Wasson
and Reeves fields are the most significant of the company's enhanced oil
recovery properties.
The company has been active in the Wasson field in the Permian Basin of
west Texas since 1939. The company's interests in this field consist principally
of royalty and working interests in four units, operated by affiliates of Amoco
Corporation, Atlantic Richfield Company and Shell Oil Company, which are
presently under CO2 flood. Most of the expenditures for plant, facilities, wells
and equipment necessary for such tertiary recovery projects have been made. In
addition, while expenditures relating to the purchase of CO2 for the Wasson
field are expected to continue, CO2 can be recycled and, therefore, such
expenditures should decline in the future.
During 1996 the Wasson field accounted for approximately 21% of the
company's crude oil and liquids production. Since initiation of CO2 flooding
operations in 1984, the field's previous production decline has been reversed.
Reservoir engineering studies prepared on behalf of the company indicate
significant additions to proved reserves can be made through additional EOR and
development projects.
The company is the operator and owns a 72% average net revenue interest in
the Reeves field, which is located seven miles east of the Wasson field in west
Texas. The field has been under waterflood since 1965. During 1996, 21 wells
were drilled and 15 wells were worked over as part of a program to infill drill
the unit from 40-acre to 20-acre spacing and enhance current waterflood
operations.After three years, the program has more than doubled the production
rates at the beginning of the project. Based on its success to date, the company
plans to continue the infill drilling and workover program in this field in
1997. During 1996 the Reeves field accounted for approximately 7% of the
company's crude oil and liquids production.
The company continued its development activities in Lea and Eddy Counties
in southeastern New Mexico with a total of 22 gross (8.6 net) development wells
being completed in 1996. At year-end 1996, production from this area averaged
9.7 MBOE per day, a 10% increase from year-end 1995. The Cisco-Canyon project in
Eddy County continues to be the company's most significant project in the area.
At year-end net production from the project was averaging approximately 4.4 MBOE
per day from eleven wells. Development drilling in the East Indian Basin area of
the Cisco-Canyon project added approximately 1.7 MBOE per day to 1996
production. Development drilling will continue in the area in 1997.
Central Division development and acquisition capital expenditures are
expected to total approximately $66 million in 1997. Such expenditures include
the first quarter acquisitions of working interests in certain properties in the
Levelland field in the Permian Basin of west Texas for approximately $31.4
million. Such properties currently produce approximately 1,100 BOE per day, net
to the company.
GULF DIVISION
Gulf Division production in 1996 increased to 98.1 MMcf of natural gas per
day and 3.6 MBbls of crude oil and liquids per day, a 10% increase from 1995.
The increase in production, which reversed a two-year decline, was due primarily
to the Company's successful exploration program in 1995 and 1996, during which
14 of 19 exploratory wells were successful. Gulf Division properties accounted
for 60% of the company's 1996 natural gas production and 50% of the company's
proved natural gas reserves at year-end 1996.
The company's activities in the Gulf of Mexico have historically been
concentrated in the shallow water area (less than 400 feet of water) where the
company has considerable experience in drilling and field operations. The Gulf
Division participates in 51 producing fields on 90 blocks, 11 of which are
company-operated. The company expects seven new fields to commence production in
1997, six of which are company-operated.
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During 1996 the Division spent $41.8 million on development, including $6.8
million on acquisitions. The company participated in the drilling of seven gross
(1.6 net) development wells, six of which were successfully completed. Three of
these wells were producing at year end 1996, including a horizontal completion
that is part of the Main Pass 225 Unit. The Main Pass 225 Unit is currently
producing approximately 10 MMcf of natural gas per day net to the company. The
remaining three wells are scheduled to commence production in 1997 and 1998. In
mid-1996 the company completed platform and pipeline construction and commenced
production from its 100% owned Galveston A-34 project. At year end three wells
were producing approximately 15 MMcf of natural gas and 300 barrels of
condensate per day.
Gulf Division development expenditures are expected to total approximately
$45 million in 1997. The division expects to participate in the drilling of six
development wells in 1997.
INTERNATIONAL DIVISION
International Division production and development operations are currently
focused in Indonesia, Argentina and Gabon. In 1996 the International Division
accounted for 29% of the company's crude oil and liquids and 13% of the
company's natural gas production. The Division's 1996 production comes from the
Salawati Basin and Salawati Island fields in Indonesia and the El Tordillo and
Sierra Chata fields in Argentina. New production will commence from the Mudi and
North Geragai fields in Indonesia in 1997 and from the Makmur field in Indonesia
and the Tchatamba discovery in Gabon in 1998. International Division proved
reserves at year-end 1996 accounted for 29% of the company's crude oil and
liquids reserves and 11% of the company's natural gas reserves. Such reserves do
not include volumes attributable to the Indonesian and Gabon fields which are
expected to begin production in 1997 and 1998.
International Division production averaged 8.0 MBBls of crude oil and
liquids and 21.2 MMcf of natural gas per day in 1996, a 17% increase from 1995.
During 1996 the Division spent $36.5 million on development projects and
acquisitions. In Argentina, the Division spent $12.1 million on ongoing field
enhancements at the El Tordillo and Sierra Chata fields and expansion of the gas
plant at the Sierra Chata field. In addition, the Division paid $7.4 million for
an additional 4% working interest in the El Tordillo field. Indonesian
operations accounted for $12.9 million of development expenditures and in Gabon
development expenditures totalled $3.1 million. During 1996 the Division
participated in 27 gross (5.8 net) development wells, 26 gross (5.6 net) of
which were successful.
INDONESIA. The company is the operator of a joint venture (the "Salawati
Basin Joint Venture") formed in 1970 to explore for and develop hydrocarbon
reserves in the Salawati Basin area of Irian Jaya. At December 31, 1996, the
company held a 33 1/3% participation interest in the Salawati Basin Joint
Venture. The Salawati Basin Joint Venture operates under a production sharing
contract (a "PSC") with the Indonesia state oil agency ("Pertamina"), which
expires in the year 2020. As of December 31, 1996 the contract covered an area
of approximately 235,000 acres. Production occurs from seven oil and three gas
condensate fields. The entitlement of the Salawati Basin Joint Venture under the
PSC averaged approximately 6.5 MBbls per day (approximately 2.2 MBbls per day
net to the company) for the year ended December 31, 1996.
The company is also a participant in a joint venture with Pertamina to
explore the Salawati Island Block of Irian Jaya. The effective date of this
joint venture was April 23, 1990 with a term of 30 years. At December 31, 1996
the company held a 16 2/3% participation interest in the block which covers
approximately 1.1 million acres. The company and Pertamina (with its 50%
interest) jointly operate the contract area under the terms of a Joint Operating
Body (a "JOB"). Sales from the Matoa field began in January of 1993 and in
December 1996 the field produced approximately 6.9 MBbls of oil per day
(approximately 2.0 MBbls per day net to the company) from 25 wells.
In December 1995 on the Tuban block on the island of Java, the company
tested the Mudi No. 5, the fifth successful test of the Tuban Limestone
formation on the Mudi prospect. Pertamina has given preliminary approval of a
plan of development and the company and its partners have begun
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procurement of facilities and construction services. Commercial oil sales are
expected to begin in the third quarter of 1997. The company has conducted a
seismic program to delineate the extent of the field and to further define
similar anomolies in the area. A sixth well was completed in February 1997 and a
seventh well is in progress. Three additional development wells are planned for
1997. The company holds a 12.5% interest and operates the Mudi project under the
terms of a JOB comprised of Pertamina and the company.
The Jabung Block covers nearly two million acres in central Sumatra. The
company holds a 33 1/3% interest and is the operator of the Jabung Block under
the terms of a PSC with Pertamina. In the first quarter of 1995 the company
completed the North Geragai No. 1 discovery well on the Jabung Block in central
Sumatra and to date six additional productive wells have been drilled. In
September 1996 Pertamina approved the plan of development for the North Geragai
field and procurement of facilities and initial construction commenced in
October. Three additional development wells are planned for 1997. Commercial oil
sales from the field are expected to commence in mid-1997.
In August 1995 the Northeast Batara No. 1 exploratory well, located
approximately 25 miles northeast of the North Geragai No. 1, tested 420 barrels
of condensate and 22 MMcf of gas (approximately 55% carbon dioxide) per day from
three intervals. A second well tested 204 barrels of condensate and 12 MMcf of
gas per day. A seismic program is planned to delineate the extent of the field.
In December 1996 the company tested the Makmur No. 1, the third new field
discovery on the Jabung Block, at combined flow rates of 3,915 barrels of oil
and 6.8 MMcf of gas per day from three geologic intervals. Additional seismic
and delineation drilling will be required to determine the extent of the Makmur
reservoir.
The contracts under which the company operates the Salawati Basin Joint
Venture and the Tuban Block entitle the participants to recover all expenditures
related to the operation (the "cost recovery amount") by allocating to the
participants a portion of the crude oil production ("cost oil") sufficient, at
the Indonesia government official crude oil price ("ICP"), to offset the cost
recovery amount. All unrecovered costs in any calendar year are carried forward
to future years. The balance of production after deducting the cost recovery
amount is allocated to Pertamina and the participants (66% is allocated to
Pertamina with respect to the Salawati Basin Joint Venture and 71% is allocated
to Pertamina with respect to the Tuban Block). However, after the first five
years of production 25% of such production allocated to the participants must be
sold into the Indonesian domestic market for $0.20 per barrel.
Under the terms of the contracts under which the company operates the
Salawati Island Block and the Jabung Block, the joint venture participants are
allowed to recover the cost recovery amount, after an initial 20% portion
(approximately 8% to the joint venture participants and 12% to Pertamina) has
been deducted, by allocating to the joint venture participants cost oil
sufficient to offset the cost recovery amount. All unrecovered costs in any
calendar year are carried forward to future years. The balance of production
after allocation of cost oil is allocated approximately 62% to Pertamina and 38%
to the joint venture participants. However, after the first five years of
production 25% of such production allocated to the joint venture participants
must be sold into the Indonesian domestic market for 10% to 15% of ICP.
ARGENTINA. The company acquired an interest in the El Tordillo field in
Chubut Province, Argentina in 1991. At that time, the field was producing
approximately 10,500 gross barrels of oil per day. As of December 31, 1996 the
company and its partners have completed 282 workovers and drilled 30 new wells,
expanded the existing waterflood programs and initiated two new waterflood
pilots, increasing production to approximately 20,800 gross barrels of oil per
day. The company expects to drill 22 development wells and continue the workover
program in 1997 and anticipates the expansion of the existing waterflood
projects.
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The joint venture group is allowed to sell crude oil produced from this
field into the open market. There is a 12% royalty on gross production and the
joint venture is taxed at a 33% rate after deductions for capitalized costs and
expenses. The company holds a 22% working interest in the El Tordillo field.
In April 1993 the company completed the Sierra Chata X-1 as a successful
natural gas and condensate exploratory test in Chihuidos Block, Neuquen
Province, Argentina. Fourteen additional successful wells have been drilled and
the combined deliverability of the fifteen wells is approximately 180 MMcf of
natural gas per day with a carbon dioxide content of approximately 8%. The
company expects to drill two additional development wells in 1997. The company
and its partners have built a gas processing facility and a 40-mile gathering
pipeline which transports production from the field and interconnects with two
main transmission lines owned by a third party that transport gas to Buenos
Aires and other major markets.
Sales of production from the Sierra Chata field commenced in April 1995
under a gas contract with certain "take-or-pay" and "delivery-or-pay"
obligations with MetroGas S.A., a Buenos Aires gas distribution company. Natural
gas produced in excess of the contract requirements is sold on the spot market.
The company has committed to supply gas to the Chilean market via the GasAndes
Pipeline beginning in 1998. To fulfill its commitment under the new contract,
deliveries to Metro Gas will be reduced within the contract terms. Sales from
the field averaged 20.4 MMcf per day net to the company during 1996. There is a
12% royalty and a 1% provincial tax on gross production and the joint venture is
taxed at a 33% rate after deductions for capitalized costs and expenses. The
company has a 19.9% working interest in the Block and is the operator.
During 1997 the Division expects to spend $54.5 million on development
projects. Indonesian operations account for $27.5 million of such expenditures,
primarily on Jabung Block and the Mudi field where production will begin in
1997. In Argentina, the Division expects to spend $13.1 million on the El
Tordillo and Sierra Chata fields. In Gabon, where production is expected to
commence in 1998, development expenditures are expected to total $6.9 million.
During 1997 the Division expects to participate in 51 gross (10 net) development
wells.
EXPLORATION ACTIVITIES
The company drilled 33 gross exploratory wells (13.8 net wells) in 1996 of
which 19 (8.9 net) were successful, and the company plans to participate in the
drilling of 47 gross exploratory wells at a net cost to the company of
approximately $33 million during 1997. The company typically develops its own
prospects, in many cases utilizing 3-D seismic data. A large portion of the
company's undeveloped acreage position has been acquired through federal lease
sales and through entering into concessions with foreign governments. Prior to
drilling more expensive wells, the company generally brings in partner(s) to
share the cost while retaining operatorship. In certain instances, the company
is able to get its partners to pay the company's share of the cost to drill a
well. The company's exploration program is most active in the Gulf of Mexico,
where it recently entered the "flex trend", and certain foreign locations. The
company plans to drill five exploratory wells in the flex trend, the first of
which is scheduled for the second quarter of 1997, and ten exploratory wells in
foreign locations.
DOMESTIC
At year-end 1996, the company held an interest in 245,100 gross undeveloped
acres (124,100 net acres) in the shallow water Continental Shelf area of the
Gulf of Mexico. The company participated in 7 gross (2.9 net) exploratory wells
in the Gulf of Mexico in 1996, including 5 gross (2.4 net) discovery wells, for
an 83% net success rate.
The company's offshore program has been expanded to include prospects in
the flex trend in water depths of 400 to 2,500 feet. This area of the Gulf of
Mexico has only recently had sufficient infrastructure and technology to warrant
the company's entry into the play. The "'flex" area of the Gulf is
underexplored and contains larger prospects and field sizes than are being
drilled in the
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shallower water "shelf" area. The company acquired 89,000 net acres on 14
prospects on 22 blocks in the flex trend in 1996 and intends to participate in
the two lease sales in 1997. Five of the flex trend prospects will be explored
under the terms of an agreement with Reading & Bates Development Co. A drilling
rig is under contract and drilling is expected to commence in the second quarter
of 1997. An affiliate of Reading & Bates will carry out the design, construction
and installation of facilities associated with commercial discoveries on the
five prospects.
In southeastern New Mexico, the company has continued a modest exploratory
program concentrating on multiple Permian and Pennsylvanian aged oil and gas
reservoirs ranging in depth from 1,500 to 16,000 feet. The focus in 1996 was to
drill for deeper, gas bearing objectives which also provide exposure to
shallower Delaware and Bone Springs oil reserves. The company has entered into a
joint venture 3-D seismic exploration program in western Michigan. The focus of
the play is shallow oil and gas reserves in Silurian reefs, a prolific producer
in the state. The company acquired an option covering more than 50,000 acres in
1996 and will begin the seismic and drilling phases of the program in 1997.
INTERNATIONAL
INDONESIA. In 1995 the company signed a new contract for the 956,000 acre
Bangko Block in south Sumatra. During 1996 the company drilled and abandoned two
exploratory wells, the majority of the company's costs of which were paid by its
partners. Additional exploration efforts on the block are being evaluated. The
company is the operator and holds a 35% interest in the Bangko Block.
In December 1996 the company signed a PSC with Pertamina giving the company
the right to explore the Pagatan Block, an area of approximately 2.1 million
acres along the southern coast of the island of Kalimantan. During the
three-year primary term of the contract, the company is obligated to drill at
least one well. The company is the operator and holds a 100 percent interest in
the block. The company is negotiating with potential partners for approximately
50% of its working interest.
COLOMBIA. In June 1996 the company signed a contract granting it the
exploration rights on approximately 425,000 acres in southern Colombia. The
Caprio Block covers an area in the Putumayo Basin, the northern extension of
Ecuador's Oriente Basin. The company is obligated to reprocess 1,500 kilometers
of seismic data within one year and has the option to drill an exploratory well
during the second year of the contract. The company holds a 75% working interest
in the block and is the operator.
ECUADOR. In January 1995 the company signed a contract covering
exploration rights on Oriente Block 11 which is located in the north central
portion of the Oriente Basin in northeast Ecuador. The contract includes an
initial exploration period of four years with optional extensions. Seismic
operations were completed in the first quarter of 1996 and the company drilled
two exploratory wells in the fourth quarter of 1996. One well was plugged and
abandoned and the other well has been temporarily abandoned after testing 500
barrels of oil per day. The company is obligated to drill two additional wells
on the block and plans to drill on other prospects to determine the ultimate
commerciality of the block. The company is the operator and holds a 35% working
interest in the block.
GABON. During 1995 the company participated in the drilling of the
Tchatamba Marine No. 1 on the Kowe permit, offshore Gabon. The well tested 4,545
barrels per day of 46 degree API gravity oil from a 74-foot interval in the
Upper Madiela formation between 6,306 to 6,380 feet. During 1996 additional
seismic surveys were conducted to delineate the Tchatamba structure and further
define other prospects and two successful delineation wells were drilled. An
exploitation permit has been approved by the government and construction of
production facilities is expected to begin in late 1997. During 1997 one
development well and three exploratory wells are expected to be drilled on the
block. The Company holds a 25% working interest in the 614,200-acre permit area.
In August 1996 the company signed a contract to explore the Mondah Bay
Block in Gabon's Atlantic Salt Basin. The contract provides for an initial
exploration period of two years with a three-year optional extension and a
twenty-year production period. The company has committed to drill one well in
mid-1997 and it is expected that all of the company's share of the cost will be
paid by its
8
<PAGE>
partner. The block is located in the northern, unexplored portion of the
Atlantic Salt Basin and covers a combined onshore and offshore area of
approximately 600 square miles. Initial activity will focus on the offshore
portions of the block where water depths are less than 100 feet and prospects
are targeted at drilling depths of less than 5,000 feet. The company holds a 50%
working interest in the block and is the operator.
COTE D'IVOIRE. In October 1996 the company signed an exploration contract
to explore Block CI-24 in the offshore portion of Cote d'Ivoire's Abidjan
margin. The block covers 649,000 acres in predominantly shallow water. Early
exploration activity will focus on the interpretation of a 3-D seismic survey
acquired by Petroci, the national oil company of Cote d'Ivoire. Petroci holds a
10% carried interest in the block and the company holds a 90% of the remaining
working interest and is the operator.
CHINA. In November 1996 the company signed a PSC with the Chinese National
Offshore Oil Company ("CNOOC") with respect to offshore Block 27/11 in the
Pearl River Mouth Basin approximately 100 miles south of Hong Kong. The block
consists of approximately 765,000 acres, with water depths generally less than
300 feet. The work program commitment on the block includes the acquisition of
approximately 600 miles of seismic data and a well to be drilled to at least
11,500 feet. Santa Fe holds a 40% working interest in the block which is
operated by Kerr-McGee.
In January 1997 the company signed two PSCs with CNOOC, giving the company
the right to explore two additional areas of the South China Sea. Block 15/34
covers approximately 800,000 acres in the Pearl River Mouth Basin, approximately
50 miles south of Hong Kong, adjacent to Block 27/11. Several prospect areas
have been identified from existing seismic and additional data acquisition will
focus on the confirmation and selection of drillsites as well as the
identification of additional drillable prospects. Block 23/28 is located north
of the large island of Haina and covers approximately 500,000 acres in the
southern portion of the Beibu Gulf Basin. Several prospect areas have been
identified from existing data which will be supplemented with 2-D and 3-D
seismic programs. The company is obligated to acquire 2-D and 3-D seismic and
drill a well to at least 10,500 feet on each of the blocks. The company holds
100% of the working interest in both contract areas.
9
<PAGE>
DRILLING ACTIVITIES
The table below sets forth, for the periods indicated, the number of wells
drilled in which the company had an economic interest. As of December 31, 1996
wells in the process of drilling or completing included 4 gross (1.3 net)
domestic exploratory wells, 15 gross (6.7 net) domestic development wells, and 5
gross (1.2 net) foreign development wells.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
GROSS NET GROSS NET GROSS NET
Development Wells ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Completed as natural gas
wells......................... 12 3.8 13 6.3 17 4.4
Completed as oil wells.......... 28 14.7 47 25.3 58 31.2
Dry holes....................... 8 3.0 4 1.5 3 1.5
Foreign
Completed as natural gas
wells........................... 5 1.1 3 0.9 2 0.4
Completed as oil wells.......... 21 4.5 17 3.2 14 4.3
Dry holes....................... 1 0.2 5 1.1 2 0.6
------ --------- ------ --------- ------ ---------
75 27.3 89 38.3 96 42.4
------ --------- ------ --------- ------ ---------
Exploratory Wells
Domestic
Completed as natural gas
wells......................... 10 5.1 13 6.3 3 1.5
Completed as oil wells.......... 6 2.9 9 3.3 9 3.5
Dry holes....................... 8 3.0 5 2.1 23 8.6
Foreign
Completed as natural gas
wells........................... 1 0.2 2 0.8 1 0.5
Completed as oil wells.......... 2 0.7 3 0.9 1 0.3
Dry holes....................... 6 1.9 3 0.8 6 2.1
------ --------- ------ --------- ------ ---------
33 13.8 35 14.2 43 16.5
------ --------- ------ --------- ------ ---------
108 41.1 124 52.5 139 58.9
====== ========= ====== ========= ====== =========
</TABLE>
PRODUCING WELLS
The following table sets forth the company's ownership in producing wells
at December 31, 1996:
<TABLE>
<CAPTION>
U.S.(A) ARGENTINA(B) INDONESIA(C) TOTAL
------------------ -------------- -------------- ---------------
GROSS NET GROSS NET GROSS NET GROSS NET
------ --------- ------ ---- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oil.................................. 8,539 931 386 84 368 117 9,293 1,132
Natural gas.......................... 567 164 16 3 7 2 590 169
------ --------- ------ ---- ------ ---- ------ -----
9,106 1,095 402 87 375 119 9,883 1,301
====== ========= ====== ==== ====== ==== ====== =====
</TABLE>
- ------------
(a) Includes 61 gross wells with multiple completions.
(b) At December 31, 1996 one gross gas well was shut-in.
(c) Includes one gross well with multiple completions and 69 gross wells which
were shut-in at December 31, 1996.
10
<PAGE>
DOMESTIC ACREAGE
The following table summarizes developed and undeveloped fee and leasehold
acreage in the United States at December 31, 1996. Excluded from such
information is acreage in which ownership interest is limited to royalty,
overriding royalty and other similar interests.
UNDEVELOPED DEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
--------- --------- --------- ---------
(IN ACRES)
Alabama -- Offshore................ -- -- 23,040 12,480
Alabama -- Onshore................. -- -- 824 112
Arkansas........................... 329 60 818 182
Colorado........................... 872 728 5,931 5,249
Kansas............................. 93 63 3,833 874
Louisiana -- Offshore.............. 232,523 109,651 229,185 88,302
Louisiana -- Onshore............... 1,856 609 8,998 2,093
Mississippi........................ 300 84 2,991 523
Montana............................ 3,450 428 670 43
New Mexico......................... 169,270 117,497 52,701 28,342
New York........................... -- -- 189 47
North Dakota....................... 2,963 986 4,570 1,025
Oklahoma........................... 6,631 5,417 21,569 8,091
Pennsylvania....................... 20 20 25 3
Texas -- Offshore.................. 133,003 103,478 58,381 18,087
Texas -- Onshore................... 137,942 107,137 188,270 133,865
Utah............................... 1,363 531 3,325 1,527
Wyoming............................ 16,384 9,260 22,844 10,753
--------- --------- --------- ---------
706,999 455,949 628,164 311,598
========= ========= ========= =========
FOREIGN ACREAGE
The following table summarizes foreign acreage at December 31, 1996:
UNDEVELOPED DEVELOPED
-------------------- --------------------
GROSS NET GROSS NET
--------- --------- --------- ---------
(THOUSANDS OF ACRES)
Argentina.......................... 2,169 539 93 19
China.............................. 765 306 -- --
Colombia........................... 423 318 -- --
Cote d'Ivoire...................... 197 197 -- --
Ecuador............................ 474 166 -- --
Gabon.............................. 1,001 345 -- --
Indonesia.......................... 6,427 3,297 43 13
--------- --------- --------- ---------
11,456 5,168 136 32
========= ========= ========= =========
11
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data with
respect to the company, excluding Monterey:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(a)
-----------------------------------------------------
1996 1995 1994 1993(g) 1992(h)
--------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
INCOME STATEMENT DATA
Revenues........................ 290.4 230.7 212.3 250.0 212.4
--------- --------- --------- --------- ---------
Costs and Expenses
Production and
operating............... 80.6 69.7 63.7 63.6 48.5
Oil and gas systems and
pipelines............... -- -- -- 4.2 3.2
Exploration, including dry
hole costs.............. 32.8 21.0 19.0 29.3 22.8
Depletion, depreciation
and
amortization............ 110.8 100.8 89.3 111.5 102.3
Impairment of oil and gas
properties.............. 57.4 30.2 -- 50.2 --
General and
administrative.......... 21.2 19.6 19.5 23.1 22.1
Taxes (other than
income)................. 17.1 11.3 17.1 18.9 15.4
Restructuring
charges(b).............. -- -- 5.9 26.7 --
Loss (gain) on disposition
of assets............... (12.1) 0.3 (8.3) 0.6 (13.9)
--------- --------- --------- --------- ---------
307.8 252.9 206.2 328.1 200.4
--------- --------- --------- --------- ---------
Income (Loss) from Operations... (17.4) (22.2) 6.1 (78.1) 12.0
========= ========= ========= ========= =========
COSTS AND EXPENSES PER BOE
Production and operating(c)..... 4.03 3.92 3.76 3.43 3.28
Exploration, including dry hole
costs........................ 1.64 1.19 1.12 1.58 1.55
Depletion, depreciation and
amortization(d).............. 5.39 5.61 5.26 6.03 6.91
General and administrative(e)... 0.88 1.10 1.15 1.25 1.49
Taxes other than income(f)...... 0.86 0.63 1.01 1.03 1.04
(TABLE CONTINUED ON FOLLOWING PAGE)
12
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31,(a)
-----------------------------------------------------
1996 1995 1994 1993(g) 1992(h)
--------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
OPERATING DATA
DAILY AVERAGE PRODUCTION
Crude oil and liquids
(MBbls/day)
Domestic.................. 19.5 16.7 16.3 17.7 16.3
Argentina................. 3.7 2.6 2.4 2.4 2.4
Indonesia................. 4.3 5.2 5.7 4.1 1.8
--------- --------- --------- --------- ---------
27.5 24.5 24.4 24.2 20.5
========= ========= ========= ========= =========
Natural gas (MMcf/day).......... 163.4 144.7 132.8 159.0 119.2
Total production (MBOE/day)..... 54.7 48.6 46.6 50.7 40.4
AVERAGE SALES PRICES
Crude oil and liquids ($/Bbl)
Unhedged
Domestic............. 19.96 16.34 14.92 16.20 18.38
Argentina............ 19.06 14.72 13.23 14.07 15.99
Indonesia............ 18.92 16.10 15.09 15.50 17.51
Total................ 19.68 16.12 14.79 15.87 18.02
Hedged.................... 18.66 16.40 14.79 15.87 18.17
Natural Gas ($/Mcf)
Unhedged.................. 2.18 1.46 1.77 2.04 1.72
Hedged.................... 1.83 1.45 1.75 1.90 1.71
PROVED RESERVES AT YEAR END
Crude oil, condensate and
natural gas
liquids (MMBbls)............. 83.1 79.7 67.1 64.6 64.8
Natural gas (Bcf)............... 247.2 232.7 229.0 251.2 258.7
Proved reserves (MMBOE)......... 124.3 118.5 105.2 106.4 108.1
Proved developed reserves
(MMBOE)...................... 103.2 95.0 82.7 83.2 90.8
PRESENT VALUE OF PROVED RESERVES AT
YEAR-END
Before income taxes............. 1,047.7 602.8 417.0 400.7 532.0
</TABLE>
- ------------
(a) Certain prior period amounts have been restated to conform to 1996
presentation.
(b) 1993 amount includes losses on property dispositions of $16.5 million,
long-term debt repayment penalties of $8.6 million and accruals of certain
personnel benefits and related costs of $1.6 million. 1994 amount represents
severance, benefits and relocation expenses.
(c) Excluding related production, severance and ad valorem taxes.
(d) Excludes effect of unproved property writedowns of $0.13 per BOE in 1996 and
$0.06 per BOE in 1995.
(e) Excludes effect of $1.6 million charge related to the abandonment of an
office lease and $2.0 million in costs and expenses related to the IPO
($0.18 per BOE) in 1996.
(f) Includes production, severance and ad valorem taxes.
(g) Includes production attributable to properties sold during 1993 of 4.1 MBbls
of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day) and gives
effect to the sale in 1993 of approximately 8.0 MMBOE of proved reserves.
(h) On May 19, 1992 Adobe Resources Corporation was merged with and into the
company.
13
<PAGE>
SANTA FE ENERGY TRUST
In November 1992 5,725,000 Depositary Units ("Depositary Units"), each
consisting of beneficial ownership of one unit of undivided interest in the
Trust and a $20 face amount beneficial ownership interest in a $1,000 face
amount zero coupon United States Treasury obligation maturing on February 15,
2008, were sold in a public offering. The assets of the Trust consist of certain
oil and gas properties conveyed by the company. A total of $114.5 million was
received from public investors, of which $38.7 million was used to purchase the
Treasury obligations and $5.7 million was used to pay underwriting commissions
and discounts. The company received the remaining $70.1 million and retained
575,000 Depositary Units. A portion of the proceeds received by the company was
used to retire $30.0 million of debt and the remainder was used for general
corporate purposes. In the first quarter of 1994 the company sold the remaining
575,000 Depositary Units it held for $11.3 million.
The properties conveyed to the Trust consisted of two term royalty
interests in two production units in the Wasson field in west Texas and a net
profits royalty interest in certain royalty and working interests in a
diversified portfolio of properties located in twelve states. At December 31,
1996, 4.3 MMBOE of the company's estimated proved reserves were subject to such
net profits interest. The reserve estimates included herein reflect the
conveyance of the Wasson term royalties to the Trust.
For any calendar quarter ending on or prior to December 31, 2002, the Trust
will receive additional royalty payments to the extent that such payments are
required to provide distributions of $0.40 per Depositary Unit per quarter. Such
additional royalty payments, if needed, will come from the company's remaining
royalty interest in one of the production units in the Wasson field described
above, and are non-recourse to the company. If such additional payments are
made, certain proceeds otherwise payable to the Trust in subsequent quarters may
be reduced to recoup the amount of such additional payments. The aggregate
amount of the additional royalty payments (net of any amounts recouped) is
limited to $20.0 million on a revolving basis. As of December 31, 1996 the
company had made additional royalty payments (net of recoupments) totalling $1.2
million and will recoup $1.0 million from the proceeds payable to the Trust in
the first quarter of 1997. Dependent on various factors, such as sales volumes
and prices and the level of operating costs and capital expenditures incurred,
proceeds payable to the Trust with respect to operations in subsequent quarters
may not be sufficient to make distributions of $0.40 per quarter. In such
instances the company would be required to make additional royalty payments.
MONTEREY RESOURCES, INC.
In 1996 Santa Fe formed Monterey to assume the operations of Santa Fe's
Western Division (the "Western Division") which conducted Santa Fe's oil and
gas operations in the State of California. In November 1996, prior to the
initial public offering (the "IPO") discussed below, pursuant to a
contribution and conveyance agreement (the "Contribution Agreement"), among
other things: (i) Santa Fe contributed to Monterey substantially all of the
assets and properties of the Western Division, subject to the retention by Santa
Fe of a production payment, as defined below, and certain other assets; (ii)
Santa Fe retained a $30.0 million production payment (the "Production
Payment") with respect to certain properties in the Midway-Sunset field; (iii)
Monterey assumed all obligations and liabilities of Santa Fe associated with or
allocated to the assets and properties of the Western Division, including $245.0
million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997,
10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series
E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv)
Monterey agreed to purchase from Santa Fe an $8.3 million promissory note
receivable related to the sale to a third party of certain surface acreage
located in Orange County, California. Also prior to the IPO, Monterey and Santa
Fe entered into a $75.0 million revolving credit facility with a group of banks
(the "Monterey Credit Facility") and borrowed $16.0 million which was retained
by Santa Fe.
In November 1996 Monterey sold 9,335,000 shares of its common stock for
total consideration of $123.6 million (after deducting underwriting discounts of
$9.1 million and other related costs of $2.6
14
<PAGE>
million). The proceeds from the IPO were used in part to (i) repay the Series E
Notes and Series F Notes ($70.0 million) and pay a prepayment penalty thereon of
$2.5 million; (ii) retire the Production Payment ($30.0 million); (iii) repay
the $16.0 million outstanding under the New Credit Facility; and (iv) pay a $2.0
million fee with respect to a supplement to the indenture relating to Santa Fe's
11% Senior Subordinated Debentures due 2004. Subsequent to the IPO, Monterey
issued $175.0 million in aggregate principal amount of 10.61% Senior Notes due
2005 (the "Monterey Senior Notes") to holders of the Series G Notes in
exchange for the cancellation of such notes and paid a $1.3 million consent fee
in connection therewith.
In December 1996 Santa Fe sold the surface rights to approximately 116
surface acres in Orange County, California for total consideration of $24.2
million and recognized a $12.3 million gain. Santa Fe received $15.9 million in
cash and an $8.3 million note, which note was then purchased by Monterey for
cash.
At December 31, 1996, Santa Fe owned 82.8% of Monterey's outstanding common
stock. Santa Fe has announced that it intends to distribute pro rata to its
common shareholders all of the shares of Monterey's common stock that it owns by
means of a tax-free distribution. See -- "GENERAL."
The discussions included herein with respect to the years ended December
31, 1995 and prior relate to the operations of the Western Division. The
discussions with respect to the year ended December 31, 1996 relate to the
operations of the Western Division for January through October and the
operations of Monterey for November and December.
RESERVES
The following table sets forth information regarding changes in Monterey's
estimates of proved net reserves from January 1, 1994 to December 31, 1996 and
the balance of Monterey's estimated proved developed reserves at December 31, of
each of the years 1993 through 1996, as prepared by Ryder Scott:
<TABLE>
<CAPTION>
INCREASES (DECREASES)
-------------------------------------------------------------
BALANCE NET
AT REVISION EXTENSIONS, PURCHASES BALANCE
BEGINNING OF DISCOVERIES (SALES) OF AT END
OF PREVIOUS IMPROVED AND MINERALS OF
PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD
--------- --------- -------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1994:
Oil and Condensate (MMBbls)...... 183.6 9.9 12.6 -- 0.2 (15.1) 191.2
Gas (Bcf)........................ 11.8 2.9 -- -- 0.1 (1.4) 13.4
Oil Equivalent (MMBOE)........... 185.6 10.4 12.6 -- 0.2 (15.3) 193.5
1995:
Oil and Condensate (MMBbls)...... 191.2 9.7 13.7 -- 0.1 (15.2) 199.5
Gas (Bcf)........................ 13.4 0.9 -- -- -- (1.9) 12.4
Oil Equivalent (MMBOE)........... 193.5 9.8 13.7 -- 0.1 (15.5) 201.6
1996:
Oil and Condensate (MMBbls)...... 199.5 12.0 14.4 -- 7.6 (17.1) 216.4
Gas (Bcf)........................ 12.4 1.1 -- -- -- (1.3) 12.2
Oil Equivalent (MMBOE)........... 201.6 12.1 14.4 -- 7.6 (17.3) 218.4
</TABLE>
DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
PROVED DEVELOPED RESERVES (MMBOE)... 172.6 158.6 141.8 142.3
During the five years ended December 31, 1996, Monterey spent a total of
$172.9 million on development activities on its properties. Cumulative
production from the properties during the same five-year period exceeded 79.8
MMBOE while additions to proved reserves exceeded 111.4 MMBOE (yielding 31.6
MMBOE net additions after production.) Based on reservoir engineering studies
prepared by Ryder Scott, Monterey believes that it can continue to make
significant additions to proved reserves on its properties through additional
EOR and development projects. Monterey anticipates
15
<PAGE>
spending approximately $70.9 million during 1997 on additional development
projects on its properties. Because the actual amounts expended in the future
and the results therefrom will be influenced by numerous factors, including many
beyond its control, and due to the inherent uncertainty of reservoir engineering
studies, no assurances can be given as to the amounts that will be expended or,
if expended, that the results therefrom will be consistent with the Monterey's
prior experience or expectations.
DEVELOPMENT ACTIVITIES
Monterey is engaged in development activities primarily through the
application of thermal EOR techniques on its heavy oil properties in the San
Joaquin Valley. Thermal EOR operations involve the injection of steam into a
reservoir to raise the temperature and reduce the viscosity of heavy oil,
facilitating the flow of the oil into producing wellbores. In addition, Monterey
has begun to utilize horizontal drilling in conjunction with the steam projects
already deployed. Based on results to date it is believed that horizontal wells
can provide production rates up to 10 times greater than the typical vertical
well while providing drainage for portions of the reservoir that cannot be
effectively drained by vertical wells. In addition to these thermal techniques,
Monterey has extensive experience in the use of waterfloods, which involves the
injection of water into a reservoir to drive hydrocarbons into producing
wellbores.
In 1996 Monterey spent $48.7 million on development work including the
drilling of vertical infill and step-out wells and seven horizontal wells, the
addition of 39 steamflood patterns and the expansion of key facilities to serve
increased production and steam volumes. The majority of the 1996 development
activity was focused at Midway-Sunset and Kern River and resulted in a combined
net oil production increase from December 31, 1995 to December 31, 1996 of 4.3
MBbls per day. During 1996 Monterey drilled 227 gross (218 net) development
wells.
Monterey's production and reserves are concentrated in four fields in
California's San Joaquin Valley. These fields, Midway-Sunset, Kern River, South
Belridge and Coalinga account for 95% of Monterey's 1996 net production and 93%
of Monterey's December 31, 1996 proved reserves. Monterey's properties in these
fields are generally highly concentrated and equipped with efficient centralized
infrastructure.
MIDWAY-SUNSET. Monterey owns and operates a 100% working interest (96%
average net revenue interest) in over 13,000 gross acres and 2,300 producing
wells in the Midway-Sunset field. The Company is currently the largest producer
in the field and has operated there continuously since 1905. Substantially all
of the oil produced from the Midway-Sunset field is heavy crude oil located in
the Pleistocene and Miocene reservoirs at depths of less than 2,000 feet.
During 1996, Monterey's properties at Midway-Sunset produced at record
levels averaging 35.1 MBbls per day for the year, an increase of 2.5 MBbls per
day over the average for 1995, and accounted for 74% of Monterey's 1996 crude
production. Total December 31, 1996 proved reserves for Monterey's Midway-Sunset
properties represented approximately 75% of Monterey's total proved reserves.
Based on reservoir engineering studies prepared by Ryder Scott, Monterey
believes that it can continue to make significant additions to its proved
reserves in this field through additional EOR and development projects. Monterey
has identified in excess of 1,300 well operations that could be undertaken in
the field and anticipates completing 300 of these operations (including 40
horizontal wells) in 1997 at an estimated capital cost of $51.0 million.
KERN RIVER. Monterey owns and operates a 100% working interest (91%
average net revenue interest) in four properties in the Kern River field,
located near Bakersfield, California. Monterey acquired its interest in the Kern
River field in 1905. With field-wide production rates of approximately 135 MBbls
per day, the Kern River field is the second largest producing oil field in the
lower 48 states and has produced in excess of 1.5 billion barrels of oil. Most
of the oil produced from the Kern River field is heavy crude oil produced from
Plio-Pleistocene reservoirs at depths of less than 1,000 feet. During 1996, the
Kern River field accounted for approximately 11% of Monterey's total crude
16
<PAGE>
production. As of December 31, 1996, Monterey's total proved reserves in the
Kern River field were approximately 9% of its total proved reserves. As with the
Midway-Sunset field, based on engineering studies prepared by Ryder Scott,
Monterey believes that it can continue to make significant additions to its
proved reserves in the Kern River field through additional thermal development
projects.
SOUTH BELRIDGE. Monterey has a 46% average working interest (40% average
net revenue interest) in its properties in the South Belridge field, which is
located 15 miles north of the Midway-Sunset field. Monterey acquired interests
in the South Belridge field in 1987 and expanded its holdings in 1991. The oil
in the South Belridge field is heavy and light crude that is produced from
depths of generally less than 2,000 feet. During 1996, the South Belridge field
accounted for approximately 5% of Monterey's total crude production. As of
December 31, 1996, Monterey's total proved reserves in the South Belridge field
were approximately 6% of its total proved reserves.
COALINGA. Monterey has a 100% average working interest (84% average net
revenue interest) in its properties in the Coalinga field which is located 55
miles southwest of Fresno, California. During 1996, the Coalinga field accounted
for approximately 5% of Monterey's crude production. As of December 31, 1996,
Monterey's total proved reserves in the Coalinga field were approximately 3% of
its total proved reserves.
17
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data with
respect to Monterey:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (a)
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
INCOME STATEMENT DATA
Revenues........................... 292.9 218.7 191.9 199.5 226.4
--------- --------- --------- --------- ---------
Costs and Expenses
Production and operating..... 107.8 86.1 87.4 101.7 106.3
Cost of crude oil
purchased.................. 20.8 6.5 11.7 11.1 9.9
Exploration, including dry
hole costs................. 1.7 2.4 1.4 1.7 2.7
Depletion, depreciation and
amortization............... 37.4 32.4 32.0 41.2 44.0
Impairment of oil and gas
properties................. -- -- -- 49.1 --
General and administrative... 8.9 7.3 7.8 9.2 8.8
Taxes (other than income).... 9.4 7.9 8.7 8.4 8.9
Restructuring charges........ -- -- 1.1 11.9 --
Loss (gain) on disposition of
oil and gas properties..... -- -- (0.3) 0.1 0.3
--------- --------- --------- --------- ---------
186.0 142.6 149.8 234.4 180.9
--------- --------- --------- --------- ---------
Income (Loss) from Operations...... 106.9 76.1 42.1 (34.9) 45.5
========= ========= ========= ========= =========
COSTS AND EXPENSES PER BOE:
Production and Operating
Expenses:.......................
Steam generation............. 2.51(b) 1.98 2.16 2.26 2.41
Lease operating.............. 3.53 3.56 3.55 4.05 4.24
Total................... 6.04(b) 5.54 5.71 6.31 6.65
Exploration, including dry holes... 0.10 0.15 0.09 0.11 0.17
Depletion, depreciation and
amortization.................... 2.16 2.08 2.09 2.59 2.79
General and administrative......... 0.44 0.47 0.51 0.58 0.56
Taxes (other than income).......... 0.54 0.51 0.56 0.53 0.56
(TABLE CONTINUED ON FOLLOWING PAGE)
18
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31, (a)
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
OPERATING DATA
DAILY AVERAGE PRODUCTION
Crude oil and liquids
(MBbls/day)..................... 46.8 41.8 41.3 42.5 42.0
Natural gas (MMcf/day)............. 3.5 5.3 3.8 6.4 7.1
Total production (MBOE/day)........ 47.4 42.7 41.9 43.6 43.2
AVERAGE SALES PRICES
Crude oil and liquids ($/Bbl)
Unhedged..................... 16.00 13.79 11.77 11.77 13.22
Hedged....................... 15.82 13.79 11.77 11.77 13.78
Natural gas ($/Mcf realized)....... 1.03 0.98 1.14 1.59 1.57
PROVED RESERVES AT YEAR-END
Crude oil, condensate and natural
gas liquids
(MMBbls)........................ 216.4 199.5 191.2 183.6 190.3
Natural gas (Bcf).................. 12.2 12.4 13.4 11.8 18.8
Proved reserves (MMBOE)............ 218.5 201.6 193.5 185.6 193.4
Proved developed reserves
(MMBOE)......................... 172.6 158.6 141.8 142.3 157.6
PRESENT VALUE OF PROVED RESERVES AT
YEAR-END
Before income taxes................ 1,047.8 654.4 553.8 167.1 383.2
PRODUCTION COSTS PER BOE (including
related production, severance and
ad valorem taxes) (in dollars)..... 6.64 5.98 6.19 6.85 7.23
</TABLE>
- ------------
(a) Reflects the operations of the Western Division for the years 1992 through
1995. The year 1996 reflects the operations of the Western Division for
January through October and Monterey for November and December.
(b) Excludes $0.18 per BOE loss on hedging. The hedging transactions which
generated these losses expired on June 30, 1996. Including such hedging
losses, historical steam generation costs would have been $2.69 per BOE and
historical total production costs would have been $6.22 per BOE.
SANTA FE CONSOLIDATED
Unless otherwise indicated, discussions and amounts throughout the
remainder of this Form 10-K relate to Santa Fe Energy Resources, Inc.
consolidated with its 83% subsidiary Monterey. Therefore all references
hereafter to "Santa Fe" or the "Company" relate to Santa Fe, including
Monterey.
At December 31, 1996 the Company had worldwide proved reserves totaling
342.7 MMBOE (consisting of approximately 299.5 MMBbls of oil and approximately
259.4 Bcf of natural gas), of which approximately 92% were domestic reserves and
approximately 8% were foreign reserves. During 1996 the Company's worldwide
production aggregated approximately 37.4 MMBOE, of which approximately 73% was
crude oil and approximately 27% was natural gas.
Santa Fe was incorporated in Delaware in 1971 as Santa Fe Natural
Resources, Inc., a wholly owned subsidiary of a predecessor of Santa Fe Pacific
Corporation ("SFP"). On January 8, 1990 Santa Fe Energy Company, which
previously conducted a substantial portion of Santa Fe's domestic exploration
and development operations, merged into Santa Fe. Santa Fe thereafter changed
its name to Santa Fe Energy Resources, Inc. On March 8, 1990 Santa Fe sold
11,700,000 previously unissued shares of common stock in initial public
offering. On December 4, 1990 SFP distributed all of the shares of Santa Fe's
common stock it held to its shareholders. In May 1992 Adobe Resources
Corporation ("Adobe") was merged with and into the Company (the "Adobe
Merger").
19
<PAGE>
RESERVES
The following tables set forth information regarding changes in the
Company's estimates of proved net reserves from January 1, 1994 to December 31,
1996 and the balance of the Company's estimated proved developed reserves at
December 31 of each of the years 1993 through 1996, as prepared by Ryder Scott:
<TABLE>
<CAPTION>
INCREASES (DECREASES)
-------------------------------------------------------------
BALANCE NET
AT REVISION EXTENSIONS, PURCHASES BALANCE
BEGINNING OF DISCOVERIES (SALES) OF AT END
OF PREVIOUS IMPROVED AND MINERALS OF
PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION PERIOD
--------- --------- -------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1994:
Crude Oil and Liquids (MMBbls)... 248.2 15.2 13.9 5.5 (0.5) (24.0) 258.3
Gas (Bcf)........................ 263.0 (2.7) 0.9 36.2 (5.1) (49.9) 242.4
Oil Equivalent (MMBOE)........... 292.0 14.7 14.1 11.5 (1.3) (32.3) 298.7
1995:
Crude Oil and Liquids (MMBbls)... 258.3 18.2 16.1 4.4 6.3 (24.1) 279.2
Gas (Bcf)........................ 242.4 2.3 0.2 36.9 18.0 (54.7) 245.1
Oil Equivalent (MMBOE)........... 298.7 18.5 16.2 10.7 9.3 (33.3) 320.1
1996(A) :
Crude Oil and Liquids (MMBbls)... 279.2 17.7 14.4 2.2 13.2 (27.2) 299.5
Gas (Bcf)........................ 245.1 23.3 -- 41.9 10.2 (61.1) 259.4
Oil Equivalent (MMBOE)........... 320.1 21.5 14.4 9.2 14.9 (37.4) 342.7(b)
</TABLE>
DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
PROVED DEVELOPED RESERVES (MMBOE).. 275.8 253.6 224.5 225.5
- ------------
(a) At December 31, 1996 Monterey had proved reserves totalling 216.4 MMBbls
of oil and liquids and 12.2 Bcf of natural gas.
(b) At December 31, 1996, 4.3 MMBOE were subject to a 90% net profits interest
held by Santa Fe Energy Trust. See "-- Santa Fe Energy Trust."
Historically, the Company has utilized active development and exploration
programs as well as selected acquisitions to replace its reserves depleted by
production. The Company has increased its proved reserves (net of production and
sales) by approximately 33% over the five years ended December 31, 1996. Most of
such increases are attributable to proved reserve additions from the Company's
producing oil properties in the San Joaquin Valley of California and the Permian
Basin in west Texas, proved reserves acquired in the Adobe Merger and other
purchases of oil and gas reserves.
During 1996 the Company filed Energy Information Administration Form 23
which reported natural gas and oil reserves for the year 1995. On an equivalent
barrel basis, the reserve estimates for the year 1995 contained in such report
and those reported herein for the year 1995 do not differ by more than five
percent.
20
<PAGE>
DRILLING ACTIVITIES
The table below sets forth, for the periods indicated, the number of wells
drilled in which Santa Fe had an economic interest. As of December 31, 1996
Santa Fe was in the process of drilling or completing 4 gross (1.3 net) domestic
exploratory wells, 15 gross (6.7 net) domestic development wells, and 5 gross
(1.2 net) foreign development wells.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
GROSS NET GROSS NET GROSS NET
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Development Wells
Domestic
Completed as natural gas
wells........................ 12 3.8 13 6.3 17 4.4
Completed as oil wells.......... 252 229.9 271 234.5 136 101.4
Dry holes....................... 11 6.0 4 1.5 4 2.5
Foreign
Completed as natural gas
wells........................... 5 1.1 3 0.9 2 0.4
Completed as oil wells.......... 21 4.5 17 3.2 14 4.3
Dry holes....................... 1 0.2 5 1.1 2 0.6
------ --------- ------ --------- ------ ---------
302 245.5 313 247.5 175 113.6
------ --------- ------ --------- ------ ---------
Exploratory Wells
Domestic
Completed as natural gas
wells........................ 10 5.1 13 6.3 3 1.5
Completed as oil wells.......... 6 2.9 9 3.3 9 3.5
Dry holes....................... 9 3.4 8 5.1 23 8.6
Foreign
Completed as natural gas
wells........................... 1 0.2 2 0.8 1 0.5
Completed as oil wells.......... 2 0.7 3 0.9 1 0.3
Dry holes....................... 6 1.9 3 0.8 6 2.1
------ --------- ------ --------- ------ ---------
34 14.2 38 17.2 43 16.5
------ --------- ------ --------- ------ ---------
336 259.7 351 264.7 218 130.1
====== ========= ====== ========= ====== =========
</TABLE>
PRODUCING WELLS
The following table sets forth Santa Fe's ownership in producing wells at
December 31, 1996:
<TABLE>
<CAPTION>
U.S.(a) ARGENTINA(b) INDONESIA(c) TOTAL
--------------------- -------------- ----------------- ---------------
GROSS NET GROSS NET GROSS NET GROSS NET
--------- --------- ------ ---- --------- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oil.................................. 14,178 6,034 386 84 368 117 14,932 6,235
Natural gas.......................... 569 164 16 3 7 2 592 169
--------- --------- ------ ---- --------- ---- ------ -----
14,747 6,198 402 87 375 119 15,524 6,404
========= ========= ====== ==== ========= ==== ====== =====
</TABLE>
- ------------
(a) Includes 61 gross wells with multiple completions.
(b) At December 31, 1996 one gross gas well was shut-in.
(c) Includes one gross well with multiple completions and 69 gross wells which
were shut-in at December 31, 1996.
21
<PAGE>
DOMESTIC ACREAGE
The following table summarizes Santa Fe's developed and undeveloped fee and
leasehold acreage in the United States at December 31, 1996. Excluded from such
information is acreage in which Santa Fe's interest is limited to royalty,
overriding royalty and other similar interests.
UNDEVELOPED DEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
(IN ACRES)
Alabama -- Offshore............... -- -- 23,040 12,480
Alabama -- Onshore................ -- -- 824 112
Arkansas.......................... 329 60 818 182
California -- Offshore............ -- -- 17,280 2,074
California -- Onshore............. 6,602 6,602 19,716 19,496
Colorado.......................... 872 728 5,931 5,249
Kansas............................ 93 63 3,833 874
Louisiana -- Offshore............. 232,523 109,651 229,185 88,302
Louisiana -- Onshore.............. 1,856 609 8,998 2,093
Mississippi....................... 300 84 2,991 523
Montana........................... 3,450 428 670 43
New Mexico........................ 169,270 117,497 52,701 28,342
New York.......................... -- -- 189 47
North Dakota...................... 2,963 986 4,570 1,025
Oklahoma.......................... 6,631 5,417 21,569 8,091
Pennsylvania...................... 20 20 25 3
Texas -- Offshore................. 133,003 103,478 58,381 18,087
Texas -- Onshore.................. 137,942 107,137 188,270 133,865
Utah.............................. 1,363 531 3,325 1,527
Wyoming........................... 16,384 9,260 22,844 10,753
--------- --------- --------- ---------
713,601 462,551 665,160 333,168
========= ========= ========= =========
At December 31, 1996 the Company held oil and gas rights to 372,062 net
undeveloped leasehold acres. The primary lease terms with respect to 9% of such
acreage expires in 1997, 8% in 1998, 10% in 1999, 8% in 2000 and the remainder
thereafter. In addition, the Company holds 90,489 acres of undeveloped fee
acreage, located primarily in Texas.
FOREIGN ACREAGE
See "SANTA FE EXCLUDING MONTEREY -- Foreign Acreage."
CURRENT MARKETS FOR OIL AND GAS
Substantially all of the Company's oil and gas production is sold at market
responsive prices. The domestic crude oil marketing activities of the Company
are conducted through its Santa Fe Energy Products Division ("Energy
Products"), which is also engaged in crude oil trading. A substantial portion
of the Company's domestic natural gas production is currently marketed under the
terms of a sales contract with LG&E Natural Marketing Inc. ("LG&E"), formerly
Hadson Corporation ("Hadson").
The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, oil and gas. The price received by the
Company for its crude oil and natural gas depends upon numerous factors, the
majority of which are beyond the Company's control, including economic
conditions in the United States and elsewhere, the world political situation as
it affects OPEC, the Middle East and other producing countries, the actions of
OPEC and governmental
22
<PAGE>
regulation. The fluctuation in world oil prices continues to reflect market
uncertainty regarding OPEC's ability to control member country production and
underlying concern about the balance of world demand for and supply of oil and
gas. Decreases in the prices of oil and gas have had, and could have in the
future, an adverse effect on the Company's development and exploration programs,
proved reserves, revenues, profitability and cash flow. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
Monterey's market for heavy crude oil produced in California differs
substantially from the remainder of the domestic crude oil market, due
principally to the transportation and refining requirements associated with
heavy crude. The profit margin realized from the sale of heavy crude oil is
generally lower than that realized from the sale of light crude oil because the
costs of producing heavy oil are generally higher, and the sales price realized
for heavy crude oil is generally lower than the comparable costs and prices paid
for light crude oils.
From time to time the Company has hedged a portion of its oil and natural
gas production to manage its exposure to volatility in prices of oil and natural
gas. See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General" for a discussion of the Company's hedging
activities.
During 1996 affiliates of Shell Oil Company, Celeron Corporation and
Coastal States Trading, Inc. accounted for approximately 24%, 15% and 12%,
respectively, of Energy Products' crude oil sales (which with respect to certain
properties includes royalty and working interest owners' share of production).
No other individual customer accounted for more than 10% of the Company's crude
oil and liquids revenues during 1996. Availability of a ready market for the
Company's oil production depends on numerous factors, including the level of
consumer demand, the extent of worldwide oil production, the cost and
availability of alternative fuels, the availability of refining capacity, the
cost of and proximity of pipelines and other transportation facilities,
regulation by state and federal authorities and the cost of complying with
applicable environmental regulations.
In December 1993 the Company signed a seven-year gas sales contract with
LG&E pursuant to the terms of which LG&E markets a substantial portion of the
Company's domestic natural gas production. Pursuant to such gas contract, LG&E
is required to pay the Company for all production delivered at a price for such
gas equal to stipulated published monthly index prices. LG&E is obligated to use
its best efforts to receive gas from the Company at delivery points so as to
maximize the net price received by the Company for such production. Payment for
purchases by LG&E are made in immediately available funds no later than the last
working day of the month following the month of production.
OTHER BUSINESS MATTERS
COMPETITION
The Company faces competition in all aspects of its business, including,
but not limited to, acquiring reserves, leases, licenses and concessions;
obtaining goods, services and labor needed to conduct its operations and manage
the Company; and marketing its oil and gas. The Company's competitors include
multinational energy companies, government-owned oil and gas companies, other
independent producers and individual producers and operators. The Company
believes that its competitive position is affected by its technical and
operational capabilities. Many competitors have greater financial and other
resources than the Company. The Company believes that the well-defined nature of
the reservoirs in its long-lived oil fields, its expertise in EOR methods in
these fields, its active development and exploration program, its financial
flexibility and its experienced management may give it a competitive advantage
over some other producers.
REGULATION OF CRUDE OIL AND NATURAL GAS
The petroleum industry is subject to various types of regulation throughout
the world, including regulation in the United States by state and federal
agencies. Domestic legislation affecting the oil and
23
<PAGE>
gas industry is under constant review for amendment or expansion, frequently
increasing the regulatory burden. Also, numerous departments and agencies, both
federal and state, are authorized by statute to issue and have issued rules and
regulations binding on the oil and gas industry and its individual members,
compliance with which is often difficult and costly and which may carry
substantial penalties for non-compliance. Although the regulatory burden on the
oil and gas industry increases the cost of doing business and, consequently,
affects profitability, generally these burdens do not appear to affect the
Company any differently or to any greater or lesser extent than other companies
in the industry with similar types and quantities of production. While the
Company is a party to several regulatory proceedings before governmental
agencies arising in the ordinary course of business, the Company does not
believe that the outcome of such proceedings will have a material adverse affect
on its operations or financial condition. Set forth below is a general
description of certain state and federal regulations which have an effect on the
Company's operations.
STATE REGULATION. State statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. Most
states in which the Company operates also have statutes and regulations
governing the conservation of oil and gas and the prevention of waste, including
the unitization or pooling of oil and gas properties and rates of production
from oil and gas wells. Rates of production may be regulated through the
establishment of maximum daily production allowables on a market demand or
conservation basis or both.
FEDERAL REGULATION. A portion of the Company's oil and gas leases are
granted by the federal government and administered by the Bureau of Land
Management ("BLM") and the Minerals Management Service ("MMS"), both of
which are federal agencies. Such leases are issued through competitive bidding,
contain relatively standardized terms and require compliance with detailed BLM
and MMS regulations and orders (which are subject to change by the BLM and the
MMS). For offshore operations, lessees must obtain MMS approval for 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, Army Corps of Engineers and Environmental Protection Agency),
lessees must obtain a permit from the BLM or the MMS prior to the commencement
of drilling.
The interstate transportation of natural gas is regulated by the Federal
Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 and,
to a lesser extent, the Natural Gas Policy Act of 1978 (collectively, the
"Acts"). Since 1991, FERC's regulatory efforts have centered largely around
its generic rulemaking proceedings, Order No. 636. Through Order No. 636 and
successor orders, FERC has undertaken to restructure the interstate pipeline
industry with the goal of providing enhanced access to, and competition among,
alternative gas suppliers. By requiring interstate pipelines to "unbundle"
their sales services and to provide their customers with direct access to any
upstream pipeline capacity held by pipelines, Order No. 636 has enabled pipeline
customers to choose the levels of transportation and storage service they
require, as well as to purchase gas directly from third-party merchants other
than the pipelines.
Even though the implementation of Order No. 636 on individual interstate
pipelines is largely complete, many of the issues related to this Order are
still pending final resolution by the FERC (in remand proceedings) and by the
courts. Thus, while Order No. 636 has generally facilitated the transportation
of gas and the direct access to end-user markets, the ultimate impact of these
regulations on marketing production cannot be predicted at this time.
With the completion of the Order No. 636 implementation process on the FERC
level, FERC's natural gas regulatory efforts have turned towards a number of
other important policies, all of which could significantly affect the marketing
of gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy (which
has been approved by the courts) of generally approving the divestiture of
pipeline-owned gathering facilities to pipeline affiliates, (ii) FERC's efforts
to implement uniform standards for pipeline electronic bulletin boards,
electronic data exchange, and basic business and operational practices of the
pipelines,
24
<PAGE>
(iii) efforts to refine FERC's regulations controlling the operation of the
secondary market for released pipeline capacity, (iv) a policy statement
regarding market and other non-cost-based rates for interstate pipeline
transmission and storage capacity and (v) an inquiry into the appropriate nature
and extent of continuing FERC regulation of offshore pipelines. The on-going and
evolving nature of these regulatory initiatives make it impossible at this time
to predict their ultimate impact upon marketing natural gas.
Finally, numerous states are in the process of implementing regulatory
initiatives requiring local distribution companies ("LDCs") to develop (to
various degrees) unbundled transportation and related service options and rates.
Typically, these programs are designed to allow the LDCs' commercial,
industrial, and, in more and more cases, residential, customers to have access
to transportation service on the LDC, coupled with an ability to select
third-party city-gate gas suppliers. These developments have already led a
number of industry participants to redirect significant marketing resources to
these emerging downstream markets.
ENVIRONMENTAL REGULATION
Various federal, state and local laws and regulations covering the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect the Company's operations and costs. In
particular, the Company's oil and gas exploration, development, production and
EOR operations, its activities in connection with storage and transportation of
liquid hydrocarbons and its use of facilities for treating, processing,
recovering or otherwise handling hydrocarbons and wastes therefrom are subject
to stringent environmental regulation by governmental authorities. Such
regulation has increased the cost of planning, designing, drilling, installing,
operating and abandoning the Company's oil and gas wells and other facilities.
The Company has expended significant resources, both financial and managerial,
to comply with environmental regulations and permitting requirements and
anticipates that it will continue to do so in the future in order to comply with
stricter industry and regulatory safety standards such as those described below.
Although the Company believes that its operations and facilities are in general
compliance with applicable environmental regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations and there can be no
assurance that significant costs and liabilities will not be incurred in the
future. Moreover, it is possible that other developments, such as increasingly
strict environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from the Company's operations, could result in substantial costs and
liabilities in the future. Although the resulting costs cannot be accurately
estimated at this time, these requirements and risks typically apply to
companies with types, quantities and locations of production similar to those of
the Company and to the oil and gas industry in general.
OFFSHORE PRODUCTION. Offshore oil and gas operations are subject to
regulations of the United States Department of the Interior, the Department of
Transportation, the United States Environmental Protection Agency ("EPA") and
certain state agencies. In particular, the Federal Water Pollution Control Act
of 1972, as amended ("FWPCA"), imposes strict controls on the discharge of oil
and its derivatives into navigable waters. The FWPCA provides for civil and
criminal penalties for any discharges of petroleum in reportable quantities and,
along with the Oil Pollution Act of 1990 and similar state laws, imposes
substantial liability for the costs of oil removal, remediation and damages.
SOLID AND HAZARDOUS WASTE. The Company currently owns or leases, and has
in the past owned or leased, numerous properties that have been used for
production of oil and gas for many years. Although the Company has utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other solid wastes may have been disposed or released on or
under the properties owned or leased by the Company. State and federal laws
applicable to oil and gas wastes and properties have gradually become more
strict. Under these new laws, the Company has been, and in the future could be,
required to remove or remediate previously disposed wastes or property
contamination (including groundwater contamination) or to perform remedial
plugging operations to prevent future contamination.
25
<PAGE>
The Company generates hazardous and nonhazardous wastes that are subject to
the federal Resource Conservation and Recovery Act and comparable state
statutes. The EPA has limited the disposal options for certain hazardous wastes
and is considering the adoption of stricter disposal standards for nonhazardous
wastes. Furthermore, it is anticipated that additional wastes (which could
include certain wastes generated by the Company's oil and gas operations) will
in the future be designated as "hazardous wastes," which are subject to more
rigorous and costly disposal requirements. In response to the changing
regulatory environment, the Company has made certain changes in its operations
and disposal practices. For example, the Company has commenced remediation of
sites or replacement of facilities where its wastes have previously been
disposed.
SUPERFUND. 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 that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
a site and companies that disposed or arranged for the disposal of the hazardous
substance found at a site. CERCLA also authorizes the EPA and, in some cases,
third parties to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs they incur. In the course of its operations, the Company has generated and
will generate wastes that may fall within CERCLA's definition of "hazardous
substances". The Company may be responsible under CERCLA for all or part of the
costs to clean up sites at which such wastes have been disposed. Certain
properties owned or used by the Company or its predecessors have been
investigated under state and Federal Superfund statutes, and the Company has
been and could be named a potentially responsible party ("PRP") for the
cleanup of some of these sites.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and
hold harmless Santa Fe from and against any costs incurred in the future
relating to environmental liabilities of the Western Division assets (other than
those retained by Santa Fe), including any costs or expenses incurred at any of
the OII Site, the Santa Fe Springs Site and the Eastside Site (as defined
herein), and any costs or liabilities that may arise in the future are
attributable to laws, rules or regulations in respect to any property or
interest therein located in California and formerly owned or operated by the
Western Division or its predecessors.
The Company has been identified as one of over 250 PRPs at a Superfund site
in Los Angeles County, California (the "OII Site"). The OII Site was operated
by a third party as a waste disposal facility from 1948 until 1983. The EPA is
requiring the PRPs to undertake remediation of the site in several phases, which
include site monitoring and leachate control, gas control and final remediation.
In November 1988 the EPA and a group of PRPs that includes the Company entered
into a consent decree covering the site monitoring and leachate control phases
of remediation. The Company was a member of the group Coalition Undertaking
Remediation Efforts ("CURE") which was responsible for constructing and
operating the leachate treatment plant. This phase is now complete and the
Company's share of costs with respect to this phase was $0.9 million. Another
consent decree provides for the predesign, design and construction of a gas
plant to harness and market methane gas emissions. The Company is a member of
the New CURE group which is responsible for the gas plant construction and
operation and landfill cover. Currently, New CURE is in the design stage of the
gas plant. The Company's share of costs of this phase is expected to be $1.9
million and such costs have been provided for in the financial statements.
Pursuant to consent decrees settling lawsuits against the municipalities and
transporters involved with the OII site but not named by the EPA as PRPs, such
parties are required to pay approximately $84 million, of which approximately
$76 million will be credited against future remediation expenses. The EPA and
the PRPs are currently negotiating the final closure requirements. After taking
into consideration the credits from the municipalities and transporters, the
Company estimates its share of final costs of closure will be approximately $0.8
million, which amount has been provided for by the Company in its financial
statements. The Company has entered into a Joint Defense Agreement with the
other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners
alleging, among other things, nuisance, trespass, strict liability and
26
<PAGE>
infliction of emotional distress. A second lawsuit has been filed by 33
additional homeowners and the Company and the other PRPs have entered into a
Joint Defense Agreement. At this stage of the lawsuit the Company is not able to
estimate costs or potential liability.
In 1994 the Company received a request from the EPA for information
pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other
PRPs to negotiate with the EPA regarding implementation of a remedial plan for a
site located in Santa Fe Springs, California (the "Santa Fe Springs Site").
The Company owned the property on which the Santa Fe Springs Site is located
from 1921 to 1932. During that time the property was leased to another company
and in 1932 the property was sold to that company. During the time the other
company leased or owned the property and for a period thereafter, hazardous
wastes were allegedly disposed at the Santa Fe Springs Site. The EPA estimates
total past and future costs for remediation to be approximately $8.0 million.
The Company filed its response to the Section 104(e) order setting forth its
position and defenses based on the fact that the other company was the lessee
and operator of the site during the time the Company was the owner of the
property. However, the Company has also given its Notice of Intent to comply
with the EPA's order to prepare a remediation design plan. The PRPs estimate
total costs to final remediation to be $3.0 million and the Company has provided
$250,000 for such costs in the financial statements.
In 1995 the Company and twelve other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill (the
"Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has
since liquidated all assets and placed the proceeds in trust (the "EPC Trust")
for closure and post-closure activities. However, these monies may not be
sufficient to close the site. The PRPs have entered into an enforceable
agreement with the DTSC to characterize the contamination at the site and
prepare a focused remedial investigation and feasibility study. The DTSC has
agreed to implement reasonable measures to bring new PRPs into the agreement.
The DTSC will address subsequent phases of the cleanup, including remedial
design and implementation in a separate order agreement. The cost of the
remedial investigation and feasibility study is estimated to be $0.8 million,
the cost of which will be shared by the PRPs and the EPC Trust. The ultimate
costs of subsequent phases will not be known until the remedial investigation
and feasibility study is completed and a remediation plan is accepted by the
DTSC. The Company currently estimates final remediation could cost $2 million to
$6 million and believes the monies in the EPC Trust will be sufficient to fund
the lower end of this range of costs. The Company has provided $80,000 in its
financial statements for its share of costs related to this site.
AIR EMISSIONS. The operations of the Company, including most of its
operations in the San Joaquin Valley, are subject to local, state and federal
regulations for the control of emissions from sources of air pollution. Legal
and regulatory requirements in this area are increasing, and there can be no
assurance that significant costs and liabilities will not be incurred in the
future as a result of new regulatory developments. In particular, the 1990 Clean
Air Act Amendments will impose additional requirements that may affect the
Company's operations, including permitting of existing sources and control of
hazardous air pollutants. However, it is impossible to predict accurately the
effects, if any, of the Clean Air Act Amendments on the Company at this time.
The Company has been and may in the future be subject to administrative
enforcement actions for failure to comply strictly with air regulations or
permits. These administrative actions are generally resolved by payment of a
monetary penalty and correction of any identified deficiencies. Alternatively,
regulatory agencies may require the Company to forego construction or operation
of certain air emission sources.
OTHER. The Company is subject to the requirements of the federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
OSHA hazard communication standard, the EPA community right-to-know regulations
under Title III of the federal Superfund Amendment and Reauthorization Act and
similar state statutes (such as California Proposition 65) require the Company
to organize information about hazardous materials used or produced in its
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens.
27
<PAGE>
The Company's facilities in California are also subject to California
Proposition 65, which was adopted in 1986 to address discharges and releases of,
or exposures to, toxic chemicals in the environment. Proposition 65 makes it
illegal to knowingly discharge a listed chemical if the chemical will pass (or
probably will pass) into any source of drinking water. It also prohibits
companies from knowingly and intentionally exposing any individual to such
chemicals through ingestion, inhalation or other exposure pathways without first
giving a clear and reasonable warning.
Although generally less stringent, the Company's foreign operations are
subject to similar foreign laws respecting environmental and worker safety
matters.
INSURANCE COVERAGE MAINTAINED WITH RESPECT TO OPERATIONS
The Company maintains insurance policies covering its operations in amounts
and areas of coverage normal for a company of its size in the oil and gas
exploration and production industry. These coverages include, but are not
limited to, workers' compensation, employers' liability, automotive liability
and general liability. In addition, an umbrella liability and operator's extra
expense policies are maintained. All such insurance is subject to normal
deductible levels. The Company does not insure against all risks associated with
its business either because insurance is not available or because it has elected
not to insure due to prohibitive premium costs.
EMPLOYEES
As of December 31, 1996, the Company had approximately 651 employees, 177
of whom were covered by a collective bargaining agreement which expires on
January 31, 1999. Of such employees, 307 are employed by Monterey, including all
employees who are covered by the collective bargaining agreement. The Company
believes that its relations with its employees are satisfactory.
ITEM 3. LEGAL PROCEEDINGS
The Company, its subsidiaries and other related companies are named
defendants in several lawsuits and named parties in certain governmental
proceedings arising in the ordinary course of business. For a description of
certain proceedings in which the Company is involved, see Items 1 and 2
"Business and Properties -- SANTA FE CONSOLIDATED -- Other Business
Matters -- Environmental Regulation" and Note 14 to the Consolidated Financial
Statements. While the outcome of lawsuits or other proceedings against the
Company cannot be predicted with certainty, the Company does not expect these
matters to have a material adverse effect on its financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Santa Fe's common stock is listed on the New York Stock Exchange and trades
under the symbol SFR. The following table sets forth information as to the last
sales price per share of Santa Fe's common stock as quoted on the Consolidated
Tape System for each calendar quarter in 1995 and 1996.
LOW HIGH
---- ----
1995
1st Quarter..................... 8 9 3/4
2nd Quarter..................... 9 1/8 10 1/2
3rd Quarter..................... 9 10 5/8
4th Quarter..................... 8 1/2 9 7/8
1996
1st Quarter..................... 8 3/8 10 1/2
2nd Quarter..................... 10 1/4 12 3/8
3rd Quarter..................... 11 1/4 14 1/4
4th Quarter..................... 13 15 1/8
The Company has not paid dividends on its common stock since the third
quarter of 1993. The determination of the amount of future cash dividends, if
any, to be declared and paid is in the sole discretion of Santa Fe's Board of
Directors and will depend on dividend requirements with respect to the Company's
convertible preferred stock, the Company's financial condition, earnings and
funds from operations, the level of its capital and exploration expenditures,
dividend restrictions in its financing agreements, its future business prospects
and other matters as the Company's Board of Directors deems relevant. For a
discussion of certain restrictions on Santa Fe's ability to pay dividends, see
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financing Activities."
At December 31, 1996 the Company had approximately 38,500 shareholders of
record.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992(d)
--------- --------- --------- ------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA(A)
INCOME STATEMENT DATA
Revenues........................ 583.3 449.4 404.2 449.5 438.8
--------- --------- --------- ------- ---------
Costs and Expenses
Production and operating... 188.4 155.8 151.1 165.3 154.8
Cost of crude oil
purchased................ 20.8 6.5 11.7 11.1 9.9
Oil and gas systems and
pipelines................ -- -- -- 4.2 3.2
Exploration, including dry
hole costs............... 34.5 23.4 20.4 31.0 25.5
Depletion, depreciation and
amortization............. 148.2 133.2 121.3 152.7 146.3
Impairment of oil and gas
properties............... 57.4 30.2 -- 99.3 --
General and
administrative........... 30.1 26.9 27.3 32.3 30.9
Taxes (other than
income).................. 26.5 19.2 25.8 27.3 24.3
Restructuring charges(b)... -- -- 7.0 38.6 --
Loss (gain) on disposition
of assets................ (12.1) 0.3 (8.6) 0.7 (13.6)
--------- --------- --------- ------- ---------
493.8 395.5 356.0 562.5 381.3
--------- --------- --------- ------- ---------
Income (Loss) from Operations... 89.5 53.9 48.2 (113.0) 57.5
Interest income............ 1.9 10.7 2.8 9.1 2.3
Interest expense........... (37.6) (32.5) (27.5) (45.8) (55.6)
Interest capitalized....... 5.2 5.8 3.6 4.3 4.9
Other income (expense)..... (1.0) (1.6) (4.0) (4.8) (10.0)
--------- --------- --------- ------- ---------
Income (Loss) Before Income
Taxes, Minority Interest and
Extraordinary Items........... 58.0 36.3 23.1 (150.2) (0.9)
Income taxes............... (14.3) (9.7) (6.0) 73.1 (0.5)
--------- --------- --------- ------- ---------
Income (Loss) Before Minority
Interest and Extraordinary
Items......................... 43.7 26.6 17.1 (77.1) (1.4)
Minority Interest in
Monterey Resources,
Inc...................... (1.3) -- -- -- --
--------- --------- --------- ------- ---------
Income (Loss) Before
Extraordinary Items........... 42.4 26.6 17.1 (77.1) (1.4)
Extraordinary Item -- Debt
Extinguishment
Costs...................... (6.0) -- -- -- --
--------- --------- --------- ------- ---------
Net Income (Loss)............... 36.4 26.6 17.1 (77.1) (1.4)
Preferred Dividend
Requirement.............. (13.5) (14.8) (11.7) (7.0) (4.3)
Convertible Preferred
Repurchase Premium....... (33.7) -- -- -- --
--------- --------- --------- ------- ---------
Earnings (Loss) Attributable to
Common Stock.................. (10.8) 11.8 5.4 (84.1) (5.7)
========= ========= ========= ======= =========
Per share data (in dollars)
Earnings (loss) before
extraordinary items...... (0.05) 0.13 0.06 (0.94) (0.07)
Extraordinary items........ (0.07) -- -- -- --
Earnings (loss) to common
shares................... (0.12) 0.13 0.06 (0.94) (0.07)
Weighted average number of
common shares outstanding (in
millions)..................... 90.6 90.2 89.9 89.7 79.0
STATEMENT OF CASH FLOWS DATA
Net cash provided by operating
activities.................... 227.6 174.5 124.5 160.2 141.5
Net cash used in investing
activities.................... 206.8 160.8 57.7 121.4 15.9
BALANCE SHEET DATA (AT PERIOD END)
Properties and equipment, net... 909.8 889.5 843.0 832.7 1,101.8
Total assets.................... 1,120.0 1,064.8 1,071.4 1,076.9 1,337.2
Long-term debt.................. 278.5 344.4 350.4 405.4 492.8
Convertible preferred stock..... 19.7 80.0 80.0 80.0 80.0
Shareholders' equity............ 526.8 437.7 423.3 323.6 416.6
(TABLE CONTINUED ON FOLLOWING PAGE)
30
<PAGE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993(c) 1992(d)
--------- --------- --------- --------- ---------
(IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
SELECTED OPERATING DATA(A)
DAILY AVERAGE PRODUCTION
Crude oil and liquids
(MBbls/day)
Domestic.................. 66.3 58.5 57.6 60.2 58.3
Argentina................. 3.7 2.6 2.4 2.4 2.4
Indonesia................. 4.3 5.2 5.7 4.1 1.8
--------- --------- --------- --------- ---------
74.3 66.3 65.7 66.7 62.5
========= ========= ========= ========= =========
Natural gas (MMcf/day).......... 166.9 150.0 136.6 165.4 126.3
Total production (MBOE/day)..... 102.1 91.3 88.5 94.3 83.6
AVERAGE SALES PRICES
Crude oil and liquids ($/Bbl)
Unhedged
Domestic............. 17.17 14.52 12.66 13.07 14.66
Argentina............ 19.06 14.72 13.23 14.07 15.99
Indonesia............ 18.92 16.10 15.09 15.50 17.51
Total................ 17.36 14.65 12.89 13.26 14.80
Hedged.................... 16.87 14.75 12.89 13.26 15.22
Natural Gas ($/Mcf)
Unhedged.................. 2.16 1.44 1.75 2.03 1.71
Hedged.................... 1.81 1.43 1.73 1.89 1.70
PROVED RESERVES AT YEAR END
Crude oil, condensate and
natural gas
liquids (MMBbls)............. 299.5 279.2 258.3 248.2 255.1
Natural gas (Bcf)............... 259.4 245.1 242.4 263.0 277.5
Proved reserves (MMBOE)......... 342.7 320.1 298.7 292.0 301.5
Proved developed reserves
(MMBOE)...................... 275.8 253.6 224.5 225.5 248.4
PRESENT VALUE OF PROVED RESERVES AT
YEAR-END
Before income taxes............. 2,095.5 1,257.2 970.8 567.8 915.2
After income taxes.............. 1,477.1 930.2 739.9 502.4 733.5
PRODUCTION COSTS PER BOE (including
related production, severance
and ad valorem taxes)
(in dollars).................... 5.64 5.18 5.34 5.43 5.71
</TABLE>
- ------------
(a) Certain prior period amounts have been restated to conform to 1996
presentation.
(b) 1993 amount includes losses on property dispositions of $27.8 million,
long-term debt repayment penalties of $8.6 million and accruals of certain
personnel benefits and related costs of $2.2 million. 1994 amount represents
severance, benefits and relocation expenses.
(c) Includes production attributable to properties sold during 1993 of 4.1 MBbls
of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day) and gives
effect to the sale in 1993 of approximately 8.0 MMBOE of proved reserves.
(d) On May 19, 1992 Adobe was merged with and into the Company.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company reported a loss to common shares for the fourth quarter of 1996
of $46.2 million, or $0.51 per share, compared to earnings to common shares of
$4.7 million, or $0.05 per share, in the fourth quarter of 1995. Earnings for
the fourth quarter of 1996 included pretax charges of $47.0 million for
impairment of oil and gas properties and $9.2 million in debt extinguishment
costs associated with the IPO and, in addition, a $33.7 million premium paid
with respect to the purchase of 3.8 million shares of the Company's Convertible
Preferred Stock, 7% Series. Earnings for the fourth quarter also included a
$12.3 million gain on the sales of certain surface lands in California. Crude
oil and liquids sales of 76.5 MBbls per day represents the highest quarterly
average in the Company's history. The Company's average hedged sales price for
crude oil and liquids of $18.80 per barrel was $4.74 per barrel higher than the
fourth quarter of 1995. Similarly, the Company's average hedged sales price for
natural gas increased $0.40 per Mcf from the fourth quarter of 1995 to $2.04 per
Mcf.
The Company reported a loss to common shares for the full year 1996 of
$10.8 million, or $0.12 per share, compared to earnings to common shares of
$11.8 million, or $0.13 per share, in 1995. Crude oil and liquids sales averaged
74.3 MBbls per day, the highest annual average in the Company's history. The
Company's average hedged sales price for crude oil and liquids of $16.87 per
barrel was $2.12 per barrel higher than 1995. Average natural gas sales of 166.9
MMcf per day were also the highest in the Company's history. The Company's
average hedged sales price for natural gas increased $0.38 per Mcf from the 1995
average to $1.81 per Mcf in 1996.
GENERAL
As an independent oil and gas producer, the Company's results of operations
are dependent upon the difference between the prices received for oil and gas
and the costs of finding and producing such resources. A material portion of the
Company's crude oil production is from long-lived fields in the San Joaquin
Valley of California where EOR methods are being utilized. The market price of
the heavy (i.e., low gravity, high viscosity) and sour (i.e., high sulfur
content) crude oils produced in these fields is lower than sweeter, light (i.e.,
low sulfur and low viscosity) crude oils, reflecting higher transportation and
refining costs. In addition, the lifting costs of heavy crude oils are generally
higher than the lifting costs of light crude oils.
The lower price received for the Company's domestic heavy and sour crude
oil is reflected in the average sales price of the Company's domestic crude oil
and liquids (excluding the effect of hedging transactions) for 1996 of $17.17
per barrel, compared to $20.44 per barrel for West Texas Intermediate ("WTI")
crude oil (an industry posted price generally indicative of prices for sweeter
light crude oil). In 1996 the Company's average sales price for California heavy
crude oil was $15.77 per barrel, approximately 77% of the annual average posted
price for WTI.
Crude oil prices are subject to significant changes in response to
fluctuations in the domestic and world supply and demand and other market
conditions as well as the world political situation as it affects OPEC, the
Middle East and other producing countries. During 1995 and 1996 the actual
average sales price (unhedged) received by the Company ranged from a high of
$18.80 per barrel in the fourth quarter of 1996 to a low of $14.16 per barrel
for the fourth quarter of 1995. Based on operating results for the year 1996,
the Company estimates that a $1.00 per barrel increase or decrease in its
average domestic crude oil sales prices would result in a corresponding $14.6
million change in net income and a $18.0 million change in cash flow from
operating activities. The foregoing estimates do not give effect to changes in
any other factors, such as the effect of the Company's hedging program or its
debt levels and related interest expense, that might result from a change in oil
prices.
The price of natural gas fluctuates due to weather conditions, the level of
natural gas in storage, the relative balance between supply and demand and other
economic factors. The actual average sales price (unhedged) received by the
Company in 1996 and 1995 for its natural gas ranged from a high of $2.45 per Mcf
in the fourth quarter of 1996 to a low of $1.31 per Mcf in the first quarter of
1995.
32
<PAGE>
Based on operating results for the year 1996, the Company estimates that a $0.10
per Mcf increase or decrease in its average domestic natural gas sales price
would result in a corresponding $2.1 million change in net income (net of $1.0
million in costs associated with natural gas purchased for use in steam
generation) and a $2.6 million change in cash flow from operating activities
(net of $1.3 million in costs associated with natural gas purchased for steam
generation). The foregoing estimates do not give effect to changes in any other
factors, such as the effect of the Company's hedging program or its debt levels
and related interest expense, that might result from a change in natural gas
prices.
From time to time the Company hedges a portion of its oil and gas sales to
provide a certain minimum level of cash flow from its sales of oil and gas.
While the hedges are generally intended to reduce the Company's exposure to
declines in market price, the Company's gain from increases in market price may
be limited. The Company uses various financial instruments whereby monthly
settlements are based on differences between the prices specified in the
instruments and the settlement prices of certain futures contracts quoted on the
New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in
instances where the applicable settlement price is less than the price specified
in the contract, the Company receives a settlement based on the difference; in
instances where the applicable settlement price is higher than the specified
price, the Company pays an amount based on the difference. The instruments
utilized by the Company differ from futures contracts in that there is no
contractual obligation which requires or allows for the future delivery of the
product. Gains or losses on hedging activities are recognized in oil and gas
revenues in the period in which the hedged production is sold.
The Company has open crude hedges on an average of approximately 7,700
barrels per day for the period January to July 1997. The instruments used have
floors ranging from $21 to $23 per barrel and ceilings ranging from $24 to $27
per barrel. Under the terms of the instruments, if the aggregate average of the
applicable daily settlement prices is below the floor, the Company will receive
a settlement based on the difference, and if the aggregate average of the
applicable daily settlement prices is above the ceiling, the Company will be
required to pay an amount based on the difference. The following table reflects
estimated amounts due to or from the Company assuming the stated settlement
prices are in effect for the entire period the aforementioned hedges are in
effect.
SETTLEMENT PRICE DUE TO (FROM) COMPANY
(DOLLARS PER BARREL) (MILLIONS OF DOLLARS)
-------------------- ---------------------
27.00 (1.6)
26.00 (0.2)
25.00 (0.1)
23.00 - 24.00 --
22.00 0.3
21.00 1.1
20.00 2.7
Crude oil hedges resulted in a $13.4 million decrease in revenues in 1996
and a $2.4 million increase in revenues in 1995.
The Company has no open natural gas hedges. In 1996 and 1995 natural gas
hedges resulted in decreases in revenues of $21.4 million and $0.3 million,
respectively.
In addition to its oil and gas sales hedges, for the first six months of
1996 the Company hedged 20.0 MMcf per day of the natural gas it purchases for
use in its steam generation operations in the San Joaquin Valley of California.
Such hedges resulted in a $3.2 million increase in 1996 production and operating
costs.
In February 1996 the Bureau of Land Management ("BLM") of the United
States Department of the Interior (which operates the Company's leases of
Federal lands) agreed, effective as of June 1, 1996, to reduce the royalties
payable on any Federal lease that produces heavy oil. As a result of this
33
<PAGE>
program, the Company's royalty rate on its Federal leases which produce heavy
oil (all of which are operated by Monterey) has been reduced from 12.5% to an
average of 4.8%, resulting in a net increase in the production attributable to
the Company's net revenue interests in such leases of approximately 1,600
barrels per day. The royalty reduction will be terminated upon the first to
occur of (i) the determination by the BLM that the WTI average oil price (as
adjusted for inflation) has remained above $24 per barrel for six consecutive
months and (ii) such time after September 10, 1999, as the Secretary of the
Interior determines that the heavy oil royalty rate reduction has not produced
the intended results (i.e., to reduce the loss of otherwise recoverable
reserves).
34
<PAGE>
RESULTS OF OPERATIONS
REVENUES
The following table reflects the components of the Company's crude oil and
liquids and natural gas revenues:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
CRUDE OIL AND LIQUIDS PRODUCED
REVENUES ($ MILLIONS)
Sales
Domestic
California Heavy........... 251.4 193.9 161.8
Other...................... 165.3 115.9 104.3
--------- --------- ---------
416.7 309.8 266.1
Argentina..................... 25.8 13.8 11.6
Indonesia..................... 29.5 30.8 31.3
Hedging......................... (13.4) 2.4 --
Net Profits Payments............ (3.2) (4.4) (3.8)
--------- --------- ---------
455.4 352.4 305.2
========= ========= =========
VOLUMES (MBBLS/DAY)
Domestic
California Heavy.............. 43.5 38.9 38.3
Other......................... 22.8 19.6 19.3
--------- --------- ---------
66.3 58.5 57.6
Argentina....................... 3.7 2.6 2.4
Indonesia....................... 4.3 5.2 5.7
--------- --------- ---------
74.3 66.3 65.7
========= ========= =========
SALES PRICES ($/BBL)
Domestic
California Heavy.............. 15.77 13.65 11.57
Other......................... 19.84 16.24 14.83
Total......................... 17.17 14.52 12.66
Argentina....................... 19.06 14.72 13.23
Indonesia....................... 18.92 16.10 15.09
Total........................... 17.36 14.65 12.89
Total Hedged.................... 16.87 14.75 12.89
NATURAL GAS PRODUCED
REVENUES ($ MILLIONS)
Sales
Domestic...................... 122.2 73.3 87.2
Foreign....................... 9.8 5.5 0.1
--------- --------- ---------
132.0 78.8 87.3
Hedging......................... (21.4) (0.3) (1.0)
Net Profits Payments............ (4.8) (1.4) (2.9)
--------- --------- ---------
105.8 77.1 83.4
========= ========= =========
VOLUMES (MMCF/DAY)
Domestic........................ 145.7 137.7 136.3
Foreign......................... 21.2 12.3 0.3
--------- --------- ---------
166.9 150.0 136.6
========= ========= =========
SALES PRICES ($/MCF)
Unhedged
Domestic...................... 2.29 1.46 1.75
Foreign....................... 1.27 1.22 0.99
Total......................... 2.16 1.44 1.75
Hedged.......................... 1.81 1.43 1.73
35
<PAGE>
Total revenues increased 30% from $449.4 million in 1995 to $583.3 million
in 1996. Revenues from the sales of crude oil and liquids produced increased
$103.0 million, primarily reflecting increased sales prices ($65.6 million) and
increased volumes ($52.1 million). Such increases were partially offset by a
$13.4 million hedging loss in 1996 compared to a $2.4 million hedging gain in
1995. Crude oil and liquids sales volumes increased 8.0 MBbls per day primarily
due to capital spending on the Company's heavy oil properties (3.5 MBbls per
day), reduced royalties on Federal heavy oil leases (1.0 MBbls per day) and new
domestic production and acquired interests in certain producing properties (3.4
MBbls per day).
Revenues from the sales of natural gas produced increased $28.7 million,
primarily reflecting increased sales prices ($39.5 million) and increased
volumes ($13.7 million). Such increases were partially offset by a $21.4 million
hedging loss in 1996 compared to a loss of $0.3 million in 1995. Domestic
natural gas sales volumes increased 8.0 MMcf per day primarily reflecting new
production partially offset by declines in production from more mature fields.
The increase in international sales volumes primarily reflects a full year's
production from the Company's Sierra Chata field in Argentina, which commenced
production in April 1995, and increased demand for the Argentine natural gas.
Revenues from the sales of crude oil purchased relate to the sale of crude
oil purchased and blended with certain of the Company's heavy oil production to
facilitate pipeline transportation. The cost to purchase such crude oil is
included in Costs and Expenses. The increase in 1996 reflects an increase in
blending to transport heavy oil to more attractive markets outside southern
California.
Total revenues increased 11% from $404.2 million in 1994 to $449.4 million
in 1995. Crude oil and liquids revenues increased $47.2 million, primarily
reflecting the effect of increased sales prices ($44.3 million) and increased
volumes ($4.3 million). Natural gas revenues declined $6.3 million primarily due
to the effect of lower sales prices ($14.6 million) which was partially offset
by the effect of higher sales volumes ($8.6 million). The increase in natural
gas sales volumes is principally due to sales from the Company's Sierra Chata
field in Argentina, which commenced production in April 1995. Other revenues for
1995 includes $10.2 million related to the favorable settlement of a disputed
natural gas sales contract.
Total revenues declined 10% from $449.5 million in 1993 to $404.2 million
in 1994. Crude oil and liquids revenues declined $10.2 million. The sale of
certain domestic properties in the fourth quarter of 1993 and the second quarter
of 1994 resulted in a decrease in oil revenues of approximately $20.4 million.
The effect of increased volumes of California heavy and Indonesian crude,
approximately $14.5 million, and lower net profits payments were partially
offset by the effect of lower sales prices. Daily average oil production in 1994
decreased 1,000 barrels per day from 1993. The 3,800 barrel per day decrease in
oil production resulting from the sale of properties was partially offset by a
1,300 barrel per day increase in California heavy crude and a 1,600 barrel per
day increase in Indonesian production.
Natural gas revenues declined from $107.8 million in 1993 to $83.4 million
in 1994. The sales of properties resulted in a decrease in natural gas revenues
of approximately $13.1 million and lower sales prices resulted in a reduction in
revenues of approximately $7.6 million. In addition, revenues for 1993 included
a positive adjustment of $3.2 million related to production in prior periods
from certain nonoperated properties. Net profits payments in 1994 were $3.3
million lower than in 1993. Natural gas sales volumes decreased from 165.4 MMcf
per day in 1993 to 136.6 MMcf per day in 1994 with the property sales accounting
for approximately 18.6 MMcf per day of the decrease. The Company's curtailment
program due to low prices resulted in a reduction in 1994 volumes of
approximately 5.1 MMcf per day and a prior period adjustment included in 1993
represented volumes of approximately 4.0 MMcf per day.
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COSTS AND EXPENSES
The following table sets forth, on a per barrel of oil equivalent produced
basis, certain of the Company's costs and expenses (in dollars):
1996 1995 1994
--------- --------- ---------
Production and operating (a)......... 5.02(f) 4.65 4.65
Exploration, including dry hole
costs.............................. 0.92 0.70 0.63
Depletion, depreciation and
amortization (b)................... 3.89 3.96 3.76
General and administrative........... 0.67(g) 0.81 0.85
Taxes other than income (c).......... 0.71 0.58 0.80
Interest, net (d)(e)................. 0.82 0.93 1.08
- ------------
(a) Excluding related production, severance and ad valorem taxes.
(b) Excludes effect of unproved property writedowns of $0.07 per BOE in 1996
and $0.03 per BOE in 1995.
(c) Includes production, severance and ad valorem taxes.
(d) Reflects interest expense less amounts capitalized and interest income.
(e) Excludes effects of (i) benefit of federal income tax audit refund of
$0.25 per BOE in 1995; (ii) benefit of an adjustment to certain financing
costs recorded in a prior period of $0.05 per BOE in 1995; (iii) benefit
of adjustments to provisions for potential state income tax obligations of
$0.15 per BOE in 1995 and $0.36 per BOE in 1994; (iv) benefit of
adjustment to provisions made in prior periods with respect to interest on
certain federal income tax audit adjustments of $0.07 per BOE in 1994; and
(v) benefit of Federal income tax audit refund and revised tax sharing
agreement with the Company's former parent of $0.36 per BOE in 1993.
(f) Excludes effect of $0.9 million charge for environmental clean-up costs
($0.02 per BOE).
(g) Excludes effect of $1.6 million charge related to the abandonment of an
office lease and $3.3 million in costs and expenses related to the IPO
($0.14 per BOE).
Costs and expenses totalled $493.8 million in 1996 compared to $395.5
million in 1995. Production and operating costs increased $32.6 million,
primarily reflecting higher production volumes, $3.2 million in expenses related
to hedges of natural gas purchased in connection with steam generation
operations in California (see -- General) and higher volumes and prices for
natural gas purchased in connection with such steam generation operations. The
cost of crude oil purchased increased primarily due to increased blending
activity (see -- REVENUES). The $11.1 million increase in exploration costs
primarily reflects higher geological and geophysical expenditures ($6.4 million)
and higher dry hole costs ($5.7 million). The increase in depletion,
depreciation and amortization ("DD&A") primarily reflects higher production
volumes. The impairments of oil and gas properties of $57.4 million in 1996 and
$30.2 million in 1995 represent writedowns taken in accordance with the
Company's accounting policy discussed in Note 1 to the Consolidated Financial
Statements. The increase in general and administrative expense primarily
reflects $3.3 million in expenses related to the IPO. The increase in taxes
other than income primarily reflects higher production and severance taxes due
to higher prices and volumes ($2.7 million) and higher ad valorem taxes. Taxes
other than income in 1995 included a $0.7 million benefit related to the
settlement of certain disputed sales and use taxes. The gain on disposition of
properties in 1996 includes a $12.3 million gain on the fourth quarter sale of
certain surface properties in Orange County, California.
Costs and expenses totalled $395.5 million in 1995 compared to $356.0
million in 1994. DD&A increased $11.9 million primarily reflecting such expense
associated with new production from the Company's Sierra Chata field in
Argentina and increased expense associated with certain of the Company's Gulf
Coast and Permian Basin properties principally due to the high level of capital
expenditures in 1995. In 1995 the Company recognized $30.2 million in impairment
of oil and gas properties associated with the adoption of a new accounting
standard with respect to the impairment of certain assets. Taxes other than
income are $6.6 million lower in 1995, primarily reflecting lower
37
<PAGE>
ad valorem taxes and a $0.7 million benefit reflecting adjustments to amounts
accrued in prior periods due to the favorable settlement of a dispute with
respect to certain sales and use taxes.
Costs and expenses for 1994 totalled $356.0 million compared to $562.5
million for 1993. Costs and expenses for 1993 included impairments of oil and
gas properties of $99.3 million and restructuring charges of $38.6 million.
Costs and expenses for 1994 included restructuring charges of $7.0 million
(see -- Liquidity and Capital Resources). Property sales in the fourth quarter
of 1993 and the second quarter of 1994 resulted in reductions in production and
operating costs and DD&A of $12.4 million and $11.5 million, respectively. The
remainder of the decrease in DD&A is primarily attributable to the effect of the
property impairments taken in the fourth quarter of 1993. Exploration expenses
were down $10.6 million primarily reflecting lower geological and geophysical
costs with respect to foreign operations and lower overhead. General and
administrative expenses were $5.0 million lower, primarily reflecting the effect
of the corporate restructuring program.
Interest income for 1995 includes $7.4 million related to a $12.0 million
refund with respect to the audit of the Company's federal income tax returns for
1981 through 1985 and $0.8 million related to a $1.3 million refund with respect
to the audit of Adobe's federal income tax returns for 1984 and 1985.
Interest expense for 1995 includes a $5.0 million benefit reflecting
adjustments to provisions made in prior periods for potential state income tax
obligations. Interest expense for 1994 includes a benefit of $2.4 million
reflecting adjustments to provisions made in prior periods with respect to
interest on certain potential federal income tax audit adjustments and a benefit
of $11.5 million reflecting adjustments to provisions made in prior periods for
potential state income tax obligations.
Other income (expense) for 1995 includes a $2.5 million gain on the sale of
Cherokee Resources Incorporated, a privately-held oil and gas company, and a
$1.8 million loss on the sale of the Company's investment in Hadson. Other
income (expense) for 1994 includes (i) a $2.4 million gain on the sale of the
Company's interest in a company which was acquired in the Adobe merger in 1992;
(ii) a net $1.6 million charge with respect to the Company's investment in
Hadson; and (iii) a $5.0 million charge with respect to certain litigation.
Income taxes for 1996 include a $8.3 million deferred tax benefit related
to certain foreign expenditures incurred in prior periods. Income taxes for 1995
include a $5.0 million benefit related to the previously discussed federal tax
audit refunds and a $1.3 million benefit related to adjustments to provisions in
prior periods for potential state income tax obligations. Income taxes for 1994
include a $3.0 million credit reflecting the benefit of adjustments to
provisions made in prior periods with respect to certain potential federal
income tax audit adjustments and a $2.6 million credit reflecting the benefit of
adjustments to provisions made in prior periods for potential state income tax
obligations.
The extraordinary item reported in 1996 represents costs and expenses
associated with the retirement of certain of the Company's debt in association
with the IPO. See Note 2 to the Consolidated Financial Statements.
The Company's preferred dividend requirement for 1996 includes a $33.7
million premium related to the purchase of 3.8 million shares of the Company's
Convertible Preferred Stock, 7% Series. The increase in the Company's preferred
dividend requirement in 1994 reflects the issuance of 10.7 million shares of
$0.732 Series A Convertible Preferred Stock in the second quarter of 1994.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), which established financial accounting and
reporting standards for stock-based employee compensation plans. FAS 123
encourages companies to adopt a fair value based method of accounting for such
plans but continues to allow the use of the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("Opinion 25"). Companies electing to continue
accounting in accordance with Opinion 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method defined in FAS
123 had been applied. The Company has elected to continue to account for
stock-based compensation in accordance with
38
<PAGE>
Opinion 25 and the pro forma disclosures in accordance with the provisions of
FAS 123 are included in Note 12 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities is a function of the
volumes of oil and gas produced from the Company's properties and the sales
prices received therefor. Since crude oil and natural gas are depleting assets,
unless the Company replaces the oil and gas produced from its properties, the
Company's assets will be depleted over time and its ability to incur debt at
constant or declining prices will be reduced. The Company increased its proved
reserves (net of production and sales) by approximately 33% over the five years
ended December 31, 1996; however, no assurances can be given that such increase
will occur in the future. Historically, the Company has generally funded
development and exploration expenditures and working capital requirements from
cash provided by operating activities. Depending upon the future levels of
operating cash flows, which are significantly affected by oil and gas prices,
the restrictions on additional borrowings included in certain of the Company's
debt agreements, together with debt service requirements and dividends, may
limit the cash available for future exploration, development and acquisition
activities. Net cash provided by operating activities and net proceeds from
sales of properties totalled $244.3 million in 1996; net cash used for capital
expenditures and producing property acquisitions in such period totalled $223.5
million.
The increase in accounts receivable in 1996 primarily reflects the effect
of higher sales prices and an increase in crude oil blending activity, partially
offset by the collection of the income tax refund discussed below. The increase
in other current assets primarily reflects an increase in advances to the
operators of joint interest oil and gas properties due to higher capital
spending and the note receivable associated with the sale of certain surface
property. Other assets at December 31, 1996 includes $24.2 million in escrowed
funds related to a producing property acquisition the Company completed in
January 1997. The increase in accounts payable at year end 1996 primarily
reflects an increase in capital projects in progress and increased crude oil
blending activity. The increase in income taxes payable in 1996 primarily
reflects current taxes associated with the contribution of assets to Monterey
and the Proposed Spin Off. The increase in other current liabilities reflects
higher advances received from joint interest partners.
The increase in accounts receivable from $76.2 million at December 31, 1994
to $89.0 million at December 31, 1995 primarily reflects a $12.0 million
receivable at December 31, 1995 related to a refund with respect to the audit of
the Company's federal income tax returns for 1981 through 1985. The decrease in
accounts payable from $84.1 million at December 31, 1994 to $73.1 million at
December 31, 1995 primarily reflects lower amounts payable with respect to
capital projects in progress.
Monterey intends to pay its shareholders a quarterly dividend of $0.15 per
share. The first dividend has been declared and will be paid in April 1997
consisting of a prorated dividend of $0.22 per share in respect of Monterey's
first partial quarter which ended December 31, 1996 and its first full quarter
ending March 31, 1997. Santa Fe will receive a total of approximately $10.0
million with respect to the 45.4 million shares that it currently holds. To the
extent Monterey continues to pay such dividends, Santa Fe will receive dividends
of approximately $6.8 million per quarter (assuming a quarterly dividend of
$0.15 per share) until the Proposed Spin Off is consummated. Such amounts would
be available to fund the Company's operations, other than those conducted by
Monterey.
Effective November 13, 1996 Santa Fe entered into a revolving credit
agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001.
The Santa Fe Credit Agreement permits the Company to obtain revolving credit
loans and issue letters of credit up to an aggregate amount of up to $150.0
million, with the aggregate amount of letters of credit outstanding at any time
limited to $30.0 million. Borrowings under the Santa Fe Credit Agreement are
unsecured and interest rates are tied to
39
<PAGE>
the bank's prime rate or eurodollar offering rate, at the option of the Company.
At December 31, 1996, no loans or letters of credit were outstanding under the
terms of the Santa Fe Credit Agreement.
Effective November 13, 1996 Monterey entered into the Monterey Credit
Agreement which matures November 13, 2000. The Monterey Credit Agreement permits
Monterey to obtain revolving credit loans and issue letters of credit up to an
aggregate amount of up to $75.0 million, with the aggregate amount of letters of
credit outstanding at any time limited to $15.0 million. Borrowings under the
Monterey Credit Agreement are unsecured and interest rates are tied to the
bank's prime rate or eurodollar offering rate, at the option of Monterey. At
December 31, 1996 no loans or letters of credit were outstanding under the terms
of the Monterey Credit Agreement.
In November 1996 Monterey issued the Monterey Senior Notes which were
exchanged for $175.0 million of senior notes previously issued by Santa Fe. The
Monterey Senior Notes bear interest at 10.61% per annum and are payable in full
in 2005. Monterey is required to repay, without premium, $25.0 million of the
principal amount each year from 1999 through 2005.
Certain of the credit agreements and the indenture for the Debentures
include covenants that restrict Santa Fe and Monterey's ability to take certain
actions, including the ability to incur additional indebtedness and to pay
dividends on capital stock. Under the most restrictive of these covenants, at
December 31, 1996 Santa Fe could incur up to $417.7 million of additional
indebtedness and pay dividends of up to $36.8 million on its aggregate capital
stock (including its common stock, 7% Convertible Preferred Stock and Series A
Preferred). At December 31, 1996, under the most restrictive of these covenants,
Monterey could incur up to $253.4 million of additional indebtedness and pay
dividends of $61.7 million on its common stock. Monterey is prohibited from
paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior
to the consummation of the Proposed Spin Off.
The Company has three short-term uncommitted lines of credit totalling
$60.0 million which are used to meet short-term cash needs. Interest rates on
borrowings under these lines of credit are typically lower than rates paid under
the Bank Facility. At December 31, 1996 $4.0 million was outstanding under these
lines of credit.
At December 31, 1996 the Company had outstanding letters of credit
totalling $6.0 million, $2.3 million of which related to the operations of
Monterey.
INITIAL PUBLIC OFFERING AND PROPOSED SPINOFF
In the third quarter of 1996 the Company announced its intention to
separate its operations in the State of California from the rest of its domestic
and international operations. In November such operations were assumed by
Monterey which subsequently issued 9.3 million shares of its common stock in an
initial public offering. The proceeds from the offering were primarily used to
retire certain of the Company's then outstanding long-term debt. See Items 1 and
2. Business and Properties -- MONTEREY RESOURCES, INC.
The Company has announced that it intends to distribute pro rata to its
common shareholders all of its remaining ownership interest in Monterey by means
of a tax-free distribution. The Proposed Spin Off is subject to certain
conditions including, the receipt of a ruling from the Internal Revenue Service
that such a distribution would be tax-free, the approval of such distribution by
the Company's common shareholders, the absence of any future change in the
market or economic conditions (including developments in the capital markets) or
the Company's or Monterey's business or financial condition that causes the
Company's Board of Directors to conclude that the Proposed Spin Off is not in
its shareholders' best interests and the final declaration of the Proposed Spin
Off by the Company's Board of Directors. The Proposed Spin Off is not expected
to occur prior to July 1997.
The Company is taking these actions because of its belief that its oil and
gas operations have developed over time into separate businesses that operate
independently and have diverging capital requirements and risk profiles. In
addition, the Board of Directors believes that dividing the Company's operations
into two independent companies will allow each to more efficiently develop its
40
<PAGE>
distinct resource base and pursue separate business opportunities while
providing each with improved access to capital markets. The Board of Directors
also believes that the IPO and the Proposed Spin Off will allow investors to
better evaluate each business, enhancing the likelihood that each would achieve
appropriate market recognition for its performance. If the Proposed Spin Off
occurs, the market price of the Company's common stock will decline to reflect
the distribution of the Monterey common stock and the increased shares available
in the market may have an adverse effect on the market price of Monterey's
common stock.
Also in November, the Company completed the purchase of 3.8 million of the
5.0 million outstanding shares of its Convertible Preferred Stock, 7% Series,
for $24.50 per share, net to the seller in cash. The Company made the offer
because it believes that the goals of the Proposed Spin Off can be better
achieved by reducing the number of preferred shares outstanding and simplifying
the Company's capital structure.
ENVIRONMENTAL MATTERS
Almost all phases of the Company's oil and gas operations are subject to
stringent environmental regulation by governmental authorities. Such regulation
has increased the costs of planning, designing, drilling, installing, operating
and abandoning oil and gas wells and other facilities. The Company has expended
significant financial and managerial resources to comply with such regulations.
Although the Company believes its operations and facilities are in general
compliance with applicable environmental regulations, risks of substantial costs
and liabilities are inherent in oil and gas operations. It is possible that
other developments, such as increasingly strict environmental laws, regulations
and enforcement policies or claims for damages to property, employees, other
persons and the environment resulting from the Company's operations, could
result in significant costs and liabilities in the future. As it has done in the
past, the Company intends to fund its cost of environmental compliance from
operating cash flows. See Items 1 and 2. "Business and Properties -- SANTA FE
CONSOLIDATED -- Other Business Matters -- Environmental Regulation" and Note 14
to the Consolidated Financial Statements.
DIVIDENDS
Dividends on the Company's 7% Convertible Preferred Stock and Series A
Preferred Stock are cumulative at an annual rate of $1.40 per share and $0.732
per share, respectively. No dividends may be declared or paid with respect to
the Company's common stock if any dividends with respect to the 7% Convertible
Preferred Stock or Series A Preferred Stock are in arrears. None of the
dividends with respect to the Company's 7% Convertible Preferred Stock and
Series A Preferred Stock are in arrears. The determination of the amount of
future cash dividends, if any, to be declared and paid on the Company's common
stock is in the sole discretion of the Company's Board of Directors and will
depend on dividend requirements with respect to the preferred stock, the
Company's financial condition, earnings and funds from operations, the level of
capital and exploration expenditures, dividend restrictions in financing
agreements, future business prospects and other matters the Board of Directors
deems relevant.
FORWARD LOOKING STATEMENTS
In its discussion and analysis of financial condition and results of
operations, the Company has included certain statements (other than statements
of historical fact) that constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used herein, the words "budget,"
"budgeted," "anticipate," "expects," "believes," "seeks," "goals,"
"intends" or "projects" and similar expressions are intended to identify
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those projected by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable and such forward-looking
statements are based upon the best data available at the time this report is
41
<PAGE>
filed with the Securities and Exchange Commission, no assurance can be given
that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements include, but are not limited to, the following:
production variances from expectations, volatility of oil and gas prices, the
need to develop and replace its reserves, the substantial capital expenditures
required to fund its operations, exploration risks, environmental risks,
uncertainties about estimates of reserves, competition, government regulation
and political risks, and the ability of the Company to implement its business
strategy. All such forward-looking statements in this document are expressly
qualified in their entirety by the cautionary statements in this paragraph.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Audited Financial Statements
Report of Independent
Accountants ............................................................... 63
Consolidated Statement of
Operations for the years
ended December 31, 1996,
1995 and 1994 ............................................................. 64
Consolidated Balance Sheet
- -- December 31, 1996 and
1995 ...................................................................... 65
Consolidated Statement of
Cash Flows for the years
ended December 31, 1996,
1995 and 1994 ............................................................. 66
Consolidated Statement of
Shareholders' Equity for
the years ended December
31, 1996, 1995 and 1994 ................................................... 67
Notes to Consolidated
Financial Statements ...................................................... 68
Unaudited Financial Information
Supplemental Information
to Consolidated Financial
Statements ................................................................ 91
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.
EXECUTIVE OFFICERS OF SANTA FE
Listed below are the names, ages (as of February 1, 1997) and positions of
all executive officers of Santa Fe (excluding executive officers who are also
directors of Santa Fe) and their business experience during the past five years.
Unless otherwise stated, all offices were held with Santa Fe Energy Company
prior to its merger with Santa Fe. Each executive officer holds office until his
or her successor is elected or appointed or until his or her earlier death,
resignation or removal.
HUGH L. BOYT, 51 Senior Vice President -- Production since March 1, 1990.
From 1989 until March 1990, Mr. Boyt served as Corporate Production Manager.
JERRY L. BRIDWELL, 53 Senior Vice President -- Exploration and Land since
1986.
JANET F. CLARK, 42 Vice President and Chief Financial Officer since January
1997. Ms. Clark was with Southcoast Capital Corporation from January 1994
until she joined Santa Fe. While with Southcoast Capital Ms. Clark served as
Vice President from January 1994 to June 1996 and as Director, Corporate
Finance, from June 1996 to December 1996. From December 1992 to January 1994
Ms. Clark served as Senior Vice President with Williams MacKay Jordan &
Company. Prior to December 1992 Ms. Clark was an independent financial
consultant.
42
<PAGE>
E. EVERETT DESCHNER, 56 Vice President -- Engineering and Evaluation since
April 1990.
KATHY E. HAGER, 45 Vice President -- Public Affairs since January 1997.
From January 1994 to January 1997 Ms. Hager served as Director, Investor
Relations and from September 1990 to January 1994 as Manager, Investor
Relations.
CHARLES G. HAIN, JR., 50 Vice President -- Human and Data Resources since
1994. Vice President -- Employee Relations from 1988 until 1994.
DAVID L. HICKS, 47 Vice President -- Law and General Counsel since March
1991.
DIRECTORS
CURRENT DIRECTORS. Listed below are the names and ages (as of February 1,
1997) of, and certain other information about, all the current directors of the
Company. The indicated periods of service as a director of the Company include
service during the time the Company was a wholly owned subsidiary of Santa Fe
Pacific Corporation.
FIRST ELECTED
NAME, AGE AND BUSINESS EXPERIENCE A DIRECTOR
- ------------------------------------- -------------
DIRECTORS CONTINUING IN OFFICE UNTIL 1997
Marc J. Shapiro, 49 ............................................. 1990
Chairman and Chief Executive
Officer of Texas Commerce Bank
National Association ("Texas
Commerce Bank") (banking) since
1987, and a member of the Policy
Council of Chase Manhattan
Corporation, (successor to the
Management Committee of Chemical
Banking Corporation) since December
1991. Mr. Shapiro is also a
director of Browning-Ferris
Industries, Burlington Northern
Santa Fe Corporation and a trustee
of Weingarten Realty Investors
William E. Greehey, 60 .......................................... 1991
Chairman of the Board, Chief
Executive Officer and director of
Valero Energy Corporation (refining
and marketing, gas transmission and
processing) since 1983. Mr. Greehey
is also a director of
Weatherford-Enterra
DIRECTORS CONTINUING IN OFFICE UNTIL 1998
Melvyn N. Klein, 55 ............................................. 1993
Attorney and Counselor at Law;
private investor; the sole
stockholder of a general partner in
GKH Partners, L.P. Mr. Klein is
also a principal of Questor
Management Company, and director of
Anixter International and Bayou
Steel Corporation (specialty steel
manufacturer)
James L. Payne, 59 .............................................. 1986
Chairman of the Board, President
and Chief Executive Officer of the
Company since June 1990. Mr. Payne
was President of Santa Fe Energy
Company, a predecessor in interest
of the Company from January 1986 to
January 1990 when he became
President of the Company. From 1982
to January 1986 Mr. Payne was
Senior Vice President--Exploration
and Land of Santa Fe Energy
Company. Mr. Payne is also a
director of Pool Energy Services
Co. (oilfield services), and
Monterey Resources, Inc.
DIRECTORS CONTINUING IN OFFICE UNTIL 1999
Allan V. Martini, 69 ............................................ 1990
Retired Vice President
Exploration/Production and director
of Chevron Corporation (petroleum
operations) since August 1988. Mr.
Martini served in that position
from July 1986 until his
retirement
(TABLE CONTINUED ON FOLLOWING PAGE)
43
<PAGE>
FIRST ELECTED
NAME, AGE AND BUSINESS EXPERIENCE A DIRECTOR
- ------------------------------------- -------------
Reuben F. Richards, 67........................................... 1992
Chairman of the Board, Terra
Industries Inc. (argibusiness) from
December 1982 until retirement in
March 1996. Chief Executive Officer
thereof from December 1982 to May
1991 and President thereof from
July 1983 to May 1991; Chairman of
the Board, Engelhard Corporation
(specialty chemicals, engineered
materials and precious metals
management services) from May 1985
to December 1994 and director
thereof since prior to 1990;
Chairman of the Board, Minorco
(U.S.A.) Inc. ("Minorco (USA)"),
from May 1990 to March 1996 and
Chief Executive Officer and
President from February 1994 to
March 1996. Mr. Richards is also a
director of Ecolab, Inc. (cleaning
and sanitizing products), Engelhard
Corporation, Potlatch Corporation
(forest products), and Minorco.
Kathryn D. Wriston, 57........................................... 1990
For the past five years, director
of various corporations and
organizations, including
Northwestern Mutual Life Insurance
Company and the Stanley Works and a
Trustee of the Financial Accounting
Foundation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Since July 1, 1990, the
Company has entered into agreements with Texas Commerce Bank or affiliates
thereof providing for cash management, lending, depository and other banking
services in the normal course of business. Texas Commerce Bank also issued
standby letters of credit with various expiration dates for security and
environmental requirements totaling $4,206,854 as of December 31, 1996. Texas
Commerce Bank is also the Trustee of the Company's Retirement Income Plan.
Finally, effective November 19, 1992, the Company in return for cash contributed
certain oil and gas interests to the Santa Fe Energy Trust which in turn issued
Secure Principal Energy Receipts evidencing an interest in the Trust and a
United States Treasury Obligation. Texas Commerce Bank is the Trustee of the
Trust and acts as registrar and transfer agent of the Secure Principal Energy
Receipts. During 1996 the Company paid Texas Commerce Bank interest in the
amount of $76,144 for loans to the Corporation and fees for various services in
the amount of $320,798 (which does not include $34,274 paid from the Retirement
Income Plan Trust). In addition, Mr. Shapiro, a director of the Company, is
Chairman and Chief Executive Officer of Texas Commerce Bank. Mr. Shapiro has no
direct or personal interest in these banking arrangements. His interest arises
only because of his positions as an officer of Texas Commerce Bank and a
director of the Company. Mr. Shapiro has abstained from voting on any issues
involving the relationships between the Company and Texas Commerce Bank.
In the opinion of the Company, the fees paid to Texas Commerce Bank for the
services performed are normal and customary.
Mr. Shapiro is also a director of Burlington Northern Santa Fe Corporation
which, as a result of a business combination in September 1995, became the
successor in interest to SFP. In connection with the distribution of shares of
the Company's common stock by SFP (and the initial distribution in December 1989
to SFP by one of SFP's wholly owned subsidiaries of such shares) (collectively
the "SFP Spin Off"), the Company and SFP entered into an agreement to protect
SFP from federal and state income taxes, penalties and interest that would be
incurred by SFP if the SFP Spin Off was determined to be a taxable event
resulting primarily from actions taken by the Company during a one year period
that ended on December 4, 1991. If the Company were required to make payments
pursuant to the agreement, such payments could have a material adverse effect on
its financial condition; however, the Company does not believe that it took any
actions during such one-year period that would have such an effect on the SFP
Spin Off.
For periods prior to the date of the SFP Spin Off, the Company was included
in the consolidated federal income tax return filed by SFP as the common parent
for itself and its subsidiaries. Pursuant to the Agreement for the Allocation of
the Consolidated Federal Income Tax Liability Among the Members of the SFP
Affiliated Group and various state agreements for the allocation of tax
liability among the SFP Group (the "Tax Agreements") between SFP and its
subsidiaries, the Company paid
44
<PAGE>
to SFP an amount approximating the federal income tax liability and for years
1989 and 1990 the state income tax liability it would have paid if it and its
subsidiaries were members of separate consolidated groups. These amounts were
payable regardless of whether the SFP consolidated group, as a whole, had any
current federal or state income tax liability. Pursuant to the Agreement
Concerning Taxes between SFP and the Company, after the SFP Spin Off additional
payments to or refunds from SFP may be made if there is an audit, carryover or
similar adjustment subsequently made that impacts the computation of amounts
paid SFP as described above.
Mr. Shapiro has no direct or personal interest in the above described
transaction. His interest arose only because of his position as a director of
Burlington Northern Santa Fe Corporation and as a director of the Company.
Mr. Payne is also a director of Pool Energy Services Co. ("Pool") which
provides various oilfield services. During 1996 the Company and Monterey paid
Pool subsidiaries $7,094,573 for services performed on properties operated by
the Company or Monterey. Mr. Payne has no direct or personal interest in these
services. His interest arises only because of his position as an officer of the
Company and a director of Pool. In the opinion of the Company, the amounts paid
for services performed by Pool were competitive and were normal and customary in
the industry.
The Company entered into an Agreement Regarding Shelf Registration dated
March 24, 1995, with HC Associates ("HC") which owns more than 5% of the
Company's common stock whereby the Company agreed that upon written demand
(which demand may be submitted to the Company once, provided such registration
is effected and the registration statement is declared effective) from HC, GKH
Partners, L.P. ("GKH"), GKH Investments, L.P., Ernest H. Cockrell Texas
Testamentary Trust or Carol Cockrell Jennings Texas Testamentary (collectively,
the "Selling Stockholders") at any time prior to March 27, 2000 to file with
the Securities and Exchange Commission a registration statement to register the
offer and sale, from time to time, by the Selling Stockholders of up to
5,203,091 shares of the Company's common stock beneficially owned by them as of
March 24, 1995, subject to certain specified restrictions. The Company is
obligated to pay all expenses incidental to such registration, excluding
underwriting discounts, commissions, fees or disbursements of legal counsel for
the Selling Stockholders.
See also Report of the Compensation and Benefits Committee -- Compensation
Committee Interlocks and Insider Participation at page 53 and Security Ownership
of Certain Beneficial Owners at page 47.
With respect to certain fees which will be payable to affiliates of Texas
Commerce Bank and to GKH upon consummation of the Proposed Spin Off, see Note 2
to the Consolidated Financial Statements.
OTHER INFORMATION CONCERNING DIRECTORS. In 1996, the Board met eight
times, and each member of the Board as it was composed at the time attended at
least 75% of the total number of meetings of the Board and the total number of
meetings held by all committees of the Board on which he or she served.
DIRECTORS COMPENSATION. Directors who are not employees of the Company or
its subsidiaries receive an annual cash retainer fee of $10,000, a fee of $1,000
for each meeting of the Board attended, and a fee of $1,000 (an additional
$2,000 annual retainer for the committee Chairman) for each committee meeting
attended plus expenses for each Board or committee meeting attended. In
addition, on May 8, 1996, the shareholders of the Company approved an amendment
to the 1990 Incentive Stock Compensation Plan, as amended (the "Stock Plan")
whereby a portion of the annual retainer is paid in shares of the Company's
common stock as well as a grant of Non-Qualified Stock Options ("NQSOs).
Pursuant to this amendment non-employee directors receive as a portion of their
retainer 1,000 shares of common stock with a six-month restriction period during
which it may not be transferred and 5,000 NQSOs issued at Fair Market Value (as
defined in the Stock Plan) as of the date of the Annual Meeting of Shareholders.
Further, all newly elected directors receive a one-time grant of 10,000 NQSOs
with a
45
<PAGE>
strike price of the Fair Market Value on the date the director is first elected.
Current directors received a similar one-time grant effective February 1, 1996,
the date the amendment to the Stock Plan was approved by the Board. Additional
terms and conditions relating to the NQSOs are described on page 52.
BOARD COMMITTEES. In 1996, the Board maintained Audit, Compensation and
Benefits, Executive, Nominating and Pension Committees. Following are the
members of each committee and brief descriptions of their functions. All
chairman of the committees are non-employee directors.
The members of the Audit Committee are Kathryn D. Wriston (Chairman), Marc
J. Shapiro and Melvyn N. Klein. The principal functions of the Audit Committee,
which met three times in 1996, include overseeing the performance and reviewing
the scope of the audit function of independent accountants. The Audit Committee
also reviews, among other things, audit plans and procedures, the Company's
policies with respect to conflicts of interest and the prohibition on the use of
corporate funds or assets for improper purposes, changes in accounting policies,
and the use of independent accountants for non-audit services.
The members of the Compensation and Benefits Committee are William E.
Greehey (Chairman), Kathryn D. Wriston and Reuben F. Richards. The principal
function of the Compensation and Benefits Committee, which met five times in
1996, is to administer all executive compensation and benefit plans of the
Company. Members of the Compensation and Benefits Committee are not eligible to
participate in any benefit plans of the Company that they administer except the
Stock Plan pursuant to which grants may be made only as described above. In
December 1996 the Pension Committee was abolished and its duties described below
were assumed by the Compensation and Benefits Committee.
The members of the Nominating Committee are Allan V. Martini (Chairman),
Kathryn D. Wriston and James L. Payne. The Nominating Committee, which met twice
in 1996, receives recommendations for review and evaluates the qualifications of
and selects and recommends to the Board of Directors, nominees for election as
Directors. The Nominating Committee will consider nominees recommended by
stockholders. Any such recommendation, together with the nominee's
qualifications and consent to be considered as a nominee, should be sent in
writing to the Secretary of the Company not less than 30 days nor more than 60
days prior to the annual meeting.
The members of the Executive Committee are Melvyn N. Klein (Chairman),
William E. Greehey, James L. Payne, Allan V. Martini and Reuben F. Richards. The
Committee, which met twice in 1996, may exercise during periods between meetings
of the Board of Directors, all powers of the Board in the management and
business of the Company subject to limitations imposed by the Bylaws,
Certificate of Incorporation or applicable law.
The members of the Pension Committee were a former director as Chairman,
James L. Payne and Allan V. Martini. The duties of the Pension Committee which
met once in 1996, included reviewing the actions of the Pension Administration
and Pension Investment Committees which are composed of Company employees,
making recommendations to the Board of Directors concerning future memberships
of such committees and such other recommendations as may be necessary or
appropriate, and recommending to the Board of Directors substantial amendments
to the Company's retirement plan which do not change benefit levels. The duties
of the Pension Committee were assumed by the Compensation and Benefits Committee
in December 1996.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the best of the Company's knowledge, the following persons are the only
persons who are beneficial owners of more than five percent of the Company's
common stock, Convertible Preferred Stock, 7% Series, or $.732 Series A
Convertible Preferred Stock based upon the number of shares outstanding on
December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES OF
SHARES OF $.732
NUMBER OF CONVERTIBLE SERIES A
SHARES OF PERCENT PREFERRED PERCENT CONVERTIBLE PERCENT
COMMON OF STOCK, OF PREFERRED OF
NAME AND ADDRESS STOCK(A) CLASS 7% SERIES CLASS STOCK CLASS
- ------------------------------------- ------------- ------- ------------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
HC Associates(b)..................... 5,203,091 5.7% -- -- % -- -- %
200 West Madison Street
27th Floor
Chicago, Illinois 60606
Neuberger & Berman, LLC(c)........... 4,535,168 5.0% -- -- % -- -- %
605 Third Ave.
New York, New York 10158
Merrill Lynch & Co., Inc.(d)......... 10,126,285 11.1% 64,393 5.0% 500,000 4.7%
World Financial Center, North Tower
250 Vesey Street
New York, NY 10281
OppenheimerFunds, Inc.(e)............ -- -- % -- -- % 825,000 7.7%
Two World Trade Center
Suite 3400
New York, New York 10048
FMR Corp.(f)......................... 9,388,321 10.3% -- -- % 2,498,800 23.4%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
The holders of Convertible Preferred Stock, 7% Series, of which there are
1,229,890 shares outstanding, may, at their option, convert any or all such
shares into 1.3913 shares of the Corporation's common stock. Each share of $.732
Series A Convertible Preferred Stock, of which there are 10,700,000 shares
outstanding, is convertible at the option of the holder into 0.8474 shares of
the Corporation's common stock at any time prior to May 15, 1998.
- ------------
(a) Each holder has claimed sole voting and investment power concerning these
shares except as noted below. The number of shares of common stock does not
include shares issuable upon conversion of preferred stock.
(b) As reported at May 31, 1995, HC Associates, a Delaware general partnership
("HC") is the owner of 5,203,091 shares (approximately 5.7 percent) of the
common stock of the Corporation. HC was organized in December 1992 for the
purpose of, among other things, acquiring, holding, selling, exchanging and
otherwise dealing with shares of the Corporation's common stock. The
partners of HC (and their respective percentage interests in HC) are GKH
Investments, L.P. (the "Fund") (92.743659 percent), GKH Partners, L.P., as
nominee for GKH Private Limited (3.506491 percent), Ernest H. Cockrell Texas
Testamentary Trust (1.874963 percent) and Carol Cockrell Jennings Texas
Testamentary Trust (1.874965 percent). The sole general partner of the Fund,
a Delaware limited partnership is GKH Partners, L.P. ("GKH"), a Delaware
limited partnership. Pursuant to a management agreement, GKH manages assets
on behalf of GKH Private Limited ("GKHPL"). The number of shares described
above do not include 39,100 shares of common stock acquired in September
1994 by GKH on behalf of GKHLP and the Fund. The general partners of GKH are
JAKK Holding Corp., a Nevada corporation ("JAKK"), DWL Lumber Corporation,
a Delaware corporation ("DWL"); and HGM Associates Limited Partnership, an
Illinois limited partnership ("HGMLP"). The sole general partner of HGMLP
is HGM Corporation, a Nevada corporation ("HGM"). Melvyn N. Klein is the
sole director and stockholder of JAKK and serves as its president, treasurer
and secretary. Mr. Klein disclaims beneficial ownership of the shares of
common stock owned by HC, GKH, GKHLP and the Fund. Dan W. Lufkin is
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
47
<PAGE>
president, director and sole stockholder, Craigh Leonard is secretary and a
director and Douglas J. McBride is assistant secretary and a director of
DWL. Jay A. Pritzker is a director and Chairman of the Board, Thomas J.
Pritzker is president and a director, Glen Miller is vice president and
treasurer and Harold S. Handelsman is vice president and secretary of HGM.
(c) As reported at February 13, 1997, Neuberger & Berman LLC is deemed to be a
beneficial owner of these shares for the purpose of Rule 13(d) since it has
shared power to make decisions whether to retain or dispose of the
securities of many unrelated clients. Neuberger & Berman, LLC does not
however have any economic interest in the securities of these clients. The
clients are the actual owners of the securities and have the sole right to
receive and the power to direct the receipt of dividends from or proceeds
from the sale of such securities.
Principals of Neuberger & Berman, LLC own 438,700 shares of the Company's
common stock. The principals own these shares in their own personal
securities accounts, Neuberger & Berman, LLC disclaims beneficial ownership
of these shares since they were purchased with each principals' personal
funds and each principal has exclusive dispositive and voting power over the
shares held in their respective accounts.
Neuberger & Berman Profit Sharing Retirement Plan owns 290,100 shares. Such
shares are held in a securities account in the name of the Plan with
Neuberger & Berman, LLC and are held in street name. The Plan's sole
beneficial owners are current and former Neuberger & Berman, LLC employees
and Principals who are Plan participants. Neuberger & Berman Trust Company
(a wholly owned affiliate of Neuberger & Berman, LLC) is trustee of the
Plan. One Principal of Neuberger & Berman, LLC makes day to day investment
decisions for the Plan. Neuberger & Berman, LLC disclaims beneficial
ownership of these shares.
(d) As reported at February 11, 1997, Merrill Lynch & Co., Inc., a Delaware
corporation ("ML & Co."), Merrill Lynch Group, Inc., a Delaware
corporation ("ML Group"), whose address is World Financial Center, North
Tower, 250 Vesey Street, New York, N.Y. 10281, and Princeton Services, Inc.,
a Delaware corporation ("PSI"), whose address is 800 Scudders Mill Road,
Plainsboro, N.J. 08536, are parent holding companies pursuant to Section
240, 13d-1 (b)(1)(ii)(G) of the Securities Exchange Act of 1934 (the
"Exchange Act"). The relevant subsidiaries of ML & Co. are Merrill Lynch
Pierce, Fenner & Smith Incorporated, a Delaware corporation with its
principal place of business at 250 Vesey Street, New York, N.Y.
("MLPF&S"), ML Group and PSI, which is the general partner of Merrill
Lynch Asset Management, L. P. (d/b/a) Merrill Lynch Asset Management
("MLAM"). The relevant subsidiaries of Merrill Lynch Group are PSI and
certain Merrill Lynch trust companies.
ML & Co. may be deemed to be the beneficial owner of the reported securities
of the Company as set forth by virtue of its control of its wholly-owned
subsidiaries, ML Group and MLPF&S.
MLPF&S, a wholly owned direct subsidiary of ML & Co. and a broker-dealer
registered pursuant to the Exchange Act holds certain of the reported
securities in proprietary trading accounts and may be deemed to be the
beneficial owner of securities held in customer accounts over which MLPF&S
has discretionary power and in unit investment trusts for which MLPF&S is
the sponsor.
ML Group, a wholly owned direct subsidiary of ML & Co., may be deemed to be
the beneficial owner of the reported securities of the Corporation as set
forth by virtue of its control of (i) its wholly-owned subsidiary, PSI, and
(ii) certain Merrill Lynch trust companies, each of which is a wholly-owned
subsidiary of ML Group and a bank as defined in Section 3(a)(6) of the
Exchange Act.
One or more Merrill Lynch trust companies or institutions, each of which is
a bank as defined in Section 3(a)(6) of the Exchange Act, may be deemed the
beneficial owner of certain of the reported securities of the Company held
by customers in accounts over which such trust companies or institutions
have discretionary authority.
PSI, a wholly owned direct subsidiary of ML Group, may be deemed to be the
beneficial owner of certain of the reported securities of the Company as set
forth by virtue of its being the general partner of MLAM.
MLAM, a Delaware limited partnership with its principal place of business at
800 Scudders Mill Road, Plainsboro, New Jersey, is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940. MLAM
may be deemed to be the beneficial owner of certain of the reported
securities of the Company as set forth by virtue of its acting as investment
advisor to one or more investment companies registered under Section 8 of
the Investment Company Act of 1940, and/or to one or more private
accounts.
48
<PAGE>
A registered investment company advised by MLAM, Merrill Lynch Growth Fund
for Investment for Retirement is the beneficial owner of 9,000,000 shares of
the Company's common stock as reported and is a reporting person
hereunder.
Pursuant to Section 240.13d-4 of the Exchange Act, ML&Co., ML Group and PSI
disclaim beneficial ownership of the securities of the Corporation reported,
and the filing of a Schedule 13G shall not be construed as an admission that
such entity is, for purposes of Section 13(d) or 13(g) of the Exchange Act,
the beneficial owner of any of the securities of the Company.
(e) As reported at February 10, 1997, the Board of Directors or Trustees of the
registered investment companies managed by Oppenheimer Funds, Inc. ("OFI")
and owning the shares of the Corporation's $.732 Series A Convertible
Preferred Stock shown can direct the disposition of dividends received by
OEIF and can dispose of such securities. Additionally, OFI shares the power
to dispose of such securities with the Board of Directors or Trustees of
such funds; however, the Board of Trustees of such funds have delegated
these responsibilities to OFI as the fund's investment advisor under its
investment advisory agreement. OFI has an interest relating to 7.5% of the
securities noted by virtue of the interest of 7.5% of such securities owned
by OEIF. OFI disclaims ownership of such securities except as expressly
stated above.
(f) As reported at February 14, 1997, as of December 31, 1996, Fidelity
Management & Research Company ("Fidelity"), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an
investment advisor registered under Section 203 of the Investment Advisors
Act of 1940, is the beneficial owner of 8,980,198 or 9.9% of the common
stock and 1,879,600 shares or 17.6% of the $.732 Series A Convertible
Preferred Stock of the Company as a result of acting as an investment
advisor to various investment companies registered under Section 8 of the
Investment Company Act of 1940.
Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the
funds each has sole power to dispose of the 8,980,198 shares of common stock
and 1,879,600 shares of Preferred Stock owned by the funds. Neither FMR
Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to
vote or direct the voting of the shares owned directly by the Fidelity
Funds, which power resides with the Funds' Board of Trustees. Fidelity
carries out the voting of the shares under written guidelines established by
the Funds' Boards of Trustees.
Fidelity Management Trust Company, 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR Corp., and a bank as
defined in Section 3(a)(6) of the Securities Exchange Act of 1934, is the
beneficial owner of 408,123 shares or less than 1% of the common stock and
619,200 shares or 5.8% of the $.732 Series A Convertible Preferred Stock of
the Company as a result of its serving as an investment manager of the
institutional accounts. Edward C. Johnson 3d and FMR Corp., through its
control of Fidelity Management Trust Company, each has sole dispositive
power over these shares, the sole power to vote or direct the vote over a
portion of the shares and no power to vote or direct the voting of the
balance of such shares.
Members of the Edward C. Johnson 3d family and trusts for their benefit are
the predominant owners of Class B shares of common stock of FMR corp.,
representing approximately 49% of the voting power of FMR Corp. Mr. Johnson
3d owns 12.0% and Abigail Johnson owns 24.5% of the aggregate outstanding
voting stock of FMR Corp. Mr. Johnson 3d is Chairman of FMR Corp. and
Abigail P. Johnson is a Director of FMR Corp. The Johnson family group and
all other Class B shareholders have entered into a shareholders' voting
agreement under which all Class B shares will be voted in accordance with
the majority vote of Class B shares. Accordingly, through their ownership of
voting common stock and the execution of the shareholders' voting agreement,
members of the Johnson family may be deemed, under the Investment Company
Act of 1940, to form a controlling group with respect to FMR Corp.
49
<PAGE>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the amount of common stock beneficially
owned as of February 1, 1997 by each of the directors, by each of the executive
officers, and by all directors and executive officers as a group. Unless
otherwise noted, each of the named persons and members of the group has sole
voting and investment power with respect to the shares shown. No individual
listed below, except Mr. Payne, beneficially owns one percent or more of the
Company's outstanding common stock. In addition, no individual listed below
beneficially owns any shares of Convertible Preferred Stock, 7% Series. With the
exception of Mr. Payne, no individual listed below owns any $.732 Series A
Convertible Preferred Stock.
SHARES
NAME OF DIRECTOR, OWNED PERCENT
EXECUTIVE OFFICER OR GROUP BENEFICIALLY OF CLASS
- ------------------------------------- ------------ --------
William E. Greehey................... 49,726 --
Melvyn N. Klein(a)................... 5,063,203 5.6%
Allan V. Martini..................... 22,907 --
Reuben F. Richards................... 21,387 --
Marc J. Shapiro...................... 26,707 --
Kathryn D. Wriston................... 21,629 --
James L. Payne(b).................... 946,277 1.0%
Jerry L. Bridwell(c)................. 366,985 --
Hugh L. Boyt(d)...................... 280,314 --
R. Graham Whaling(e)................. 20,627 --
Directors and Executive Officers as a
Group(f)........................... 7,269,102 7.8%
- ------------
(a) Includes 5,048,083 shares of common stock which may be deemed to be owned by
GKH primarily through its participation in HC Associates. See "Security
Ownership of Certain Beneficial Owners" for a description of ownership of
the Corporation's common stock by HC Associates. Mr. Klein is the sole
stockholder of one of the general partners in GKH Partners, L. P., the
general partner of GKH Investments, L. P. and the nominee for GKH Private
Limited and disclaims beneficial ownership of the shares held by HC
Associates. Also includes 15,000 shares which could be received upon the
exercise of options within 60 days. The weighted average exercise price of
such options is $10.2292.
(b) Mr. Payne's common stock ownership includes 47,906 shares arising from
participation in the Corporation's Savings Investment Plan and 722,890
shares which could be received upon the exercise of options within 60 days.
The weighted average exercise price of such options is $12.7344. In
addition, Mr. Payne owns 3,000 shares of $.732 Series A Convertible
Preferred Stock.
(c) Mr. Bridwell's common stock ownership includes 36,676 shares arising from
participation in the Corporation's Savings Investment Plan and 273,839
shares which could be received upon the exercise of options within 60 days.
The weighted average exercise price of such options is $13.5447.
(d) Mr. Boyt's common stock ownership includes 6,455 shares arising from
participation in the Company's Savings Investment Plan and 225,245 shares
which could be received upon the exercise of options within 60 days. The
weighted average exercise price of such options is $11.5275.
(e) Mr. Whaling's common stock ownership includes 1,459 shares arising from
participation in the Corporation's Savings Investment Plan.
(f) The common stock ownership described includes 115,977 shares arising from
participation in the Company's Savings Investment Plan as of February 1,
1997 and 1,649,805 shares which could be received upon the exercise of
options within 60 days.
50
<PAGE>
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE
The Compensation and Benefits Committee (the "Committee") has been
chartered by the Board to review salaries and other compensation of officers,
including Mr. Payne, the Company's Chief Executive Officer, and key employees on
an annual basis. Following review, the Committee submits recommendations to the
Board regarding such salaries and compensation. In addition, the Committee
selects officers and key employees for participation in incentive compensation
plans, establishes performance goals for those officers and key employees who
participate in such plans and reviews and monitors benefits under all employee
plans of the Company.
Although Mrs. Wriston appears below as a member of the Committee, she was
appointed as such in December 1996 and did not participate as a member in any
meetings held during 1996.
COMPENSATION POLICIES FOR EXECUTIVE OFFICERS
As a result of an extensive review undertaken in 1995 with the assistance
of Hay Management Consultants, a performance-based executive compensation
program was developed. The Committee believes the program is competitive,
reinforces the Company's business strategy and supports objectives for enhanced
shareholder value. It is designed to attract, retain and motivate key employees
by providing total compensation opportunities consistent with those maintained
by the Company's peer group. The group used for this purpose includes companies
from the peer graph on page 58 which the Committee believes approximate the
Company's size and asset mix. The program allows compensation to vary
significantly based on performance results, balance objectives for short-term
operating performance with longer term performance, and encourage stock
ownership among key employees.
Base salaries for the executive group are maintained near the median
competitive position for comparable positions among the peer group. Annual
incentive opportunities are targeted to provide compensation between a median
and upper quartile of the Company's peer group described above. Long-Term
incentive opportunities are provided through grants of stock options and Phantom
Units made pursuant to the Stock Plan and are targeted between median and upper
quartile award levels with upside opportunities based on sustained performance
and creation of shareholder value.
As a result of the review of the peer group undertaken in 1996 and in light
of the proposed Spin-Off to Monterey Resources it was determined that no salary
increases be given to the executive officers in 1996. Mr. Whaling's salary was
increased in November 1996 by action of the Monterey Resources board in
recognition of his assumption of the duties of the Chairman of the Board and
Chief Executive Officer of that company.
Annual incentives are provided through the Incentive Compensation Plan (the
"ICP Plan"). Goals are established which, if met at the target objective, will
result in the executive officer being paid 50 percent of the maximum amount for
which the individual is eligible. All executive officers participate in the ICP
Plan with maximum payout percentages in 1996 (before the possible adjustments
discussed below) of base salary ranging from 100 percent for Mr. Payne through
50 percent for all other executive officers. The Committee may increase or
decrease the ultimate award by 25 percent at its discretion. In addition, by
electing to forgo all or a portion of the cash segment of the award a
participant may elect to receive an amount of Restricted Stock under the Stock
Plan equal to an additional $1 in value for each $2 of cash given up.
The goals established for 1996 were based upon discretionary cash flow per
share, production, reserve replacement, the performance of the Company's common
stock as compared to the peer group shown in the table on page 58, general and
administrative expense and a discretionary award. The awards were subject to
reduction by 50 percent in the event the Company failed to achieve net income to
common shareholders. Discretionary cash flow per share is defined as net cash
provided by operating activities before changes in operating assets and
liabilities minus exploration dry hole costs plus total exploration expense
minus capitalized interest minus preferred dividends by the average number of
common shares outstanding. Each goal was weighted equally with the exception of
general
51
<PAGE>
and administrative expense and the discretionary award and with the exception of
the stock performance goal and discretionary award were compared against profit
plan projections. The discretionary cash flow, reserve replacement, production
and stock price performance goals were met in full. After deducting expenses
relating to the reconfiguration program undertaken in 1996 the general and
administrative expense goal was met in full and the entire amount of the
discretionary award was granted. Although the Company did not achieve net income
to common shareholders the Committee decided not to reduce the ultimate payout
since a positive net income would have resulted but for non-recurring expenses
relating to the reconfiguration program.
The payout of the awards under the ICP Plan were initially set to be made
75 percent in cash and 25 percent in Bonus Stock granted pursuant to the Stock
Plan. Participants were allowed to elect prior to the beginning of the 1996 Plan
year to forgo all or a portion of the cash payment in return for the receipt of
Restricted Stock on the basis of an additional $1 in value for each $2 of cash
given up. These shares are subject to forfeiture in certain events and will vest
one-third per year over a three-year period. The number of shares of Restricted
Stock granted to Mr. Payne and other executive officers listed in the Summary
Compensation Table on page 54 are described in a footnote to that table.
In addition to the above described cash and stock payments, the executive
officers and key employees are eligible to participate in other grants made
under the Stock Plan. In order to further the identity of interest of employees
with that of its stockholders, all forms of compensation under the Stock Plan
relate to the Company's common stock.
Prior to the Initial Public Offering of Monterey the Committee took action
to cause the acceleration of vesting of certain outstanding Non-Qualified Stock
Options ("NQSO's") and the payout of Phantom Units. NQSO's granted to
executive officers and key employees under the 1990 Incentive Stock Compensation
Plan prior to the July 1996 grant described below vested in full in September
1996. In addition, the Performance Units granted in 1996 paid out in shares of
the Company's common stock at the target level in November 1996.
As a result of this acceleration Mr. Payne received early vesting on
300,000 NQSO's with a strike price of $9.5625. The other executive officers
received early vesting on NQSO's ranging in amounts from 62,500 with a strike
price of $8.00 in the case of Mr. Whaling, 100,000 each with a strike price of
$9.5625 to several other executive officers to 12,666 each with a strike price
of $7.875 to several other executive officers. The early payout of the Phantom
Units resulted in the receipt by Mr. Payne of 34,355 shares of the Company's
common stock with the other individuals listed in the Summary Compensation Table
on page 54 receiving 9,375 shares of stock and the remaining individuals
participating in the grant receiving amounts ranging from 9,375 to 5,833.
In July 1996, as part of the strategy discussed above the Committee granted
Mr. Payne, the executive officers and other key employees NQSO's as noted in the
table located on page 56. In December 1996 the Company granted additional NQSO's
to Mr. Payne, selected executive officers and key employees in the amounts noted
in the table. All grants were made at fair market value and vest as to one-third
of the grant per year over a three-year period. The Committee did not accelerate
the vesting of these grants and the Proposed Spin Off of Monterey will not do
so.
Finally, also as part of the strategy discussed above in December 1996 the
Committee granted a total of 81,787 Performance Units to seventeen individuals
including Mr. Payne and the executive officers. Mr. Payne received 23,679
Phantom Units, the executive officers listed in the Summary Compensation Table
on page 54 (other than Messrs. Whaling and Rosinski) received 6,610 and the
remaining individuals participating in the grant received Units in amounts
ranging from 6,610 to 2,414. The Units are earned over a three-year period
commencing January 1, 1997 with ultimate payout if any to be made in an
equivalent number of shares of the Company's common stock. The Committee
established four equally weighted goals which must be attained over this
three-year period. Full payout will result if discretionary cash flow (as
described above) and production volumes equal the three-year projected levels
established by the 1997 profit plan, the Company's common stock price
performance (after deletion at the outset of the implied value of Monterey)
equals the S&P 500 Index over the three-
52
<PAGE>
year period and the Company's common stock price at the end of the three years
equals an established target. If the above goals are substantially exceeded
possible payouts may increase by 100 percent. Failure to meet a threshold goal
level will result in the reduction or total elimination of a payout.
CHIEF EXECUTIVE COMPENSATION
The review of executive compensation discussed above included a review of
Mr. Payne's compensation. As in the case of the executive officers as a result
of the review of the peer group and in light of the Proposed Spin Off of
Monterey it was determined that Mr. Payne's salary not be increased in 1996. Mr.
Payne did receive a grant of 100,000 NQSOs with a strike price of $11.625 in
July and another grant of 125,000 NQSOs with a strike price of $13.75 in
December. Further as a result of the Committee action described above, the
vesting on 300,000 NQSOs with a strike price of $9.5625 was accelerated in
September and 34,355 Performance Units paid out early in the amount of an equal
number of shares of the Company's common stock.
SECTION 162 (M) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
The Committee continues to review implications of the $1 million pay cap
rules set forth in Section 162 (m) of the Internal Revenue Code of 1986, as
amended, and takes this into account when establishing and reviewing
compensation policies.
COMPENSATION AND BENEFITS COMMITTEE
William E. Greehey, Chairman
Reuben F. Richards
Kathryn D. Wriston
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation and Benefits Committee was an officer or
employee of the Company in 1994, 1995 or 1996. Mr. Greehey is Chairman of the
Board and Chief Executive Officer of Valero Energy Corporation. During 1996, an
affiliate of Valero paid the Company $635,841 for compression of natural gas.
These fees were determined on an arm's length basis. Mr. Greehey did not have a
direct or personal interest in the above transactions and his interest in the
above transactions and his interest arises only because of his position as an
officer and director of Valero and as a director of the Company.
Mr. Richards is the retired Chairman of the Board, Chief Executive Officer
and President of Minorco (USA) and is a director of its parent Minorco. On March
8, 1996, Minorco (USA) disposed of 8,712,327 shares of the Company's common
stock which it held. Pursuant to the terms of a registration rights agreement
dated December 10, 1991, and effective as of May 19, 1992, the Company paid
substantially all expenses incidental to the registration of these shares,
excluding underwriting discounts and commissions. Mr. Richards did not have a
direct or personal interest in this transaction and his interest arises only
because of his former position as an officer and director of Minorco (USA) and a
director of Minorco and the Company.
53
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS PAYOUTS
SECURITIES ---------
ANNUAL COMPENSATION UNDERLYING LTIP ALL OTHER
NAME AND --------------------------------- OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY $ BONUS $(A) # $(B) $(C)
- ------------------------------------- --------- --------- ---------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
James L. Payne....................... 1996 515,000 708,125 225,000 515,025 30,900
Chairman of the Board, Chief 1995 433,250 284,922 -- -- 24,150
Executive Officer and 1994 406,000 300,000 -- -- 18,983
President
R. Graham Whaling.................... 1996(d) 236,538 243,930 35,000 140,625 19,993
Senior Vice President and 1995 225,000 109,766 250,000 -- 6,000
Chief Financial Officer 1994 -- -- -- -- --
Hugh L. Boyt......................... 1996 230,000 215,625 70,000 140,625 13,800
Senior Vice President -- 1995 210,731 103,938 -- -- 9,432
Production 1994 204,308 102,971 -- -- 10,489
Jerry L. Bridwell.................... 1996 230,000 172,500 70,000 140,625 12,420
Senior Vice President -- 1995 207,080 107,000 -- -- 11,246
Exploration and Land 1994 199,440 100,518 -- -- 10,295
Michael J. Rosinski.................. 1996 200,000 206,250 17,500 140,625 455,750
Senior Vice President -- 1995 194,675 91,200 -- -- 11,026
Marketing and Environmental 1994 192,900 97,222 -- -- 9,912
</TABLE>
- ------------
(a) The bonus amounts shown, while determined on a cash basis, were actually
paid partially in shares of the Company's common stock pursuant to the Stock
Plan. For 1994 Messrs. Payne, Boyt, Bridwell and Rosinski received 17,911;
6,148; 6,002 and 5,805 shares, respectively. For 1995, Messrs. Payne,
Whaling, Boyt, Bridwell and Rosinski received 14,898; 1,818; 5,435; 5,595
and 4,769 shares, respectively. For 1996, participants in the ICP Plan,
pursuant to which these bonuses were paid, received 25 percent of the bonus
earned in Bonus Stock under the Stock Plan and had the right to receive the
balance in cash. Alternatively participants could elect to forgo all or a
portion of the cash payment in return for the receipt of Restricted Stock on
the basis of an additional $1 in value for each $2 of cash given up. These
shares are subject to forfeiture in certain events and will vest one-third
per year over a three year period. The bonus amounts for 1996 reflect that
additional value received as a result of such elections. Messrs. Payne,
Whaling, Bridwell and Boyt received 6,460, 1,836, 3,067, and 2,084 shares of
Bonus Stock and 41,200, 14,192, 0, and 9,200 shares of Restricted Stock,
respectively. Mr. Rosinski, whose employment with the Company terminated on
December 31, 1996, received all cash.
(b) The amounts shown reflect the value the Company's common stock received as a
result of the accelerated payout of Performance Units granted as of January
1, 1996. See the Report of the Compensation and Benefits Committee.
(c) Amounts shown reflect matches made by the Company for employee contributions
to the Santa Fe Energy Resources, Inc. Savings Investment Plan as well as
the performance match. (See "Benefit Plans -- Savings Plan" for a
description of the Savings Investment Plan as well as the performance
match.) The performance match is contributed in the year following the
performance and therefore total amounts shown for 1994, 1995 and 1996
include the match made for 1993, 1994 and 1995 results, respectively. The
Company made a performance match in February 1997 for 1996 results for
Messrs. Payne, Whaling, Boyt, Bridwell and Rosinski in the amount of $3,000
for each individual. In addition, amounts shown for 1996 also include the
match made by the Corporation relating to deferrals under the Deferred
Compensation Plan. (See "Benefit Plans -- Savings Plan" for a description
of the Deferred Compensation Plan.) These amounts are also subject to the
performance match outlined in the Savings Investment Plan. In February 1997
the Company allocated to accounts maintained by Messrs. Payne, Whaling,
Boyt, Bridwell and Rosinski $7,300, $1,750, $1,600, $1,140 and $1,000,
respectively as a performance match.
Amounts shown for 1996 for Mr. Whaling also include grossed up tax payments
made to him relating to his relocation from Houston, Texas to Bakersfield,
California.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
54
<PAGE>
Finally, the amounts shown in 1996 for Mr. Rosinski also include $443,750
which he will receive pursuant to the terms of a severance arrangement.
(d) Mr. Whaling served as Senior Vice President and Chief Financial Officer
until November 1996 when he resigned to assume the position of Chairman of
the Board and Chief Executive Officer of Monterey Resources.
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND 1996 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED YEAR-END 1996 YEAR-END 1996
ON EXERCISES VALUE EXERCISABLE/ EXERCISABLE/
NAME DURING 1996 REALIZED UNEXERCISABLE UNEXERCISABLE(A)
- ------------------------------------- ------------ --------- ---------------- ------------------
(#) $ (#) $
<S> <C> <C> <C> <C>
James L. Payne....................... -0- 722,890/225,000 1,832,812/240,625
R. Graham Whaling (b)................ -0- 250,000/35,000 1,468,750/78,750
Hugh L. Boyt......................... -0- 225,245/70,000 625,312/83,125
Jerry L. Bridwell.................... -0- 273,839/70,000 625,312/83,125
Michael J. Rosinski (c).............. 20,000 111,250 120,000/17,500 517,500/39,375
</TABLE>
- ------------
(a) The closing price of the Company's common stock on December 31, 1996 was
$13.875.
(b) See footnote (1) under OPTION/SAR GRANTS IN LAST FISCAL YEAR for information
concerning the cancellation of these options by the Company in return for
the grant of options to Mr. Whaling by Monterey Resources.
(c) Mr. Rosinski's employment with the Company terminated on December 31, 1996.
Pursuant to the terms of a severance arrangement Mr. Rosinski received
$43,750 (the difference between the average of the high and low sales prices
of the Company's common stock on December 31, 1996 and the strike price of
$11.625 per share multiplied by his unexercisable options) in return for the
cancellation of his unexercised options.
55
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------- POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS/SARS EXERCISE APPRECIATED FOR
OPTIONS/SARS GRANTED TO OR BASE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------
(#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
------------ ------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
James L. Payne....................... 100,000 8% 11.625 07-02-06 731,090 1,852,720
125,000 10% 13.75 12-11-06 1,080,925 2,739,250
R. Graham Whaling(a)................. 35,000 3% 11.625 07-02-06 255,881 648,452
Hugh L. Boyt......................... 35,000 3% 11.625 07-02-06 255,881 648,452
35,000 3% 13.75 12-11-06 302,659 766,990
Jerry L. Bridwell.................... 35,000 3% 11.625 07-02-06 255,881 648,452
35,000 3% 13.75 12-11-06 302,659 766,990
Michael J. Roskinski(b).............. 17,500 3% 11.625 07-02-06 127,940 324,226
</TABLE>
All options described above are NQSOs granted pursuant to the 1990
Incentive Stock Compensation Plan, as amended (the "Stock Plan"). The NQSOs
were granted at market on the date of grant and vest one-third per year over a
three year period. These options were not accelerated by the IPO.
- ------------
(a) Mr. Whaling resigned his position as Senior Vice President and Chief
Financial Officer in November 1996 and assumed the position of Chairman of
the Board and Chief Executive Officer of Monterey. Upon the closing of the
IPO Mr. Whaling received 112,500 NQSOs pursuant to the Monterey Resources
1996 Incentive Stock Compensation Plan (the "Monterey Stock Plan") with a
strike price of $14.50. These options vest one-fifth per year over a five
year period but may not be exercised until one year following the
consummation of the Proposed Spin Off. In addition, in December 1996
Monterey offered to replace NQSOs granted pursuant to the Company's Stock
Plans with NQSOs granted pursuant to the Monterey Stock Plans. Mr. Whaling
accepted the offer and effective January 17, 1997, the options described
above were cancelled in return for a grant of 31,496 Monterey NQSO's with a
strike price of $12.9185. In addition, 250,000 NQSOs granted in January 1995
with a strike price of $8.00 were cancelled in return for a grant of 224,969
NQSOs issued pursuant to the Monterey Stock Plan with a strike price of
$8.8901. The newly granted NQSOs contain the same vesting schedule as the
Company NQSOs they replaced but may not be exercised until one year
following the consummation of the Proposed Spin Off even if fully or partial
vested prior to that time.
(b) Mr. Rosinski's employment with the Company terminated on December 31, 1996.
Pursuant to the terms of a severance arrangement these options were
cancelled. See -- Aggregated Option/SAR Exercises in 1996 and 1996 Year-End
Option/SAR Values.
56
<PAGE>
LONG-TERM INCENTIVE PLANS AWARDS IN 1996
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
NUMBER OF UNDER NON-STOCK
SHARES, UNITS PERFORMANCE PRICE-BASED PLANS
OR OTHER OR OTHER PERIOD ------------------------------
RIGHTS UNTIL MATURATION OR THRESHOLD TARGET MAXIMUM
NAME (#) PAYOUT (#) (#) (#)
- ------------------------------------- ------------- ------------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
James L. Payne....................... 23,679 1/1/97-12/31/99 7,104 23,679 47,358
R. Graham Whaling.................... -0- -- -- -- --
Hugh L. Boyt......................... 6,610 1/1/97-12/31/99 1,983 6,610 13,220
Jerry L. Bridwell.................... 6,610 1/1/97-12/31/99 1,983 6,610 13,220
Michael J. Rosinski.................. -0- -- -- -- --
</TABLE>
In December 1996, the individuals described above (as well as 14 other
executive officers and key employees) received grants of Phantom Units pursuant
to the Stock Plan in the amounts indicated. The grant was effective January 1,
1997 with the Units being earned over a three-year period. Ultimate payout, if
any, is to be made in an equivalent number of shares of the Company's common
stock. Four equally weighted goals have been established which must be attained
over the three year performance period. Full payout at the target level will
result if discretionary cash flow (as described on page 51) and production
volumes equal the three year projected levels established by the 1997 profit
plan, the Company's common stock price performance equals the S&P 500 Index over
the three year period and the Company's common stock price at the end of the
three years equals an established target. If the above goals are substantially
exceeded possible payouts may increase to the maximum shown. Failure to meet a
threshold level, shown above as the combined threshold level of all four goals,
will result in a reduction or total elimination of a payout.
Mr. Whaling did not receive a grant of Phantom Units but did receive 37,500
shares of Monterey Resources, Inc. Restricted Stock pursuant to the Monterey
Resources Stock Plan. These shares vest as to one-fifth of the grant per year
over a five year period. The grant is not contingent upon the attainment of
goals but is subject to forfeiture in the event of termination of employment
under certain circumstances.
57
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the performance of the
Corporation's common stock to the S&P 500 Index and to an index composed of 21
Independent Oil and Gas Companies selected by Goldman, Sachs & Co. from time to
time.(a) Although Goldman, Sachs & Co. does not represent that these companies
comprise a "peer group," the Corporation believes that its asset base and
operations are best compared to this group and that they are its peers.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG
SANTA FE ENERGY RESOURCES INC., THE S & P 500 INDEX AND A PEER GROUP
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
12/91 12/92 12/93 12/94 12/95 12/96
----- ----- ----- ----- ----- -----
SANTA FE ENERGY RESOURCES INC. 100 98 106 92 110 159
PEER GROUP 100 117 141 127 152 202
THE S & P 500 100 108 118 120 165 203
* $100 invested on 12/31/91 in stock or index -- including reinvestment of
dividends. Fiscal year ending December 31.
(a) This group of companies, which includes the Corporation, also currently
includes Anadarko Petroleum Corp., Apache Corp., Barrett Resources Corp.,
Burlington Resources, Cabot Oil & Gas, Cross Timbers Oil Co., Devon Energy,
Enron Oil & Gas, Louisiana Land & Exploration, Mitchell Energy &
Development, Noble Affiliates, Inc., Oryx Energy Co., Parker & Parsley
Petroleum, Pennzoil Co., Pogo Producing Company, Seagull Energy Corp., Union
Texas Petroleum Holdings, Inc., Vastar Resources, Inc., Vintage Petroleum
and United Meridian Corp. Due to activities such as reorganizations and
mergers, additions and deletions were made to the group from time to time.
Goldman Sachs & Co. has discontinued its past practice of selecting this
group.
58
<PAGE>
BENEFIT PLANS
The Company maintains a 401(k) savings plan and a retirement income plan.
In addition, the Company has entered into employment agreements with certain
officers and key employees and maintains a severance program for all full-time
salaried employees. These plans and agreements are briefly described below.
SAVINGS PLAN. The Company has adopted the Santa Fe Energy Resources
Retirement and Savings Plan, which became operative and was restated and renamed
the Santa Fe Energy Resources Savings Investment Plan, effective November 1,
1990 (the "Savings Investment Plan"). The Savings Investment Plan offers
eligible employees an opportunity to make long-term investments on a regular
basis through salary contributions, which are supplemented by matching employer
contributions. Substantially all salaried employees are eligible to participate
on the first day of the month after their date of hire. The Company will match
up to 4% of an employee's compensation and the employee's contribution could not
exceed $9,500 in 1996. The limit amount is indexed each year to reflect cost-of-
living increases.
In addition to the employer match described above, at the end of each
fiscal year, the Company's performance is evaluated using the same performance
measures used in the ICP Plan. If the performance meets or exceeds the goals for
that year, participants will receive up to another fifty cents on each regular
matching dollar contributed by the Company. The regular employer matching
contributions as well as the performance match are made in the Company's common
stock. The goals were 100 percent met in 1996 and a performance match was made
in March 1997.
The Savings Investment Plan is intended to qualify as a Section 401(k) cash
or deferred compensation arrangement whereby an employee's contributions and the
employer's matching contributions are not subject to federal income taxes at the
time of the contribution to the Savings Investment Plan, and the Savings
Investment Plan is subject to the restrictions imposed by the Code. Investment
alternatives to which contributions may be allocated by the participants include
a fixed income fund, an equities fund, a balanced fund, a growth equity fund and
a fund which is invested in the Company's common stock.
The Company also maintains a supplemental deferred compensation arrangement
whereby employees earning in excess of $95,000 per year are allowed to defer all
or a portion of their salary until any future year or retirement. These amounts
are not matched by the Company. Employees earning in excess of $160,000 per year
may also defer up to 4 percent of such excess and the amount will be matched by
the Company. The amount contributed is also subject to the performance match
described above in the Savings Investment Plan. All amounts are contributed in
cash and earn interest at the rate paid on the fixed income fund of the Savings
Investment Plan.
RETIREMENT PLANS. The Company has adopted the Santa Fe Energy Resources
Retirement Income Plan, a qualified defined benefit plan for substantially all
salaried employees (the "Retirement Plan"), and the Santa Fe Energy Resources
Supplemental Retirement Plan (the "Nonqualified Plan"). The Nonqualified Plan
will pay benefits to Retirement Plan participants where the Retirement Plan
formula produces a benefit to members in excess of limits imposed by ERISA and
applicable government regulations. It also includes amounts deferred under the
Santa Fe Energy Resources, Inc. Deferred Compensation Plan as pensionable
compensation. Benefits which have accrued to the Corporation's participants
under the Santa Fe Pacific Retirement Plan ("SFP Retirement Plan") are
protected under the Retirement Plan. Total approximate benefits under both the
Retirement Plan and supplemental plan are shown below for selected compensation
levels and years of service. As of December 31, 1996, Payne, Whaling, Bridwell,
Boyt, and Rosinski were credited with 14.8, 2.0, 22.8, 13.2 and 4.3 years of
service under the plans, respectively.
59
<PAGE>
PENSION PLAN TABLE
AVERAGE YEARS OF SERVICE
YEARLY ---------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ ----------- ----------- ----------- ----------- -----------
$125,000 $ 22,000 $ 29,000 $ 36,000 $ 54,000 $ 63,000
$150,000 $ 26,000 $ 35,000 $ 44,000 $ 66,000 $ 77,000
$175,000 $ 31,000 $ 41,000 $ 52,000 $ 77,000 $ 90,000
$200,000 $ 36,000 $ 48,000 $ 59,000 $ 89,000 $ 104,000
$225,000 $ 40,000 $ 54,000 $ 67,000 $ 101,000 $ 118,000
$250,000 $ 45,000 $ 60,000 $ 75,000 $ 112,000 $ 131,000
$300,000 $ 54,000 $ 72,000 $ 90,000 $ 136,000 $ 158,000
$400,000 $ 73,000 $ 97,000 $ 121,000 $ 182,000 $ 212,000
$450,000 $ 82,000 $ 110,000 $ 137,000 $ 205,000 $ 240,000
$500,000 $ 91,000 $ 122,000 $ 152,000 $ 229,000 $ 267,000
$600,000 $ 110,000 $ 147,000 $ 183,000 $ 275,000 $ 321,000
$650,000 $ 119,000 $ 159,000 $ 199,000 $ 298,000 $ 348,000
Benefit figures shown are amounts payable based on a straight life annuity
assuming retirement by the participant at age 62 in 1996 without a joint
survivorship provision. The benefits listed in the above table are not subject
to any deduction for social security or other offset amounts.
Benefits under the plans are computed based on a participant's total
compensation during this period of covered employment, for the 60 consecutive
months during the ten-year period immediately prior to the termination of his
covered employment for which his total compensation is the highest, divided by
60. If a participant has not received compensation for 60 consecutive months
during such ten-year period, his compensation shall equal the total of his
compensation for the longest period of consecutive months during such ten-year
period divided by the total number of months of compensation so considered.
Compensation recognized under the plans is the total basic compensation,
including any elective salary deferral amounts excluded from income pursuant to
Section 125 or 402 of the code, plus overtime, shift differentials and bonuses
(whether cash or stock) paid pursuant to recurring bonus programs, including
compensation deferred under the Santa Fe Energy Resources, Inc. Deferred
Compensation Plan, but excluding any special or extraordinary bonuses and any
other items of compensation. A participant's basic compensation is the regular
rate of pay specified for his position and does not include automobile
allowances, imputed income under any group term life insurance program, moving
expense or other reimbursements, fringe benefits, or similar items.
The pension compensation therefore differs from the compensation listed in
the Summary Compensation Table in several respects. Pension compensation is
based on average compensation as explained above. It does not include restricted
stock awards, stock options, and other compensation in the "All Other
Compensation" column (i.e., employer matching contributions to the Savings
Investment Plan and the performance match). It also does not include special or
extraordinary bonuses.
The pension compensation of officers whose pension compensation differs
from the compensation contained in the Summary Compensation Table is listed
below:
PENSION COMPENSATION
NAME (FINAL AVERAGE PAY)
- ---------------------------------------------------------
James L. Payne....................... $662,206
R. Graham Whaling.................... $302,058
Jerry L. Bridwell.................... $313,165
Hugh L. Boyt......................... $293,705
Michael J. Rosinski.................. $305,591
60
<PAGE>
EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements
("Employment Agreements") covering 11 employees of the Company (including each
of the individuals named in the Cash Compensation Table except Messrs. Whaling
and Rosinski. Mr. Whaling has entered into an employment agreement with Monterey
Resources similar to Mr. Payne's Employment Agreement. Mr. Rosinski's employment
with the Company terminated on December 31, 1996.) The Employment Agreements,
which replaced similar agreements with several of these employees originally
entered into in 1990, are intended to encourage such employees to remain in the
employ of the Company. The initial term of each Employment Agreement, with the
exception of Messrs. Payne's and Whaling's expires on December 31, 1998;
however, beginning January 1, 1998 and on each January thereafter the term of
the Employment Agreements will automatically be extended for additional one-year
periods, unless by September 30 of the preceding year the Company gives notice
that the Employment Agreements will not be so extended. The term of each
Employment Agreement, with the exception of Messrs. Payne's and Whaling's is
automatically extended for a period of two years following a Change in Control
(as defined herein). Messrs. Payne's and Whaling's Employment Agreement have an
initial term which expires on December 31, 1999, are automatically extended for
one-year periods beginning January 1, 1999 and are automatically extended for a
three-year period following a Change in Control.
In the event following a Change in Control employment is terminated by the
employee for "Good Reason" or the employee is involuntarily terminated by the
Company other than for "Cause" (as those terms are defined in the Employment
Agreements), or if during the six months preceding a Change in Control, the
employee's employment is terminated by the employee for Good Reason or by the
Company other than for Cause, and such termination is demonstrated to be
connected with the Change in Control, the Employment Agreements provide for
payment of certain amounts to the employee based on the employee's salary and
bonus under the Company's Incentive Compensation Plan; payout of non-vested
restricted stock, phantom units, stock options, if any, and continuation of
certain insurance benefits on a tax neutral basis for the Company employees for
a period of up to 24 months (36 months in the case of Messrs. Payne and
Whaling). The payments and benefits are payable pursuant to the Employment
Agreements only to the extent they are not paid out under the terms of any other
plan of the Company. The payments and benefits provided by the Employment
Agreements for all individuals except Messrs. Payne and Whaling may be further
limited by the Parachute Payment Limit described in the discussion of the
Company's Stock Plan below. In the event Messrs. Payne's or Whaling's payments
would exceed the Parachute Payment Limit, they will be made "whole" on a net
after-tax basis for any excise tax incurred. Without giving effect to such
limitation, the estimated value of the payments and benefits that Messrs. Payne,
Whaling, Boyt and Bridwell and all executive officers as a group would be
entitled to receive if any qualifying termination occurred on February 1, 1997
would be $2,694,711, $1,300,000, $743,326, $734,492 and $6,319,817,
respectively.
SEVERANCE PROGRAM. The Company has adopted a Severance Program for all
full-time, salaried employees who are terminated by the Company or terminated or
constructively terminated by an acquiring company, other than for Cause (as
defined in the Severance Program). However, following a Change in Control
(defined substantially the same as in the Stock Compensation Plan), an executive
officer or key employee who has entered into an Employment Agreement is not
eligible to receive duplicate benefits under the Employment Agreement and the
Severance Program. As noted above, the merger of Adobe with the Company
constituted a Change of Control. A participant in the Severance Program is
generally entitled to an amount of up to one year's pay based upon a
participant's age, length of service and highest rate of base salary in effect
during the 24-month period preceding his termination, provided that the
aggregate of such payment does not exceed two times the participant's actual
salary for the 12-month period preceding the date of termination. In addition, a
participant is entitled to continuation of health and life insurance benefits
for up to a period of two years.
61
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
PAGE
1. Financial Statements:
Report of Independent Accountants ..................................... 63
Consolidated Statement of Operations
for the years ended December
31, 1996, 1995 and 1994 ............................................... 64
Consolidated Balance Sheet -- December 31,
1996 and 1995 ......................................................... 65
Consolidated Statement of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 ......................................................... 66
Consolidated Statement of Shareholders'
Equity for the years ended December 31,
1996, 1995 and 1994 ................................................... 67
Notes to Consolidated Financial Statements ............................ 68
2. Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying
Accounts .............................................................. 100
All other schedules have been omitted
because they are not applicable or the
required information is presented in the
financial statements or the notes to
financial statements.
3. Exhibits:
See Index of Exhibits on page 101 for a description of the exhibits
filed as a part of this report.
(b) Reports on Form 8-K
DATE ITEM
----------------- ----
February 28, 1997 5
62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Santa Fe Energy Resources, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 62 present fairly, in all material
respects, the financial position of Santa Fe Energy Resources, Inc. and its
subsidiaries at 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. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 21, 1997
63
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Revenues
Sales of crude oil and liquids
produced...................... $ 455.4 $ 352.4 $ 305.2
Sales of natural gas produced... 105.8 77.1 83.4
Sales of crude oil purchased.... 21.1 6.7 11.9
Other........................... 1.0 13.2 3.7
--------- --------- ---------
583.3 449.4 404.2
--------- --------- ---------
Costs and Expenses
Production and operating........ 188.4 155.8 151.1
Cost of crude oil purchased..... 20.8 6.5 11.7
Exploration, including dry hole
costs......................... 34.5 23.4 20.4
Depletion, depreciation and
amortization.................. 148.2 133.2 121.3
Impairment of oil and gas
properties.................... 57.4 30.2 --
General and administrative...... 30.1 26.9 27.3
Taxes (other than income)....... 26.5 19.2 25.8
Restructuring charges........... -- -- 7.0
Loss (gain) on disposition of
assets........................ (12.1) 0.3 (8.6)
--------- --------- ---------
493.8 395.5 356.0
--------- --------- ---------
Income from Operations............... 89.5 53.9 48.2
Interest income................. 1.9 10.7 2.8
Interest expense................ (37.6) (32.5) (27.5)
Interest capitalized............ 5.2 5.8 3.6
Other income (expense).......... (1.0) (1.6) (4.0)
--------- --------- ---------
Income Before Income Taxes, Minority
Interest and Extraordinary Items... 58.0 36.3 23.1
Income taxes.................... (14.3) (9.7) (6.0)
--------- --------- ---------
Income Before Minority Interest and
Extraordinary Items................ 43.7 26.6 17.1
Minority Interest in Monterey
Resources, Inc................ (1.3) -- --
--------- --------- ---------
Income Before Extraordinary Items.... 42.4 26.6 17.1
Extraordinary item -- debt
extinguishment costs............ (6.0) -- --
--------- --------- ---------
Net Income........................... 36.4 26.6 17.1
Preferred dividend
requirement................... (13.5) (14.8) (11.7)
Convertible preferred repurchase
premium....................... (33.7) -- --
--------- --------- ---------
Earnings (Loss) Attributable to
Common Shares...................... $ (10.8) $ 11.8 $ 5.4
========= ========= =========
Earnings (Loss) Attributable to
Common Shares Per Share
Earnings (loss) before
extraordinary items........... $ (0.05) $ 0.13 $ 0.06
Extraordinary items -- debt
extinguishment costs.......... (0.07) -- --
--------- --------- ---------
Earnings (loss) to common
shares........................ $ (0.12) $ 0.13 $ 0.06
========= ========= =========
Weighted Average Number of Common
Shares Outstanding
(in millions)...................... 90.6 90.2 89.9
========= ========= =========
The accompanying notes are an integral part of these financial statements.
64
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS OF DOLLARS)
DECEMBER 31,
------------------------
1996 1995
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents....... $ 14.6 $ 42.6
Accounts receivable............. 109.1 89.0
Inventories..................... 13.6 10.5
Other current assets............ 35.2 17.2
----------- -----------
172.5 159.3
----------- -----------
Properties and Equipment, at cost
Oil and gas (on the basis of
successful efforts
accounting)................... 2,539.8 2,336.3
Other........................... 34.4 35.6
----------- -----------
2,574.2 2,371.9
Accumulated depletion,
depreciation, amortization and
impairment.................... (1,664.4) (1,482.4)
----------- -----------
909.8 889.5
----------- -----------
Other Assets
Receivable under gas balancing
arrangements.................. 4.5 5.8
Other........................... 33.2 10.2
----------- -----------
37.7 16.0
----------- -----------
$ 1,120.0 $ 1,064.8
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................ $ 115.4 $ 73.1
Income taxes payable............ 21.4 3.0
Interest payable................ 6.0 7.9
Other current liabilities....... 36.6 25.6
----------- -----------
179.4 109.6
----------- -----------
Long-Term Debt....................... 278.5 344.4
----------- -----------
Deferred Revenues.................... 4.0 4.9
----------- -----------
Other Long-Term Obligations.......... 27.5 24.2
----------- -----------
Deferred Income Taxes................ 53.8 64.0
----------- -----------
Minority Interest in Monterey
Resources, Inc..................... 30.3 --
----------- -----------
Commitments and Contingencies (Note
14)................................ -- --
----------- -----------
Convertible Preferred Stock, 7%
Series, $0.01 par value, 5.0
million shares authorized and
issued; 1.2 million and 5.0 million
outstanding
at December 31, 1996 and 1995,
respectively....................... 19.7 80.0
----------- -----------
Shareholders' Equity
Preferred stock, $0.01 par
value, 38.1 million shares
authorized, none issued....... -- --
$.732 Series A preferred stock,
$0.01 par value, 10.7 million
shares authorized, issued and
outstanding................... 91.4 91.4
Common stock, $0.01 par value,
200.0 million shares
authorized.................... 0.9 0.9
Paid-in capital................. 601.3 501.4
Accumulated deficit............. (166.5) (155.7)
Foreign currency translation
adjustment.................... (0.3) (0.3)
----------- -----------
526.8 437.7
----------- -----------
$ 1,120.0 $ 1,064.8
=========== ===========
The accompanying notes are an integral part of these financial statements.
65
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Operating Activities:
Net income...................... $ 36.4 $ 26.6 $ 17.1
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depletion, depreciation and
amortization............. 148.2 133.2 121.3
Impairment of oil and gas
properties............... 57.4 30.2 --
Restructuring charges...... -- -- 1.0
Deferred income taxes...... (11.2) 7.7 11.3
Loss (gain) on disposition
of assets................ (12.1) 0.3 (8.6)
Exploratory dry hole
costs.................... 11.2 5.5 6.5
Minority interest in
Monterey Resources,
Inc...................... 1.3 -- --
Equity in losses and
adjustment to valuation
of investment in Hadson
Corporation.............. -- -- 6.1
Hadson Corporation
preferred dividends
received in-kind......... -- -- (4.5)
Other...................... 6.7 2.4 3.0
Changes in operating assets and
liabilities:
Decrease (increase) in
accounts receivable...... (20.1) (12.8) 1.3
Decrease (increase) in
inventories.............. (3.1) (1.3) (0.5)
Increase (decrease) in
accounts payable......... 20.0 (4.5) (8.6)
Increase (decrease) in
interest payable......... (1.9) (0.6) (1.7)
Increase (decrease) in
income taxes payable..... 18.4 1.5 0.2
Net change in other assets
and liabilities.......... (23.6) (13.7) (19.4)
--------- --------- ---------
Net Cash Provided by Operating
Activities......................... 227.6 174.5 124.5
--------- --------- ---------
Investing Activities:
Capital expenditures, including
exploratory dry hole costs.... (185.7) (189.4) (136.6)
Acquisitions of producing
properties, net of related
debt.......................... (37.8) (33.8) (2.2)
Proceeds from sale of investment
in Hadson Corporation......... -- 55.2 --
Net proceeds from sales of
properties.................... 16.7 7.2 81.1
--------- --------- ---------
Net Cash Used in Investing
Activities......................... (206.8) (160.8) (57.7)
--------- --------- ---------
Financing Activities:
Issuance of Monterey Resources,
Inc. common stock............. 123.6 -- --
Issuance of Santa Fe Energy
Resources, Inc. common
stock......................... 2.4 -- --
Purchase of 7% Series
convertible preferred stock... (94.0) -- --
Principal payments on long-term
borrowings.................... (70.0) (10.0) (144.7)
Net change in revolving credit
agreement..................... 4.0 -- (50.0)
Issuance of 11% senior
subordinated debentures....... -- -- 96.1
Issuance of $.732 Series A
convertible preferred stock... -- -- 91.4
Cash dividends paid............. (14.8) (14.8) (10.7)
--------- --------- ---------
Net Cash Used in Financing
Activities......................... (48.8) (24.8) (17.9)
--------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents................... (28.0) (11.1) 48.9
Cash and Cash Equivalents at
Beginning of Year.................. 42.6 53.7 4.8
--------- --------- ---------
Cash and Cash Equivalents at End of
Year............................... $ 14.6 $ 42.6 $ 53.7
========= ========= =========
The accompanying notes are an integral part of these financial statements.
66
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(SHARES AND DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
$.732
SERIES A
CONVERTIBLE UNAMORTIZED FOREIGN
PREFERRED STOCK COMMON STOCK RESTRICTED CURRENCY
--------------- --------------- PAID-IN STOCK ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT
------ ------ ------ ------ ------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993......... -- $-- 89.8 $0.9 $ 496.9 $(0.1) $(173.8) $ (0.3)
Issuance of common stock
Employee stock compensation and
savings plans.................. -- -- 0.2 -- 2.0 -- -- --
Issuance of preferred stock........ 10.7 91.4 -- -- -- -- -- --
Amortization of restricted stock
awards........................... -- -- -- -- -- 0.1 -- --
Pension liability adjustment....... -- -- -- -- -- -- 0.9 --
Foreign currency translation
adjustments...................... -- -- -- -- -- -- -- (0.1)
Net income......................... -- -- -- -- -- -- 17.1 --
Dividends declared................. -- -- -- -- -- -- (11.7) --
------ ------ ------ ------ ------- ----------- ----------- ----------
Balance at December 31, 1994......... 10.7 91.4 90.0 0.9 498.9 -- (167.5) (0.4)
Issuance of common stock
Employee stock compensation and
savings plans.................. -- -- 0.3 -- 2.5 -- -- --
Foreign currency translation
adjustments...................... -- -- -- -- -- -- -- 0.1
Net income......................... -- -- -- -- -- -- 26.6 --
Dividends declared................. -- -- -- -- -- -- (14.8) --
------ ------ ------ ------ ------- ----------- ----------- ----------
Balance at December 31, 1995......... 10.7 91.4 90.3 0.9 501.4 -- (155.7) (0.3)
Issuance of common stock
Employee stock compensation and
savings plans.................. -- -- 0.7 -- 6.4 -- -- --
Issuance of Monterey Resources,
Inc. common stock................ -- -- -- -- 93.5 -- -- --
Purchase of 7% Series convertible
preferred stock.................. -- -- -- -- -- -- (33.7) --
Net income......................... -- -- -- -- -- -- 36.4 --
Dividends declared................. -- -- -- -- -- -- (13.5) --
------ ------ ------ ------ ------- ----------- ----------- ----------
Balance at December 31, 1996......... 10.7 $91.4 91.0 $0.9 $ 601.3 $-- $(166.5) $ 0.3
====== ====== ====== ====== ======= =========== =========== ==========
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
--------------
Balance at December 31, 1993......... $323.6
Issuance of common stock
Employee stock compensation and
savings plans.................. 2.0
Issuance of preferred stock........ 91.4
Amortization of restricted stock
awards........................... 0.1
Pension liability adjustment....... 0.9
Foreign currency transaction
adjustments...................... (0.1)
Net income......................... 17.1
Dividends declared................. (11.7)
--------------
Balance at December 31, 1994......... 423.3
Issuance of common stock
Employee stock compensation and
savings plans.................. 2.5
Foreign currency translation
adjustments...................... 0.1
Net income......................... 26.6
Dividends declared................. (14.8)
--------------
Balance at December 31, 1995......... 437.7
Issuance of common stock
Employee stock compensation and
savings plans.................. 6.4
Issuance of Monterey Resources,
Inc. common stock................ 93.5
Purchase of 7% Series convertible
preferred stock.................. (33.7)
Net income......................... 36.4
Dividends declared................. (13.5)
--------------
Balance at December 31, 1996......... $526.8
==============
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Santa Fe Energy Resources, Inc.
("Santa Fe" or the "Company") and its subsidiaries include the accounts of
all wholly owned subsidiaries and Monterey Resources, Inc. ("Monterey"). Prior
to its initial public offering in November 1996, the Company owned 100% of the
outstanding common stock of Monterey. At December 31, 1996, the Company owned
82.8% of the outstanding common stock of Monterey (See Note 2). References
herein to the "Company" or "Santa Fe" relate to Santa Fe Energy Resources,
Inc., individually or together with its consolidated subsidiaries.
All significant intercompany accounts and transactions have been
eliminated. Certain prior period amounts have been reclassified to conform to
current presentation.
OIL AND GAS OPERATIONS
The Company follows the successful efforts method of accounting for its oil
and gas exploration and production activities. Costs (both tangible and
intangible) of productive wells and development dry holes, as well as the cost
of prospective acreage, are capitalized. The costs of drilling and equipping
exploratory wells which do not find proved reserves are expensed upon
determination that the well does not justify commercial development. Other
exploratory costs, including geological and geophysical costs and delay rentals,
are charged to expense as incurred.
Depletion and depreciation of proved properties are computed on an
individual field basis using the unit-of-production method based upon proved oil
and gas reserves attributable to the field. Certain other oil and gas properties
are depreciated or amortized on a straight-line basis.
In the fourth quarter of 1995 the Company changed its impairment policy to
conform to the provisions of Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("FAS 121"). In accordance with the provisions of FAS 121,
proved properties are reviewed to determine if the carrying value of the
property exceeds the expected undiscounted future net cash flows from the
operation of the property. Based on this review and the continuing evaluation of
development plans, production data, economics and other factors, as appropriate,
the Company records impairment (additional depletion and depreciation) to the
extent that the carrying value of the property exceeds the fair value of the
property based on discounted future net cash flows. In accordance with its
policy, the Company recorded impairments of $57.4 million in 1996 and $30.2
million in 1995. With respect to the impairments recorded in 1995, approximately
$22.1 million was due to the adoption of FAS 121.
The Company provides for future abandonment and site restoration costs with
respect to certain of its oil and gas properties. The Company estimates that
with respect to these properties such future costs total approximately $39.0
million and such amount is being accrued over the expected life of the
properties. At December 31, 1996 and 1995 Accumulated Depletion, Depreciation,
Amortization and Impairment includes $16.6 million and $15.5 million,
respectively, with respect to such costs.
68
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The value of undeveloped acreage is aggregated and the portion of such
costs estimated to be nonproductive, based on historical experience, is
amortized to expense over the average holding period. Additional amortization
may be recognized based upon periodic assessment of prospect evaluation results.
The cost of properties determined to be productive is transferred to proved
properties; the cost of properties determined to be nonproductive is charged to
accumulated amortization.
Maintenance and repairs are expensed as incurred; major renewals and
improvements are capitalized. Gains and losses arising from sales of properties
are included in income currently.
REVENUE RECOGNITION
Revenues from the sale of crude oil and liquids produced are generally
recognized upon the passage of title, net of royalties and net profits
interests.
Revenues from natural gas production are generally recorded using the
entitlement method, net of royalties and net profits interests. Sales proceeds
in excess of the Company's entitlement are included in Deferred Revenues and the
Company's share of sales taken by others is included in Other Assets. At
December 31, 1996 the Company's deferred revenues for sales proceeds received in
excess of the Company's entitlement was $3.2 million with respect to 2.5 MMcf
and the asset related to the Company's share of sales taken by others was $4.5
million with respect to 3.2 MMcf.
The Company hedges a portion of its oil and gas sales. See Note
14 -- Commitments and Contingencies -- Oil and Gas Hedging.
Revenues from sales of crude oil purchased relate to the sales of low
viscosity crude oil purchased and blended with certain of the Company's high
viscosity, low gravity crude oil production, either to facilitate pipeline
transportation or to realize higher margins. The cost to purchase such crude oil
is reflected as an expense.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during the year.
ACCOUNTS RECEIVABLE
Accounts Receivable relates primarily to sales of oil and gas and amounts
due from joint interest partners for expenditures made by the Company on behalf
of such partners. The Company reviews the financial condition of potential
purchasers and partners prior to signing sales or joint interest agreements. At
December 31, 1996 and 1995 the Company's allowance for doubtful accounts
receivable, which is reflected in the consolidated balance sheet as a reduction
in accounts receivable, totalled $2.5 million and $2.0 million, respectively.
Accounts receivable totalling $1.1 million and $3.8 million were written off as
uncollectible in 1995 and 1994, respectively.
INVENTORIES
Inventories are valued at the lower of cost (average price or first-in,
first-out) or market. Crude oil inventories at December 31, 1996 and 1995 were
$4.5 million and $2.7 million, respectively, and materials and supplies
inventories at such dates were $9.1 million and $7.8 million, respectively.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures relating to current operations are expensed or
capitalized, as appropriate, depending on whether such expenditures provide
future economic benefits. Liabilities are recognized when the expenditures are
considered probable and can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
69
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
undiscounted site-specific costs. Generally, such recognition coincides with the
Company's commitment to a formal plan of action.
INCOME TAXES
The Company follows the asset and liability approach to accounting for
income taxes. Deferred tax assets and liabilities are determined using the tax
rate for the period in which those amounts are expected to be received or paid,
based on a scheduling of temporary differences between the tax bases of assets
and liabilities and their reported amounts. Under this method of accounting for
income taxes, any future changes in income tax rates will affect deferred income
tax balances and financial results.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities and the
periods in which certain items of revenue and expense are included. Actual
results may differ from such estimates.
(2) MONTEREY RESOURCES, INC.
In 1996 Santa Fe formed Monterey to assume the operations of the Company's
Western Division (the "Western Division") which conducted the Company's oil
and gas operations in the State of California. In November 1996, prior to the
initial public offering (the "IPO") discussed below, pursuant to a
contribution and conveyance agreement (the "Contribution Agreement"), among
other things: (i) Santa Fe contributed to Monterey substantially all of the
assets and properties of the Western Division, subject to the retention by Santa
Fe of a production payment, as defined below, and certain other assets; (ii)
Santa Fe retained a $30.0 million production payment (the "Production
Payment") with respect to certain properties in the Midway-Sunset field; (iii)
Monterey assumed all obligations and liabilities of Santa Fe associated with or
allocated to the assets and properties of the Western Division, including $245.0
million of indebtedness in respect of Santa Fe's 10.23% Series E Notes due 1997,
10.27% Series F Notes due 1998 and 10.61% Series G Notes due 2005 (the "Series
E Notes", "Series F Notes" and "Series G Notes", respectively) and (iv)
Monterey agreed to purchase from Santa Fe an $8.3 million promissory note
receivable related to the sale to a third party of certain surface acreage
located in Orange County, California. Also prior to the IPO, Monterey and Santa
Fe entered into a $75.0 million revolving credit facility with a group of banks
(the "Monterey Credit Facility") and borrowed $16.0 million which was retained
by Santa Fe.
In November 1996 Monterey sold 9,335,000 shares of its common stock for
total consideration of $123.6 million (after deducting underwriting discounts of
$9.1 million and other related costs of $2.6 million). The proceeds from the IPO
were used in part to (i) repay the Series E Notes and Series F Notes ($70.0
million) and pay a prepayment penalty thereon of $2.5 million; (ii) retire the
Production Payment ($30.0 million); (iii) repay the $16.0 million outstanding
under the Monterey Credit Facility; and (iv) pay a $2.0 million fee with respect
to a supplement to the indenture relating to Santa Fe's 11% Senior Subordinated
Debentures due 2004. Subsequent to the IPO, Monterey issued $175.0 million in
aggregate principal amount of 10.61% Senior Notes due 2005 (the "Monterey
Senior Notes") to holders of the Series G Notes in exchange for the
cancellation of such notes and paid a $1.3 million consent fee in connection
therewith.
The costs and expenses related to the retirement of Santa Fe's outstanding
debt, as discussed above, and approximately $3.4 million of deferred debt issue
costs and related transaction costs are reflected in the Statement of Operations
as an extraordinary item, net of $3.2 million in income taxes.
70
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, Santa Fe owned 82.8% of the Monterey's outstanding
common stock. Santa Fe has announced that it intends to distribute pro rata to
its common shareholders all of the shares of Monterey's common stock that it
owns by means of a tax-free distribution (the "Proposed Spin Off"). Santa Fe's
final determination to proceed will require a declaration of the Proposed Spin
Off by Santa Fe's Board of Directors. Such declaration is not expected to be
made until certain conditions, many of which are beyond the control of Santa Fe,
are satisfied, including: (i) receipt by Santa Fe of a ruling from the Internal
Revenue Service as to the tax-free nature of the Proposed Spin Off; (ii)
approval of the Proposed Spin Off by Santa Fe's shareholders; and (iii) the
absence of any future change in market or economic conditions (including
developments in the capital markets) or Santa Fe's or Monterey's business and
financial condition that causes Santa Fe's Board to conclude that the Proposed
Spin Off is not in the best interests of Santa Fe's shareholders. The Company
does not expect the Proposed Spin Off to occur prior to July 1997.
Pursuant to the terms of a letter agreement dated as of June 13, 1996, a
fee will be payable by Monterey to Chase Securities Inc. and Petrie Parkman &
Co., Inc. upon consummation of the Proposed Spin Off. The total amount of such
fee is equal to the product of (a) the sum of the market value of the shares of
Monterey distributed in the Proposed Spin Off (based upon the average closing
price of Monterey's common stock during the ten trading days after the Proposed
Spin Off) PLUS the aggregate principal amount of long-term indebtedness assumed
by Monterey in connection with the Proposed Spin Off (which totalled $175.0
million) TIMES (b) 0.5%, LESS $1.0 million. If the market value of the Monterey
common stock distributed is $16.00 per share, the Company estimates the total
fee payable would be approximately $3.5 million, of which $1.75 million would be
payable to each of Chase Securities and Petrie Parkman. In addition, a fee of
$400,000 will be payable to GKH Partners, L.P., of which $200,000 will be
payable by each the Company and Monterey. Certain of the Company's directors are
associated with Chase Securities and GKH Partners.
Monterey has agreed to indemnify the Company if at any time during the
one-year period after the consummation of the Proposed Spin Off (or if certain
tax legislation is enacted and is applicable, such longer period as is required
for the Proposed Spin Off to be tax free to Santa Fe) Monterey takes certain
actions the effects of which result in the Proposed Spin Off being taxable to
Santa Fe.
Santa Fe provides various administrative and financial services to
Monterey, including administration of certain employee benefits plans, access to
telecommunications, corporate legal assistance and certain other corporate staff
and support services. Santa Fe and Monterey have entered into a Services
Agreement, terminable by either party on thirty day's notice, under which
Monterey pays a fee of $120,000 per month for such services until such time as
Monterey assumes full responsibility during 1997 for each of the services
covered by the agreement. During 1996 Santa Fe charged Monterey $240,000 under
the terms of the Services Agreement.
Certain Monterey employees are participants in Santa Fe's employee benefit
and pension plans. Subsequent to the IPO Santa Fe charged Monterey $0.2 million
in connection with Monterey employees' participation in such plans.
(3) CORPORATE RESTRUCTURING PROGRAM
In 1993 the Company adopted a corporate restructuring program which
included, among other things, a cost reduction program which consisted of a
reduction in the Company's salaried work force, an improvement in the efficiency
of information systems and a reduction in other general and administration and
production and operating costs. The Company's income from operations for 1994
includes restructuring charges of $7.0 million, comprised of severance, benefits
and relocation expenses associated with the cost reduction program.
71
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENT IN HADSON CORPORATION
In December 1993 the Company completed a transaction with Hadson
Corporation ("Hadson") under the terms of which the Company sold the common
stock of Adobe Gas Pipeline Company ("AGPC"), a wholly-owned subsidiary which
held the Company's natural gas gathering and processing assets, to Hadson in
exchange for Hadson 11.25% preferred stock with a face value of $52.0 million
and 40% of Hadson's common stock. The Company accounted for the sale as a
non-monetary transaction and the investment in Hadson was valued at $56.2
million, the carrying value of the Company's investment in AGPC. The Company's
investment in Hadson was accounted for on the equity basis.
Also in December 1993 the Company signed a seven-year gas sales contract
with Hadson under the terms of which Hadson markets a substantial portion of the
Company's domestic natural gas production at market prices as defined by
published monthly indices for relevant production locations.
In November 1994 the Company and Hadson settled a lawsuit related to
certain of the assets sold to Hadson by the Company in December 1993. The
settlement totalled $5.7 million and the Company's share, approximately $3.3
million, is included in Other Income (Expense) in the income statement. The
Company paid the full amount of the settlement and Hadson gave the Company a
$2.4 million ten-year note for its share. The note bore interest at 9%, payable
annually, with the principal amount due at maturity. The note was retired as
part of the sales transaction discussed below.
In 1995 the Company sold its holdings in Hadson for $55.2 million. Other
Income (Expense) for 1995 includes a $1.8 million charge with respect to the
Company's loss on the sale. Subsequent to the sale Hadson's name was changed to
LG&E Natural Marketing Inc. ("LG&E").
(5) SANTA FE ENERGY TRUST
In November 1992 5,725,000 Depository Units ("Trust Units"), each
consisting of beneficial ownership of one unit of undivided beneficial interest
in the Santa Fe Energy Trust (the "Trust") and a $20 face amount beneficial
ownership interest in a $1,000 face amount zero coupon United States Treasury
obligation maturing on or about February 15, 2008, were sold in a public
offering. The Trust consists of certain oil and gas properties conveyed by Santa
Fe.
In the first quarter of 1994, the Company sold 575,000 Trust Units which it
held for $11.3 million. The gain on the sale of $0.8 million is included in
Other Income (Expense).
For any calendar quarter ending on or prior to December 31, 2002, the Trust
will receive additional royalty payments to the extent that it needs such
payments to distribute $0.40 per Depository Unit per quarter. The source of such
additional royalty payments, if needed, will be limited to the Company's
remaining royalty interest in certain of the properties conveyed to the Trust.
If such additional payments are made, certain proceeds otherwise payable to the
Trust in subsequent quarters may be reduced to recoup the amount of such
additional payments. The aggregate amount of the additional royalty payments
(net of any amounts recouped) will be limited to $20.0 million on a revolving
basis. Through December 31, 1996 the Company had made additional royalty
payments, net of recoupments, totalling $1.2 million.
At December 31, 1996 and 1995, Accounts Payable included $3.1 million and
$2.6 million, respectively, due to the Trust.
72
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) CASH FLOWS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
In December 1996 the Company sold the surface rights to approximately 116
surface acres in Orange County, California for total consideration of $24.2
million and recognized a $12.3 million gain. The Company received $15.9 million
in cash and an $8.3 million note which was purchased by Monterey for cash.
In November 1993 the Company completed the sale of certain southern
California and Gulf Coast producing properties for net proceeds totalling $42.0
million in cash, $10.5 million of which was collected in 1994.
In April 1994 the Company completed the sale of certain Mid-Continent and
Rocky Mountain producing and nonproducing oil and gas properties for net
proceeds totalling $46.7 million. The Company's income from operations for 1994
includes $2.2 million attributable to the assets sold. In the first quarter of
1994 the Company sold its interest in certain oil and gas properties, in which
it had no remaining basis, for $8.3 million.
The Company made interest payments of $38.6 million, $37.6 million and
$47.9 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, the
Company made tax payments of $2.0 million, $1.6 million and $1.8 million,
respectively, and in 1996 and 1995 received tax refunds of $11.2 million and
$1.3 million, respectively, primarily related to the audit of prior years'
returns.
(7) INCOME TAXES
In December 1990 SFP distributed all of the shares of the Company it held
to its shareholders (the "SFP Spin Off"). Through the date of the SFP Spin Off
the taxable income or loss of the Company was included in the consolidated
federal income tax return filed by SFP. The consolidated federal income tax
returns of SFP have been examined through 1990 and all years prior to 1986 are
closed. Issues relating to the open years are being contested through various
stages of administrative appeal. The Company, in conjunction with the SFP Spin
Off, agreed to indemnify SFP should the transaction be determined to be taxable
to SFP because of the Company's actions. The Company does not believe it has
taken any action that would have such an effect. Accounts Receivable at December
31, 1995 included $12.0 million with respect to a refund related to the audit of
the years 1981 through 1985 which was collected in 1996. The Company has filed
separate consolidated federal income tax returns for periods subsequent to the
SFP Spin Off. The consolidated returns of the Company through 1991 have been
audited and are closed.
During 1989, the Company received a notice of deficiency for certain state
franchise tax returns filed for the years 1978 through 1983 as part of the
consolidated tax returns of SFP. The matter was contested by the Company and
favorably resolved in 1994. The years 1984 through 1986 have been audited and no
significant Company issues were raised. The years 1987 through 1992 are
currently being audited.
With the Merger of Adobe the Company succeeded to a net operating loss
carryforward that is subject to Internal Revenue Code Section 382 limitations
which annually limit taxable income that can be offset by such losses. Certain
changes in the Company's shareholders in 1995 resulted in a second Section 382
limitation, the imposition of which is not expected to result in a limitation of
the Company's ability to use its net operating losses. Losses carrying forward
of $71.4 million will expire beginning in 2004.
73
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total pretax income for the years ended December 31, 1996, 1995 and 1994
was taxed under the following jurisdictions (in millions of dollars):
1996 1995 1994
--------- --------- ---------
Domestic............................. 46.4 40.5 22.0
Foreign.............................. 2.4 (4.2) 1.1
--------- --------- ---------
48.8 36.3 23.1
========= ========= =========
The Company's total income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 consisted of (in millions of dollars):
1996 1995 1994
--------- --------- ---------
Current
U.S. federal.................... 13.6 1.5 (3.5)
State........................... 5.1 (2.1) (3.2)
Foreign......................... 3.6 2.6 1.4
--------- --------- ---------
22.3(a) 2.0 (5.3)
--------- --------- ---------
Deferred
U.S. federal.................... 4.7 13.3 8.6
State........................... 1.3 (0.6) 2.4
Foreign......................... (17.2)(b) (5.0) 0.3
--------- --------- ---------
(11.2) 7.7 11.3
--------- --------- ---------
11.1(a) 9.7 6.0
========= ========= =========
- ------------
(a) Includes $3.2 million income tax benefit which is reflected in extraordinary
item - debt extinguishment costs (see Note 2).
(b) Includes benefit of $8.3 million related to certain prior period foreign
expenditures.
The Company's deferred income tax liabilities (assets) at December 31, 1996
and 1995 are composed of the following differences between financial and tax
reporting (in millions of dollars):
1996 1995
--------- ---------
Capitalized costs and write-offs..... 99.9 138.5
State deferred liability............. 10.5 7.6
Foreign deferred liability........... (8.1) 9.1
--------- ---------
Gross deferred liabilities........... 102.3 155.2
--------- ---------
Accruals not currently deductible for
tax purposes....................... (0.7) (16.7)
Alternative minimum tax
carryforwards...................... (13.6) (12.7)
Net operating loss carryforwards..... (25.0) (54.7)
Other................................ (9.2) (7.1)
--------- ---------
Gross deferred assets................ (48.5) (91.2)
--------- ---------
Deferred tax liability............... 53.8 64.0
========= =========
74
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's total U.S. income tax expense computed by
applying the statutory U.S. federal income tax rate to the Company's total
income (loss) before income taxes for the years ended December 31, 1996, 1995
and 1994 is presented in the following table (in millions of dollars):
1996 1995 1994
--------- --------- ---------
U.S. federal income taxes at
statutory rate..................... 17.1 12.7 8.1
Increase (reduction) resulting from:
State income taxes, net of federal
effect.......................... 4.3 0.6 0.9
Foreign income taxes in excess of
(less than) U.S. rate........... (14.4) (0.9) 1.4
U.S. tax on foreign reinvested
earnings........................ 2.8 0.8 1.2
Benefit of tax losses.............. (1.8) (0.3) (4.3)
Prior period adjustments........... 1.7 (2.7) (1.6)
Other.............................. 1.4 (0.5) 0.3
--------- --------- ---------
11.1 9.7 6.0
========= ========= =========
(8) FINANCING AND DEBT
Long-term debt at December 31, 1996 and 1995 consisted of (in millions of
dollars):
DECEMBER 31,
--------------------------------------------
1996 1995
-------------------- --------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
Santa Fe
Senior Notes................. -- -- -- 245.0
11% Senior Subordinated
Debentures................ -- 99.5 -- 99.4
Short-term lines of credit... -- 4.0 -- --
------- --------- ------- ---------
-- 103.5 -- 344.4
Monterey
Senior Notes................. -- 175.0 -- --
------- --------- ------- ---------
-- 278.5 -- 344.4
======= ========= ======= =========
Aggregate total maturities of long-term debt during the next five years are
as follows: 1997 -- none; 1998 -- none; 1999 -- $25.0 million; 2000 -- $25.0
million; and 2001 -- $29.0 million.
Effective November 13, 1996 Santa Fe entered into a revolving credit
agreement (the "Santa Fe Credit Agreement") which matures November 13, 2001.
The Santa Fe Credit Agreement permits the Company to obtain revolving credit
loans and issue letters of credit up to an aggregate amount of $150.0 million,
with the aggregate amount of letters of credit outstanding at any time limited
to $30.0 million. Borrowings under the Santa Fe Credit Agreement are unsecured
and interest rates are tied to the bank's prime rate or eurodollar offering
rate, at the option of the Company. At December 31, 1996, no loans or letters of
credit were outstanding under the terms of the Santa Fe Credit Agreement.
Effective November 13, 1996 Monterey entered into the Monterey Credit
Agreement which matures November 13, 2000. The Monterey Credit Agreement permits
Monterey to obtain revolving credit loans and issue letters of credit up to an
aggregate amount of up to $75.0 million, with the aggregate amount of letters of
credit outstanding at any time limited to $15.0 million. Borrowings under the
Monterey Credit Agreement are unsecured and interest rates are tied to the
bank's prime rate
75
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or eurodollar offering rate, at the option of Monterey. At December 31, 1996, no
loans or letters of credit were outstanding under the terms of the Monterey
Credit Agreement.
In November 1996 Monterey issued the Monterey Senior Notes which were
exchanged for $175.0 million of senior notes previously issued by Santa Fe. The
Monterey Senior Notes bear interest at 10.61% per annum and mature in 2005.
Monterey is required to repay $25.0 million of the principal amount each year
from 1999 through 2005.
In a public offering in May 1994 the Company issued $100.0 million of 11%
Senior Subordinated Debentures due 2004 (the "Debentures"). The Debentures
were issued for 99.266% of face value and the Company received proceeds of $96.1
million, after deducting related costs and expenses of $3.2 million. The
Debentures, which mature May 15, 2004, are not redeemable prior to May 15, 1999
and may be redeemed after such date at the option of the Company at prices set
forth in the indenture for the Debentures. Under certain circumstances, the
Company may be required to redeem the Debentures for 101% of the principal
amount. The Debentures are general unsecured subordinated obligations of the
Company. The Company used the proceeds from the issuance of the Debentures,
together with a portion of the proceeds from the issuance of the Series A
Preferred (see Note 11), to retire $132.3 million of its then outstanding
long-term debt.
In the first quarter of 1995 the Company retired the $10.0 million balance
of a loan from an Argentine bank. The loan, which related to the Company's
purchase of an interest in a producing oil field in Argentina in 1991, bore
interest at 13% at the time it was retired.
Santa Fe has three short-term uncommitted lines of credit totalling $60.0
million which are used to meet short-term cash needs. Interest rates on
borrowings under these lines of credit are typically lower than rates paid under
the Santa Fe Credit Agreement. At December 31, 1996 $4.0 million was outstanding
under these lines of credit. The amount outstanding at December 31, 1996 is
classified as long-term since the Santa Fe Credit Agreement is available to
refinance such amount on a long-term basis.
At December 31, 1996 the Company had outstanding letters of credit
totalling $6.0 million, $2.3 million of which relate to the operations of
Monterey.
Certain of the credit agreements and the indenture for the Debentures
include covenants that restrict Santa Fe and Monterey's ability to take certain
actions, including the ability to incur additional indebtedness and to pay
dividends on capital stock. Under the most restrictive of these covenants, at
December 31, 1996 Santa Fe could incur up to $417.7 million of additional
indebtedness and pay dividends of up to $36.8 million on its aggregate capital
stock (including its common stock, 7% Convertible Preferred Stock and Series A
Preferred). At December 31, 1996, under the most restrictive of these covenants,
Monterey could incur up to $253.4 million of additional indebtedness and pay
dividends of $61.7 million on its common stock. Monterey is prohibited from
paying more than $31.0 million in dividends to Santa Fe in any fiscal year prior
to the consummation of the Proposed Spin Off.
76
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) SEGMENT INFORMATION
The principal business of the Company consists of the acquisition,
exploration and development of oil and gas properties and the production and
sale of crude oil and liquids and natural gas. Pertinent information with
respect to the Company's oil and gas business is presented in the following
table (in millions of dollars):
<TABLE>
<CAPTION>
OIL AND GAS
------------------------------------------
OTHER GENERAL
U.S. ARGENTINA INDONESIA FOREIGN CORPORATE TOTAL
--------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996
Revenues........................... 517.9 35.8 29.6 -- -- 583.3
Income (Loss) from Operations...... 126.0 17.6 (11.3) (17.4) (25.4) 89.5
Depletion, Depreciation,
Amortization and Impairment..... 164.9 7.9 24.6 5.0 3.2 205.6
Additions to Property and
Equipment....................... 190.0 20.2 15.3 9.4 10.8 245.7
Identifiable Assets at December
31.............................. 854.7 87.3 72.6 6.2 99.2 1,120.0
1995
Revenues........................... 398.6 19.2 31.6 -- -- 449.4
Income (Loss) from Operations...... 87.9 3.6 0.8 (6.5) (31.9) 53.9
Depletion, Depreciation,
Amortization and Impairment..... 143.3 7.0 10.0 0.5 2.6 163.4
Additions to Property and
Equipment....................... 175.4 14.4 16.7 3.8 6.5 216.8
Identifiable Assets at December
31.............................. 806.7 73.0 84.8 9.5 90.8 1,064.8
1994
Revenues........................... 359.5 12.9 31.8 -- -- 404.2
Income (Loss) from Operations...... 88.9 3.1 6.1 (10.3) (39.6) 48.2
Depletion, Depreciation,
Amortization and Impairment..... 99.9 3.8 9.7 6.3 1.6 121.3
Additions to Property and
Equipment....................... 98.2 13.6 16.3 4.4 5.4 137.9
Identifiable Assets at December
31.............................. 817.6 57.8 103.1 6.5 86.4 1,071.4
</TABLE>
Crude oil and liquids and natural gas accounted for more than 93% of
revenues in 1996, 1995 and 1994. The following table (which with respect to
certain properties includes royalty and working interest owners' share of
production) reflects sales to crude oil purchasers who accounted for more than
10% of the Company's crude oil and liquids revenues (in millions of dollars):
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
----- ----- ----
Celeron Corporation.................. 66.7 62.1 58.7
Coastal States Trading, Inc.......... 56.4 (a) (a)
Shell Oil Company.................... 105.7 100.4 94.5
- ------------
(a) Sales represented less than 10% of crude oil and liquids revenues.
In 1996, 1995 and 1994 the only purchaser of the Company's natural gas to
account for more than 10% of natural gas revenues was LG&E (see Note 4 with
respect to the Company's gas sales contract with LG&E).
77
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) CONVERTIBLE PREFERRED STOCK, 7% SERIES
The Company's Convertible Preferred Stock, 7% Series, which was issued in
connection with the Company's merger with Adobe Resources Corporation
("Adobe") in 1992, is non-voting and entitled to receive cumulative cash
dividends at an annual rate equivalent to $1.40 per share. The holders of the
convertible preferred shares may, at their option, convert any or all such
shares into 1.3913 shares of the Company's common stock. The Company may, at any
time after the fifth anniversary of the effective date of the Merger and upon
the occurrence of a "Special Conversion Event", convert all outstanding shares
of convertible preferred stock into common stock at the initial conversion rate
of 1.3913 shares of common stock, subject to certain adjustments, plus
additional shares in respect to accrued and unpaid dividends. A Special
Conversion Event is deemed to have occurred when the average daily closing price
for a share of the Company's common stock for 20 of 30 consecutive trading days
equals or exceeds 125% of the quotient of $20.00 divided by the then applicable
conversion rate (approximately $18.00 per share at a conversion rate of 1.3913).
Upon the occurrence an ownership change, as defined, of Santa Fe, each
holder of shares of convertible preferred stock shall have the right, at the
holder's option, to elect to have all of such holder's shares redeemed for
$20.00 per share plus accrued and unpaid interest and dividends. The First
Ownership Change shall be deemed to have occurred when any person or group,
together with any affiliates or associates, becomes the beneficial owner of 50%
or more of the outstanding common stock of Santa Fe.
In November 1996 the Company purchased 3,770,110 of the outstanding shares
for $24.50 per share. The excess of the cost of the acquired shares ($94.0
million, including related costs of $1.7 million) over the book value of such
shares, $33.7 million, is reflected in the Statement of Operations as a
preferred dividend. At December 31, 1996, 1,229,890 shares were outstanding.
(11) SHAREHOLDERS' EQUITY
$.732 SERIES A CONVERTIBLE PREFERRED STOCK
In a public offering in May 1994 the Company issued 10,700,000 shares of
$.732 Series A Convertible Preferred Stock. The Series A Preferred was issued at
$8.875 per share and the Company received total proceeds of $91.4 million after
deducting related costs and expenses of $3.6 million. Each share of Series A
Preferred mandatorily converts into one share of common stock on May 15, 1998
and the Company has the option to redeem the shares, in whole or in part, on or
after May 15, 1997 and prior to May 15, 1998 at prices set forth in the
certificate of designation for the Series A Preferred which decline from $9.058
per share on May 15, 1997 to $8.875 per share on May 14, 1998, payable in common
stock. Each share of Series A Preferred is convertible at the option of the
holder into 0.8474 shares of common stock at any time prior to May 15, 1998.
The Series A Preferred ranks prior to common stock both as to payment of
dividends and distribution of assets upon liquidation. The holders of Series A
Preferred are entitled to receive cumulative preferential dividends, accruing at
the rate per share of $0.732 per annum ($0.183 per quarter) payable quarterly in
arrears.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
shareholders, to cause shares of preferred stock to be issued in one or more
series, and to determine the number of shares in each series and the rights,
preferences and limitations of each series. Among the specific matters which may
be determined by the Board of Directors are: the annual rate of dividends; the
redemption price, if any; the terms of a sinking or purchase fund, if any; the
amount payable in the
78
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
event of any voluntary liquidation, dissolution or winding up of the affairs of
the Company; conversion rights, if any; and voting powers, if any.
SHAREHOLDER RIGHTS PLAN
The Company has adopted a shareholder rights plan (the "Rights Plan")
whereby preferred stock purchase rights (the "Rights") will be distributed to
holders of the Company's common stock. The Rights will expire two years after
the Proposed Spin Off or on March 3, 2000, whichever occurs first. The Rights
will be exercisable only if a person acquires beneficial ownership of 15 percent
or more of the Company's common stock (an "Acquiring Person"), or commences a
tender offer which would result in ownership of 15 percent or more of such
stock. Under the Rights Plan, one Right to purchase one one-hundredth of a share
of a new series of junior preferred stock of the Company at an exercise price of
$42.00 per one one-hundredth of a share (subject to adjustment) will be issued
for each outstanding share of the Company's common stock held at the close of
business on March 3, 1997.
If any person becomes an Acquiring Person, each Right will entitle the
holder to purchase, at the Right's then current exercise price, shares of the
Company's common stock having a value of twice the Right's exercise price. In
addition, if, after a person becomes an Acquiring Person, the Company is
involved in a merger or other business combination transaction with another
person in which the Company is not the surviving corporation, or under certain
other circumstances, each Right will entitle its holder to purchase, at the
Right's then current exercise price, shares of common stock of the other person
having a value of twice the Right's exercise price.
The Company will generally be entitled to redeem the Rights in whole, but
not in part, at $0.01 per Right payable in cash or common stock, subject to
adjustment, at any time until 10 business days (subject to extension) after the
first public announcement that an Acquiring Person has become such.
The terms of the Rights may be amended by the Company without the approval
of the holders of the Rights at any time the Rights are redeemable. At any time
the Rights are no longer redeemable the terms may be amended only to (i) cure
any ambiguity; (ii) correct or supplement any provision which may be defective
or inconsistent with other provisions; (iii) shorten or lengthen any time
period; or (iv) change or supplement the provisions in any manner which the
Company deems necessary or desirable, so long as such change does not adversely
affects the interests of the holders of the Rights.
(12) STOCK OPTION PLANS
Under the terms of the Santa Fe Energy Resources 1990 Incentive Stock
Compensation Plan (the "1990 Plan") the Company may grant options and awards
with respect to no more than 7,500,000 shares of common stock to officers,
directors and key employees. Under the terms of the Santa Fe Energy Resources
1995 Incentive Stock Compensation Plan (the "1995 Plan") the Company may grant
options and awards with respect to not more than 1,000,000 shares of common
stock per year to employees other than executive officers and directors. Awards
made under the terms of the 1990 Plan and the 1995 Plan (collectively the
"Plans") may be made in the form of Restricted Stock, Bonus Stock, Phantom
Units and Stock Appreciation Rights, as such terms are defined in the Plans.
79
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options under the terms of the Plans are granted at the average market
price on the date of grant and have a ten-year term with vesting periods ranging
from six months to three years. The following table summarizes the activity with
respect to options outstanding under the Plans during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
(THOUSANDS) ($/SHARE) (THOUSANDS) ($/SHARE)
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 4,441.7 11.85 4,039.7 12.23
Grants............................... 1,240.5 12.07 472.7 8.75
Cancellations........................ (27.9) 11.31 (61.3) 13.47
Exercises............................ (280.3) 8.73 (9.4) 9.41
------------ ------------
Outstanding at end of year........... 5,374.0 12.07 4,441.7 11.85
============ ============
Exercisable at end of year........... 4,265.6 4,218.6
Weighted average fair value of
options granted during year
($/share).......................... 6.67 4.80
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: (i)
expected dividend yield -- 0.0%; (ii) expected stock price volatility -- 22 to
27%; (iii) risk-free interest rate -- 5 to 7%; and (iv) expected life of
options -- 10 years.
The following table summarizes certain information with respect to options
outstanding under the Plans at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------- ---------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE
($/SHARE) (THOUSANDS) (YEARS) ($/SHARE) (THOUSANDS) ($/SHARE)
--------------- ----------- ----------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
7-10 2,714.6 7 9.06 2,685.2 9.05
11-15 2,186.7 7 13.31 1,107.7 14.29
23-25 472.7 4 23.62 472.7 23.62
-----------
5,374.0 4,265.6
===========
</TABLE>
In December 1995 the Company granted 0.1 million Phantom Units to certain
executive officers which were to be earned over a three-year period commencing
January 1, 1996. The Phantom Units vested as a result of the IPO. The Company
recognized $1.6 million in expense in 1996 with respect to such Phantom Units.
80
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996 the Company granted 0.2 million Phantom Units to certain
executive officers and key personnel which are to be earned over a three-year
period commencing January 1, 1997. During 1996 and 1995 the Company granted 0.1
million and 0.2 million, respectively, shares of restricted stock to certain
executive officers and other employees. At December 31, 1996 1.4 million shares
were available for options or awards under the 1990 Plan and 1.0 million shares
were available under the 1995 Plan.
Under the terms of the Monterey Resources, Inc. 1996 Incentive Stock
Compensation Plan (the "Monterey Plan"), Monterey may grant options and awards
with respect to up to 3.0 million shares of common stock to officers, directors
and key employees, including up to 0.5 million shares of restricted stock.
During 1996 Monterey granted options on 0.2 million shares at an average
exercise price of $14.59 per share, with each option granted having an average
fair value of $7.77 per share. The grants were made at the market price at the
date of grant, have a ten year term and vest one year from the date of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (i) expected
dividend yield -- 0.0%; (ii) expected stock price volatility -- 24%; (iii)
risk-free interest rate -- 6.4%; and (iv) expected life of options -- 10 years.
During 1996 Monterey also issued 0.1 million restricted shares which vest
over a five-year period from the date of grant.
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), which established financial accounting and
reporting standards for stock-based employee compensation plans. FAS 123
encourages companies to adopt a fair value based method of accounting for such
plans but continues to allow the use of the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has elected to continue to account for
stock-based compensation costs based on the fair value of options granted as
prescribed by FAS 123. Earnings (loss) attributable to common shares and the
related per share amounts would have been reduced as is reflected by the
proforma amounts in the following table (in millions of dollars, except per
share data):
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
As Reported:
Earnings (loss) attributable to
common shares................. (10.8) 11.8
Earnings (loss) attributable to
common shares per share....... (0.12) 0.13
Proforma:
Earnings (loss) attributable to
common shares................. (12.6) 10.9
Earnings (loss) attributable to
common shares per share....... (0.14) 0.12
During the initial phase-in period, the effects of applying FAS 123 for
recognizing compensation cost on a proforma basis may not be representative of
the effects on reported earnings for future periods since the options granted
vest over several periods and additional awards will be made in future periods.
81
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) PENSION AND OTHER EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a defined benefit retirement plan (the "SFER Plan")
covering substantially all salaried employees not covered by collective
bargaining agreements and a nonqualified supplemental retirement plan (the
"Supplemental Plan"). The Supplemental Plan will pay benefits to participants
in the SFER Plan in those instances where the SFER Plan formula produces a
benefit in excess of limits established by ERISA and the Tax Reform Act of 1986.
Benefits payable under the SFER Plan are based on years of service and
compensation during the five highest paid years of service during the ten years
immediately preceding retirement. The Company's funding policy is to contribute
annually not less than the minimum required by ERISA and not more than the
maximum amount deductible for income tax purposes.
The following table sets forth the funded status of the SFER Plan and the
Supplemental Plan at December 31, 1996 and 1995 (in millions of dollars):
<TABLE>
<CAPTION>
SFER PLAN SUPPLEMENTAL PLAN
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Plan assets at fair value, primarily
invested in common stocks and U.S.
and corporate bonds................ 36.1 32.5 -- --
Actuarial present value of projected
benefit obligations:
Accumulated benefit obligations
Vested.................... (30.8) (30.4) (1.6) (0.7)
Nonvested................. (1.7) (1.3) (0.2) --
Effect of projected future
salary
increases.................... (8.3) (7.3) (1.4) (1.3)
--------- --------- --------- ---------
Excess of projected benefit
obligations over plan assets....... (4.7) (6.5) (3.2) (2.0)
Unrecognized net loss from past
experience different from that
assumed and effects of changes in
assumptions........................ 1.2 3.0 (1.1) (2.1)
Unrecognized prior service cost...... (1.9) (2.0) 1.9 2.0
Unrecognized net (asset) obligation
being recognized over plan's
average remaining
service life....................... (0.8 (0.9) 0.2 0.2
--------- --------- --------- ---------
Accrued pension liability............ (6.2) (6.4) (2.2) (1.9)
========= ========= ========= =========
Major assumptions at year-end
Discount rate................... 7.50% 7.50% 7.50% 7.50%
Long-term asset yield........... 9.50% 9.50% -- --
Rate of increase in future
compensation................. 5.25% 5.25% 5.25% 5.25%
</TABLE>
82
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the components of pension expense for the
SFER Plan and Supplemental Plan for 1996, 1995 and 1994 (in millions of
dollars):
<TABLE>
<CAPTION>
SFER PLAN SUPPLEMENTAL PLAN
---------------------- ----------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost......................... 1.6 1.3 1.7 0.1 0.4 --
Interest cost........................ 2.9 2.7 2.8 0.2 0.4 0.1
Return on plan assets................ (4.1) (5.5) 0.5 -- -- --
Net amortization and deferral........ 0.8 2.5 (3.3) -- 0.3 --
---- ---- ---- ---- ---- ----
1.2 1.0 1.7 0.3 1.1 0.1
==== ==== ==== ==== ==== ====
</TABLE>
The Company sponsors a pension plan covering certain hourly-rated employees
in California (the "Hourly Plan"). The Hourly Plan provides benefits that are
based on a stated amount for each year of service. The Company annually
contributes amounts which are actuarially determined to provide the Hourly Plan
with sufficient assets to meet future benefit payment requirements.
The following table sets forth the funded status of the Hourly Plan at
December 31, 1996 and 1995 (in millions of dollars):
1996 1995
--------- ---------
Plan assets at fair value, primarily
invested in fixed-rate securities.... 9.5 8.7
Actuarial present value of projected
benefit obligations
Accumulated benefit obligations
Vested.................... (10.9) (10.4)
Nonvested................. (0.4) (0.4)
--------- ---------
Excess of projected benefit
obligation over plan assets........ (1.8) (2.1)
Unrecognized net (gain) loss from
past experience different from that
assumed and effects of changes in
assumptions........................ (0.4) (0.3)
Unrecognized prior service cost...... 0.4 0.4
Unrecognized net obligation.......... 1.0 1.2
Additional minimum liability......... (1.1) (1.3)
--------- ---------
Accrued pension liability....... (1.9) (2.1)
========= =========
Major assumptions at year-end
Discount rate................... 7.50% 7.50%
Expected long-term rate of
return on plan assets......... 8.50% 8.50%
The following table sets forth the components of pension expense for the
Hourly Plan for 1996, 1995 and 1994 (in millions of dollars):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Service cost.................... 0.2 0.2 0.2
Interest cost................... 0.8 0.8 0.8
Return on plan assets........... (0.9) (1.4) (0.4)
Net amortization and deferral... 0.4 0.9 --
--------- --------- ---------
0.5 0.5 0.6
========= ========= =========
83
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company sponsors a pension plan for certain persons employed in foreign
locations (the "Foreign Plan"). The following table sets forth the funded
status of the Foreign Plan at December 31, 1996 and 1995 (in millions of
dollars):
1996 1995
--------- ---------
Plan assets.......................... -- --
Actuarial present value of projected
benefit obligations:
Accumulated benefit
obligations..................
Vested.......................... (0.1) --
Nonvested....................... (0.2) (0.2)
Effect of projected future
salary increases............. (0.1) --
--------- ---------
Excess of projected benefit
obligations over plan assets....... (0.4) (0.2)
Unrecognized prior service costs..... 0.1 0.1
--------- ---------
Accrued pension liability............ (0.3) (0.1)
========= =========
Major assumptions at year-end:
Discount rate................... 7.50% 7.50%
Rate of increase in future
compensation................. 5.00% 5.00%
The following table sets forth the components of pension expense for the
Foreign Plan for 1996, 1995 and 1994 (in millions of dollars):
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Service cost......................... 0.1 0.1 --
Interest cost........................ -- -- --
Net amortization and deferral........ -- -- --
--------- --------- ---------
0.1 0.1 --
========= ========= =========
84
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care and life insurance benefits for
substantially all employees who retire under the provisions of a
Company-sponsored retirement plan and their dependents. Participation in the
plans is voluntary and requires a monthly contribution by the retiree. The
following table sets forth the plan's funded status at December 31, 1996 and
1995 (in millions of dollars):
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Plan assets, at fair value........... -- --
Accumulated postretirement benefit
obligation
Retirees........................... (4.2) (4.6)
Eligible active participants....... (1.0) (1.4)
Other active participants.......... (2.1) (1.2)
--------- ---------
Accumulated postretirement benefit
obligation in excess of plan
assets............................. (7.3) (7.2)
Unrecognized transition obligation... 3.7 3.8
Unrecognized net loss (gain) from
past experience different from that
assumed and from changes in
assumptions........................ (0.2) 0.3
--------- ---------
Accrued postretirement benefit
cost............................... (3.8) (3.1)
========= =========
Assumed discount rate................ 7.50% 7.75%
Assumed rate of compensation
increase........................... 5.25% 5.25%
The Company's net periodic postretirement benefit cost for 1996, 1995 and
1994 includes the following components (in millions of dollars):
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Service costs........................ 0.5 0.3 0.4
Interest costs....................... 0.5 0.5 0.5
Amortization of unrecognized
transition obligation.............. 0.3 0.3 0.3
---- ---- ----
1.3 1.1 1.2
==== ==== ====
Estimated costs and liabilities have been developed assuming trend rates
for growth in future health care costs beginning with 8.0% for 1996 graded to
6.0% (5.5% for post age 65) by the year 2000 and remaining constant thereafter.
Increasing the assumed health care cost trend rate by one percent each year
would increase the accumulated postretirement benefit obligation as of December
31, 1996 by $0.4 million and the aggregate of the service cost and interest cost
components of the net periodic postretirement benefit cost for 1997 by $0.1
million.
SAVINGS PLAN
The Company has a savings plan available to substantially all salaried
employees and intended to qualify as a deferred compensation plan under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). The Company will
match employee contributions for an amount up to 4% of each employee's base
salary. In addition, if at the end of each fiscal year the Company's performance
for such year has exceeded certain predetermined criteria, each participant will
receive an additional matching contribution equal to 50% of the regular matching
contribution. The Company's contributions to the 401(k) Plan, which are made in
the form of the Company's common stock and charged to expense, totalled $1.2
million in 1996, $1.3 million in 1995 and $1.2 million in 1994.
85
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a savings plan with respect to certain personnel
employed in foreign locations. The plan is an unsecured creditor of the Company
and at December 31, 1996 and 1995 the Company's liability with respect to the
plan totalled $0.3 million and $0.1 million, respectively.
(14) COMMITMENTS AND CONTINGENCIES
OIL AND GAS HEDGING
From time to time the Company hedges a portion of its oil and gas sales to
provide a certain minimum level of cash flow from its sales of oil and gas.
While the hedges are generally intended to reduce the Company's exposure to
declines in market price, the Company's gain from increases in market price may
be limited. The Company uses various financial instruments whereby monthly
settlements are based on differences between the prices specified in the
instruments and the settlement prices of certain futures contracts quoted on the
New York Mercantile Exchange ("NYMEX") or certain other indices. Generally, in
instances where the applicable settlement price is less than the price specified
in the contract, the Company receives a settlement based on the difference; in
instances where the applicable settlement price is higher than the specified
price, the Company pays an amount based on the difference. The instruments
utilized by the Company differ from futures contracts in that there is no
contractual obligation which requires or allows for the future delivery of the
product. Gains or losses on hedging activities are recognized in oil and gas
revenues in the period in which the hedged production is sold.
Crude oil sales hedges resulted in a $13.4 million decrease in revenues in
1996 and a $2.4 million increase in revenues in 1995. At December 31, 1996 the
Company had open crude oil sales hedges on an average of 2,000 barrels per day
for the period January to June 1997. Under the terms of the instruments, if the
average of the applicable daily settlement prices is below $21.00 per barrel,
the Company will receive a settlement based on the difference, and if the
average of the applicable daily settlement prices is above $26.10, the Company
will be required to pay an amount based on the difference.
Subsequent to year end, the Company entered into additional agreements
which increased the number of barrels hedged to an average of approximately
7,700 barrels per day for the period January to July 1997. The instruments used
have floors ranging from $21.00 to $23.00 per barrel and ceilings ranging from
$24.00 to $27.00 per barrel. Under the terms of the instruments, if the
aggregate average of the applicable daily settlement prices is below the floor,
the Company will receive a settlement based on the difference, and if the
aggregate average of the applicable daily settlement prices is above the
ceiling, the Company will be required to pay an amount based on the difference.
At December 31, 1996 the Company had no open natural gas sales hedges.
Natural gas sales hedges resulted in a decrease in revenues of $21.4 million in
1996, $0.3 million in 1995 and $1.0 million in 1994.
In addition to its oil and gas sales hedges, for the first six months of
1996 the Company hedged 20 MMcf per day of the natural gas it purchases for use
in its steam generation operations in the San Joaquin Valley of California. Such
hedges resulted in a $3.2 million increase in production and operating costs.
ENVIRONMENTAL REGULATION
Federal, state and local laws and regulations relating to environmental
quality control affect the Company in all of its oil and gas operations. 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 that contributed to the release of a "hazardous substance" into the
environment. These persons include the owner or
86
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operator of a site and companies that disposed or arranged for the disposal of
the hazardous substance found at a site. CERCLA also authorizes the
Environmental Protection Agency (the "EPA") and, in some cases, third parties
to take actions in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs they
incur. In the course of its operations, the Company has generated and will
generate wastes that may fall within CERCLA's definition of "hazardous
substances". The Company may be responsible under CERCLA for all or part of the
costs to clean up sites at which such wastes have been disposed. Certain
properties owned or used by the Company or its predecessors have been
investigated under state and Federal Superfund statutes, and the Company has
been and could be named a potentially responsible party ("PRP") for the
cleanup of some of these sites.
The Company has been identified as one of over 250 PRPs at a Superfund site
in Los Angeles County, California (the "OII Site"). The OII Site was operated
by a third party as a waste disposal facility from 1948 until 1983. The EPA is
requiring the PRPs to undertake remediation of the site in several phases, which
include site monitoring and leachate control, gas control and final remediation.
In November 1988 the EPA and a group of PRPs that includes the Company entered
into a consent decree covering the site monitoring and leachate control phases
of remediation. The Company was a member of the group Coalition Undertaking
Remediation Efforts ("CURE") which was responsible for constructing and
operating the leachate treatment plant. This phase is now complete and the
Company's share of costs with respect to this phase was $0.9 million. Another
consent decree provides for the predesign, design and construction of a gas
plant to harness and market methane gas emissions. The Company is a member of
the New CURE group which is responsible for the gas plant construction and
operation and landfill cover. Currently, New CURE is in the design stage of the
gas plant. The Company's share of costs of this phase is expected to be $1.9
million and such costs have been provided for in the financial statements.
Pursuant to consent decrees settling lawsuits against the municipalities and
transporters involved with the OII site but not named by the EPA as PRPs, such
parties are required to pay approximately $84 million, of which approximately
$76 million will be credited against future remediation expenses. The EPA and
the PRPs are currently negotiating the final closure requirements. After taking
into consideration the credits from the municipalities and transporters, the
Company estimates its share of final costs of closure will be approximately $0.8
million, which amount has been provided for by the Company in its financial
statements. The Company has entered into a Joint Defense Agreement with the
other PRPs to defend against a lawsuit filed in September 1994 by 95 homeowners
alleging, among other things, nuisance, trespass, strict liability and
infliction of emotional distress. A second lawsuit has been filed by 33
additional homeowners and the Company and the other PRPs have entered into a
Joint Defense Agreement. At this stage of the lawsuit the Company is not able to
estimate costs or potential liability.
In 1994 the Company received a request from the EPA for information
pursuant to Section 104(e) of CERCLA and a letter ordering the Company and other
PRPs to negotiate with the EPA regarding implementation of a remedial plan for a
site located in Santa Fe Springs, California (the "Santa Fe Springs Site").
The Company owned the property on which the Santa Fe Springs Site is located
from 1921 to 1932. During that time the property was leased to another company
and in 1932 the property was sold to that company. During the time the other
company leased or owned the property and for a period thereafter, hazardous
wastes were allegedly disposed at the Santa Fe Springs Site. The EPA estimates
total past and future costs for remediation to be approximately $8.0 million.
The Company filed its response to the Section 104(e) order setting forth its
position and defenses based on the fact that the other company was the lessee
and operator of the site during the time the Company was the owner of the
property. However, the Company has also given its Notice of Intent to comply
with the EPA's order to prepare a remediation design plan. The PRPs estimate
total costs to final remediation to be $3.0 million and the Company has provided
$250,000 for such costs in the financial statements.
87
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995 the Company and twelve other companies received notice that they
have been identified as PRPs by the California Department of Toxic Substances
Control (the "DTSC") as having generated and/or transported hazardous waste to
the Environmental Protection Corporation ("EPC") Eastside Landfill (the
"Eastside Site") during its fourteen-year operation from 1971 to 1985. EPC has
since liquidated all assets and placed the proceeds in trust (the "EPC Trust")
for closure and post-closure activities. However, these monies may not be
sufficient to close the site. The PRPs have entered into an enforceable
agreement with the DTSC to characterize the contamination at the site and
prepare a focused remedial investigation and feasibility study. The DTSC has
agreed to implement reasonable measures to bring new PRPs into the agreement.
The DTSC will address subsequent phases of the cleanup, including remedial
design and implementation in a separate order agreement. The cost of the
remedial investigation and feasibility study is estimated to be $0.8 million,
the cost of which will be shared by the PRPs and the EPC Trust. The ultimate
costs of subsequent phases will not be known until the remedial investigation
and feasibility study is completed and a remediation plan is accepted by the
DTSC. The Company currently estimates final remediation could cost $2 million to
$6 million and believes the monies in the EPC Trust will be sufficient to fund
the lower end of this range of costs. The Company has provided $80,000 in its
financial statements for its share of costs related to this site.
Pursuant to the Contribution Agreement, Monterey agreed to indemnify and
hold harmless Santa Fe from and against any costs incurred in the future
relating to environmental liabilities of the Western Division assets (other than
those retained by Santa Fe), including any costs or expenses incurred at any of
the OII Site, the Santa Fe Springs Site and the Eastside Site, and any costs or
liabilities that may arise in the future that are attributable to laws, rules or
regulations in respect to any property or interest therein located in California
and formerly owned or operated by the Western Division or its precedessors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with eleven employees.
The initial term of ten of the agreements expire on December 31, 1998; however,
beginning January 1, 1998 and on each January 1 thereafter, the term is
automatically extended for one-year periods, unless by September 30 of the
preceding year the Company gives notice that the agreement will not be extended.
The term of the agreements is automatically extended for a period of two years
following a change of control. The initial term of the other agreement expires
December 31, 1999 and beginning January 1, 1999, is automatically extended for
one-year periods and is automatically extended for a three-year period following
a change of control.
In the event following a change in control employment is terminated by the
employee for "good reason" or the employee is involuntarily terminated by the
Company other than for "cause" (as those terms are defined in the employment
agreements), or if during the six months preceding a change in control, the
employee's employment is terminated by the employee for good reason or by the
Company other than for cause, and such termination is demonstrated to be
connected with the change in control, the employment agreements provide for
payment of certain amounts to the employee based on the employee's salary and
bonus under the Company's incentive compensation plan; payout of non-vested
restricted stock, phantom units, stock options, if any, and continuation of
certain insurance benefits on a tax neutral basis for a period of up to 36
months. The payments and benefits are payable pursuant to the employment
agreements only to the extent they are not paid out under the terms of any other
plan of the Company. The payments and benefits provided by the employment
agreements may be limited, with the exception of those made to Mr. Payne, by
certain provisions of the Internal Revenue Code.
88
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Company has noncancellable agreements with terms ranging from one to
ten years to lease office space and equipment. Minimum rental payments due under
the terms of these agreements are: 1997 -- $6.2 million,1998 -- $5.7 million,
1999 -- $3.7 million,2000 -- $1.9 million, 2001 -- $1.5 million and $6.1 million
thereafter. Rental expense under the terms of noncancellable agreements totalled
$5.9 million in 1996, $6.1 million in 1995 and $6.2 million in 1994.
OTHER MATTERS
The Company has certain long-term contracts ranging up to twelve years for
the supply and transportation of approximately 20 million cubic feet per day of
natural gas to the Company's operations in Kern County, California. In the
aggregate, these contracts involve a minimum commitment on the part of the
Company of approximately $18.6 million per year (based on prices and
transportation charges in effect for December 1996). In connection with the
development of a gas field in Argentina in which the Company has a 19.9% working
interest, a gas contract with "take-or-pay" and "delivery-or-pay"
obligations was executed in 1994 with a gas distribution company.
There are other claims and actions, including certain other environmental
matters, pending against the Company. In the opinion of management, the amounts,
if any, which may be awarded in connection with any of these claims and actions
could be significant to the results of operations of any period but would not be
material to the Company's consolidated financial position.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosure About Fair Value of Financial Instruments"
requires the disclosure, to the extent practicable, of the fair value of
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences, if any, of realization or
settlement. The following table reflects the financial instruments for which the
fair value differs from the carrying amount of such financial instrument in the
Company's December 31, 1996 and 1995 balance sheets (in millions of dollars):
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Liabilities
Long-Term Debt.................. 278.5 315.4 344.4 378.5
Convertible Preferred Stock, 7%
Series....................... 19.7 28.4 80.0 95.6
Shareholders' Equity
$.732 Series A Convertible
Preferred Stock.............. 91.4 131.1 91.4 105.7
</TABLE>
The fair value of the Company's 11% Senior Subordinated Debentures,
Convertible Preferred Stock, 7% Series and $.732 Series A Convertible Preferred
Stock is based on market prices. The fair value of the Company's fixed-rate
long-term debt is based on current borrowing rates available for financings with
similar terms and maturities. With respect to the Company's floating-rate debt
the carrying amount approximates fair value.
At December 31, 1996 the Company had open oil sales hedging contracts (see
Note 14). Based on the year-end 1996 settlement prices of the applicable NYMEX
futures contracts, the Company would recognize no gain or loss with respect to
such hedges in 1997. The actual gains or losses realized by the Company from
these hedges may vary significantly due to the volatility of the futures markets
and other indices.
89
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1 QTR 2 QTR 3 QTR 4 QTR YEAR
------ ------ ------ ------ -----
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1996(A)
Revenues........................ 123.7 137.5 149.4 172.7 583.3
Gross profit (b)................ 35.5 33.9 40.3 9.9 119.6
Impairment of oil and gas
properties.................... -- 10.4 -- 47.0 57.4
Loss (gain) on sale of assets... 0.2 0.3 -- (12.6) (12.1)
Income (loss) from operations... 29.5 26.0 33.9 0.1 89.5
Income (loss) before
extraordinary items........... 12.6 17.4 16.5 (4.1) 42.4
Extraordinary item -- debt
extinguishment costs.......... -- -- -- 6.0 6.0
Net income (loss)............... 12.6 12.4 16.5 (10.1) 36.4
Earnings (loss) attributable to
common shares................. 8.9 13.7 12.8 (46.2) (10.8)
Earnings (loss) attributable to
common shares per share
Earnings (loss) before
extraordinary items...... 0.10 0.15 0.14 (0.44) (0.05)
Extraordinary items........ -- -- -- (0.07) (0.07)
Earnings (loss) to common
shares................... 0.10 0.15 0.14 (0.51) (0.12)
Average shares outstanding
(millions).................... 90.4 90.6 90.6 90.9 90.6
1995
Revenues........................ 100.3 111.4 113.4 124.3 449.4
Gross profit (b)................ 18.4 29.4 26.9 6.1 80.8
Income (loss) from operations... 12.5 22.5 19.8 (0.9) 53.9
Net income (loss)............... 3.6 7.6 7.0 8.4 26.6
Earnings (loss) attributable to
common shares................. (0.1) 3.9 3.3 4.7 11.8
Earnings (loss) attributable to
common shares per share....... -- 0.04 0.04 0.05 0.13
Average shares outstanding
(millions).................... 90.1 90.3 90.3 90.3 90.2
</TABLE>
- ------------
(a) The fourth quarter of 1996 includes impairments of oil and gas properties of
$47.0 million (see Note 1), a $12.3 million gain on the sale of certain
surface lands (see Note 6), a $6.0 million extraordinary item with respect
to debt extinguishment costs (see Note 2) and a $33.7 million convertible
preferred redemption premium (see Note 10).
(b) Revenues less operating expenses other than general and administrative.
90
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
Information with respect to the Company's oil and gas producing activities
is presented in the following tables. Reserve quantities as well as certain
information regarding future production and discounted cash flows were
determined by independent petroleum consultants, Ryder Scott Company.
OIL AND GAS RESERVES
The following table sets forth the Company's net proved oil and gas
reserves at December 31, 1993, 1994, 1995 and 1996 and the changes in net proved
oil and gas reserves for the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF)
---------------------------------------- ---------------------------------------------
U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL
--------- --------- --------- ----- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves at
December 31, 1993................... 230.9 8.8 8.5 248.2 235.9 26.4 0.7 263.0
Revisions of previous estimates.... 13.3 0.6 1.3 15.2 (2.7) -- -- (2.7)
Improved recovery techniques....... 13.9 -- -- 13.9 0.9 -- -- 0.9
Extensions, discoveries and other
additions........................ 3.6 0.8 1.1 5.5 22.5 13.7 -- 36.2
Purchases of minerals-in-place..... 0.2 -- -- 0.2 0.5 -- -- 0.5
Sales of minerals-in-place......... (0.7) -- -- (0.7) (2.5) (3.1) -- (5.6)
Production......................... (21.0) (0.9) (2.1) (24.0) (49.8) -- (0.1) (49.9)
--------- --------- --------- ----- --------- --------- ---------- ---------
Proved reserves at
December 31, 1994................... 240.2 9.3 8.8 258.3 204.8 37.0 0.6 242.4
Revisions of previous estimates.... 16.4 1.4 0.4 18.2 1.0 1.3 -- 2.3
Improved recovery techniques....... 15.3 0.8 -- 16.1 -- 0.2 -- 0.2
Extensions, discoveries and other
additions........................ 1.7 2.2 0.5 4.4 36.4 0.5 -- 36.9
Purchases of minerals-in-place..... 6.3 -- -- 6.3 18.0 -- -- 18.0
Production......................... (21.3) (0.9) (1.9) (24.1) (50.3) (4.3) (0.1) (54.7)
--------- --------- --------- ----- --------- --------- ---------- ---------
Proved reserves at
December 31, 1995................... 258.6 12.8 7.8 279.2 209.9 34.7 0.5 245.1
Revisions to previous estimates.... 15.6 (0.2) 2.3 17.7 25.9 (2.4) (0.2) 23.3
Improved recovery techniques....... 14.4 -- -- 14.4 -- -- -- --
Extensions, discoveries and other
additions........................ 0.6 1.3 0.3 2.2 40.8 1.1 -- 41.9
Purchases of minerals-in-place..... 10.7 2.8 -- 13.5 11.7 0.6 -- 12.3
Sales of minerals-in-place......... (0.3) -- -- (0.3) (2.1) -- -- (2.1)
Production......................... (24.3) (1.4) (1.5) (27.2) (53.4) (7.6) (0.1) (61.1)
--------- --------- --------- ----- --------- --------- ---------- ---------
Proved reserves at December 31,
1996................................ 275.3 15.3 8.9 299.5 232.8 26.4 0.2 259.4
========= ========= ========= ===== ========= ========= ========== =========
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
91
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF)
----------------------------------------- ---------------------------------------------
U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL
--------- --------- ---------- ----- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed reserves at
December 31
1993............................ 178.8 5.5 6.7 191.0 206.0 -- 0.7 206.7
1994............................ 181.3 6.1 7.1 194.5 178.2 1.3 0.6 180.1
1995............................ 206.5 7.1 6.0 219.6 170.2 33.3 0.5 204.0
1996............................ 224.1 8.5 6.5 239.1 193.6 25.9 0.2 219.7
</TABLE>
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data indicate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods.
Indonesian reserves represent an entitlement to gross reserves in
accordance with a production sharing contract. These reserves include estimated
quantities allocable to the Company for recovery of operating costs as well as
quantities related to the Company's net equity share after recovery of costs.
Accordingly, these quantities are subject to fluctuations with an inverse
relationship to the price of oil. If oil prices increase, the reserve quantities
attributable to the recovery of operating costs decline. Although this reduction
would be offset partially by an increase in the net equity share, the overall
effect would be a reduction of reserves attributable to the Company. At December
31, 1996, the quantities include 0.6 million barrels which the Company is
contractually obligated to sell for $.20 per barrel.
The Company has certain commitments with respect to the delivery of natural
gas (see Note 14) which the Company believes it can fulfill from its proved
reserves and supply contracts with other companies.
At December 31, 1996 U.S. proved reserves included 216.4 MMBbls of crude
oil and liquids (171.0 MMBbls of which were proved developed) and 12.2 Bcf of
natural gas (9.5 Bcf of which were proved developed) attributable to Monterey.
At December 31, 1996, 2.0 million barrels of crude oil reserves and 14.1
billion cubic feet of natural gas reserves were subject to a 90% net profits
interest held by Santa Fe Energy Trust.
92
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS
Estimated future net cash flows from the Company's proved oil and gas
reserves at December 31, 1996, 1995 and 1994 are presented in the following
table (in millions of dollars, except as noted):
<TABLE>
<CAPTION>
U.S. ARGENTINA INDONESIA TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
1996
Future cash inflows............. 6,393.6 377.7 191.8 6,963.1
Future production costs......... (2,792.7) (138.8) (135.2) (3,066.7)
Future development costs........ (286.7) (53.0) (22.5) (362.2)
Future income tax expenses...... (999.2) (33.4) (11.9) (1,044.5)
---------- --------- --------- ----------
Net future cash flows..... 2,315.0 152.5 22.2 2,489.7
Discount at 10% for timing of
cash flows................... (951.2) (54.3) (7.1) (1,012.6)
---------- --------- --------- ----------
Present value of future net cash
flows from
proved reserves.............. 1,363.8 98.2 15.1 1,477.1
========== ========= ========= ==========
Present value of pretax future
net cash flows from proved
reserves..................... 1,952.3 119.6 23.6 2,095.5
========== ========= ========= ==========
Average sales prices
Oil ($/Barrel)............ 20.35 22.62 21.67 20.51
Natural gas ($/Mcf)....... 3.47 1.20 1.05 3.24
1995
Future cash inflows............. 4,191.2 244.7 137.4 4,573.3
Future production costs......... (1,852.8) (103.0) (63.0) (2,018.8)
Future development costs........ (282.8) (36.1) (6.1) (325.0)
Future income tax expenses...... (541.7) (11.8) (25.1) (578.6)
---------- --------- --------- ----------
Net future cash flows..... 1,513.9 93.8 43.2 1,650.9
Discount at 10% for timing of
cash flows................... (672.0) (35.7) (13.0) (720.7)
---------- --------- --------- ----------
Present value of future net cash
flows from
proved reserves.............. 841.9 58.1 30.2 930.2
========== ========= ========= ==========
Present value of pretax future
net cash flows from proved
reserves..................... 1,143.1 65.4 48.7 1,257.2
========== ========= ========= ==========
Average sales prices
Oil ($/Barrel)............ 14.75 15.66 17.51 14.87
Natural gas ($/Mcf)....... 1.88 1.27 1.03 1.79
1994
Future cash inflows............. 3,488.8 176.9 134.9 3,800.6
Future production costs......... (1,614.6) (89.6) (69.4) (1,773.6)
Future development costs........ (263.7) (32.3) (6.2) (302.2)
Future income tax expenses...... (385.2) (3.7) (20.0) (408.9)
---------- --------- --------- ----------
Net future cash flows..... 1,225.3 51.3 39.3 1,315.9
Discount at 10% for timing of
cash flows................... (544.9) (20.1) (11.0) (576.0)
---------- --------- --------- ----------
Present value of future net cash
flows from
proved reserves.............. 680.4 31.2 28.3 739.9
========== ========= ========= ==========
Present value of pretax future
net cash flows from proved
reserves..................... 894.3 33.5 43.0 970.8
========== ========= ========= ==========
Average sales prices
Oil ($/Barrel)............ 13.18 14.06 15.21 13.28
Natural gas ($/Mcf)....... 1.63 1.25 0.97 1.57
</TABLE>
93
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The following tables sets forth the changes in the present value of
estimated future net cash flows from proved reserves during 1996, 1995 and 1994
(in millions of dollars):
<TABLE>
<CAPTION>
U.S. ARGENTINA INDONESIA TOTAL
------ --------- --------- ---------
<S> <C> <C> <C> <C>
1996
Balance at beginning of year....... 841.9 58.1 30.2 930.2
------ --------- --------- ---------
Increase (decrease) due to:
Sales of oil and gas, net of
production costs of $210.8
million...................... (311.7) (25.6) (13.9) (351.1)
Net changes in prices and
production costs............. 552.1 35.0 (8.3) 578.8
Extensions, discoveries and
improved recovery............ 169.1 16.4 0.8 186.3
Purchases of
minerals-in-place............ 92.5 19.2 -- 111.7
Sales of minerals-in-place...... (3.3) -- -- (3.3)
Development costs incurred...... 145.4 19.5 12.9 177.8
Changes in estimated volumes.... 152.3 6.6 3.1 162.0
Changes in estimated development
costs........................ (100.8) (23.4) (22.8) (147.0)
Interest factor -- accretion of
discount..................... 113.7 6.6 3.0 123.2
Income taxes.................... (287.4) (14.2) 10.1 (291.5)
------ --------- --------- ---------
521.9 40.1 (15.1) 546.9
------ --------- --------- ---------
1,363.8 98.2 15.1 1,477.1
====== ========= ========= =========
1995
Balance at beginning of year....... 680.4 31.2 28.3 739.9
------ --------- --------- ---------
Increase (decrease) due to:
Sales of oil and gas, net of
production costs of $172.6
million...................... (244.7) (11.8) (13.2) (269.7)
Net changes in prices and
production costs............. 178.2 13.9 9.1 201.2
Extensions, discoveries and
improved recovery............ 110.3 4.6 4.2 119.1
Purchases of
minerals-in-place............ 56.6 -- -- 56.6
Development costs incurred...... 145.4 13.7 11.3 170.4
Changes in estimated volumes.... 19.9 9.6 0.3 29.8
Changes in estimated development
costs........................ (105.6) (2.4) (10.2) (118.2)
Interest factor -- accretion of
discount..................... 88.7 4.4 4.2 97.3
Income taxes.................... (87.3) (5.1) (3.8) (96.2)
------ --------- --------- ---------
161.5 26.9 1.9 190.3
------ --------- --------- ---------
841.9 58.1 30.2 930.2
====== ========= ========= =========
</TABLE>
94
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
U.S. ARGENTINA INDONESIA TOTAL
------ --------- --------- ---------
<S> <C> <C> <C> <C>
1994
Balance at beginning of year....... 482.0 7.5 12.9 502.4
------ --------- --------- ---------
Increase (decrease) due to:
Sales of oil and gas, net of
production costs of $172.2
million...................... (196.0) (7.3) (17.2) (220.5)
Net changes in prices and
production costs............. 389.0 21.1 19.6 429.7
Extensions, discoveries and
improved recovery............ 78.8 7.4 10.4 96.6
Purchases of
minerals-in-place............ 1.2 -- -- 1.2
Sales of minerals-in-place...... (8.9) (0.4) -- (9.3)
Development costs incurred...... 81.7 13.0 9.3 104.0
Changes in estimated volumes.... 18.5 (2.6) 8.3 24.2
Changes in estimated development
costs........................ (66.6) (7.3) (6.5) (80.4)
Interest factor -- accretion of
discount..................... 53.3 2.0 2.0 57.3
Income taxes.................... (152.6) (2.2) (10.5) (165.3)
------ --------- --------- ---------
198.4 23.7 15.4 237.5
------ --------- --------- ---------
680.4 31.2 28.3 739.9
====== ========= ========= =========
</TABLE>
Estimated future cash flows represent an estimate of future net cash flows
from the production of proved reserves using estimated sales prices and
estimates of the production costs, ad valorem and production taxes, and future
development costs necessary to produce such reserves. No deduction has been made
for depletion, depreciation or any indirect costs such as general corporate
overhead or interest expense.
The sales prices used in the calculation of estimated future net cash flows
are based on the prices in effect at year end. Such prices have been held
constant except for known and determinable escalations.
Operating costs and ad valorem and production taxes are estimated based on
current costs with respect to producing oil and gas properties. Future
development costs are based on the best estimate of such costs assuming current
economic and operating conditions.
Income tax expense is computed based on applying the appropriate statutory
tax rate to the excess of future cash inflows less future production and
development costs over the current tax basis of the properties involved. While
applicable investment tax credits and other permanent differences are considered
in computing taxes, no recognition is given to tax benefits applicable to future
exploration costs or the activities of the Company that are unrelated to oil and
gas producing activities.
The information presented with respect to estimated future net revenues and
cash flows and the present value thereof is not intended to represent the fair
value of oil and gas reserves. Actual future sales prices and production and
development costs may vary significantly from those in effect at year-end and
actual future production may not occur in the periods or amounts projected. This
information is presented to allow a reasonable comparison of reserve values
prepared using standardized measurement criteria and should be used only for
that purpose.
At December 31, 1996 approximately $126.0 million of the Company's
estimated present value of future net cash flows were attributable to the
minority interest in Monterey.
95
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The following table includes all costs incurred, whether capitalized or
charged to expense at the time incurred (in millions of dollars):
<TABLE>
<CAPTION>
OTHER
U.S. ARGENTINA INDONESIA FOREIGN TOTAL
--------- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
1996
Property acquisition costs
Unproved........................ 31.6 -- -- 1.8 33.4
Proved.......................... 30.2 7.4 -- 0.2 37.8
Exploration costs.................. 29.5 0.1 2.4 11.4 43.4
Development costs.................. 115.2 12.1 12.9 3.9 144.1
--------- --------- --------- -------- ------
206.5 19.6 15.3 17.3 258.7
========= ========= ========= ======== ======
1995
Property acquisition costs
Unproved........................ 13.0 -- 0.7 0.1 13.8
Proved.......................... 33.8 -- -- -- 33.8
Exploration costs.................. 27.7 1.2 7.7 7.2 43.8
Development costs.................. 111.5 13.7 11.3 0.5 137.0
--------- --------- --------- -------- ------
186.0 14.9 19.7 7.8 228.4
========= ========= ========= ======== ======
1994
Property acquisition costs
Unproved........................ 4.5 0.1 0.6 0.2 5.4
Proved.......................... 1.9 0.3 -- -- 2.2
Exploration costs.................. 19.3 1.2 7.5 6.8 34.8
Development costs.................. 81.6 13.0 9.3 0.1 104.0
--------- --------- --------- -------- ------
107.3 14.6 17.4 7.1 146.4
========= ========= ========= ======== ======
</TABLE>
96
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth information concerning capitalized costs at
December 31, 1996 and 1995 related to the Company's oil and gas operations (in
millions of dollars):
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------- --------------------
OTHER
U.S. ARGENTINA INDONESIA FOREIGN TOTAL U.S. ARGENTINA
--------- ---------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and gas properties
Unproved......................... 63.8 4.5 11.8 1.9 82.0 41.7 4.5
Proved........................... 2,236.8 90.3 113.9 5.3 2,446.3 2,090.6 70.8
Other............................ 11.5 -- -- -- 11.5 12.8 --
Accumulated amortization of unproved
properties......................... (18.9) (2.4) (4.4) (1.4) (27.1) (12.8) (2.4)
Accumulated depletion, depreciation
and impairment of proved
properties......................... (1,523.9) (23.4) (63.8) (3.5) (1,614.6) (1,385.9) (15.9)
Accumulated depreciation of other oil
and gas properties................. (4.4) -- -- -- (4.4) (5.3) --
--------- ---------- --------- ------- --------- ------- ---------
764.9 69.0 57.5 2.3 893.7 741.1 57.0
========= ========== ========= ======= ========= ======= =========
</TABLE>
OTHER
INDONESIA FOREIGN TOTAL
--------- ------- ---------
Oil and gas properties
Unproved......................... 12.0 3.0 61.2
Proved........................... 99.1 1.8 2,262.3
Other............................ -- -- 12.8
Accumulated amortization of unproved
properties......................... (3.8) (1.8) (20.8)
Accumulated depletion, depreciation
and impairment of proved
properties......................... (39.7) -- (1,441.5)
Accumulated depreciation of other oil
and gas properties................. -- -- (5.3)
--------- ------- ---------
67.6 3.0 868.7
========= ======= =========
97
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1996, 1995 and
1994 (in millions of dollars):
<TABLE>
<CAPTION>
OTHER
U.S. ARGENTINA INDONESIA FOREIGN TOTAL
------ --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
1996
Revenues........................... 517.9 35.8 29.6 -- 583.3
Production costs
Production and operating
costs........................ (162.4) (10.0) (15.7) (0.3) (188.4)
Taxes (other than income)....... (22.2) (0.2) -- -- (22.4)
Cost of crude oil purchased........ (20.8) -- -- -- (20.8)
Exploration, including dry hole
costs........................... (21.9) (0.1) (0.6) (11.9) (34.5)
Depletion, depreciation,
amortization and impairments.... (164.9) (7.9) (24.6) (5.0) (202.4)
Gain (loss) on disposition of
properties...................... 0.3 -- -- (0.2) 0.1
------ --------- --------- ------- ---------
126.0 17.6 (11.3) (17.4) 114.9
Income taxes....................... (49.6) (5.3) 2.9 3.5 (48.5)
------ --------- --------- ------- ---------
76.4 12.3 (8.4) (13.9) 66.4
====== ========= ========= ======= =========
1995
Revenues........................... 398.6 19.2 31.6 -- 449.4
Production costs
Production and operating
costs........................ (130.6) (7.1) (17.7) (0.4) (155.8)
Taxes (other than income)....... (16.5) (0.3) -- -- (16.8)
Cost of crude oil purchased........ (6.5) -- -- -- (6.5)
Exploration, including dry hole
costs........................... (13.6) (1.2) (3.1) (5.5) (23.4)
Depletion, depreciation,
amortization and impairments.... (143.3) (7.0) (10.0) (0.5) (160.8)
Gain (loss) on disposition of
properties...................... (0.2) -- -- (0.1) (0.3)
------ --------- --------- ------- ---------
87.9 3.6 0.8 (6.5) 85.8
Income taxes....................... (34.8) (1.1) (1.2) -- (37.1)
------ --------- --------- ------- ---------
53.1 2.5 (0.4) (6.5) 48.7
====== ========= ========= ======= =========
1994
Revenues........................... 359.5 12.9 31.8 -- 404.2
Production costs
Production and operating
costs........................ (130.8) (5.5) (14.6) (0.2) (151.1)
Taxes (other than income)....... (21.0) (0.1) -- -- (21.1)
Cost of crude oil purchased........ (11.7) -- -- -- (11.7)
Exploration, including dry hole
costs........................... (14.0) (1.2) (1.4) (3.8) (20.4)
Depletion, depreciation,
amortization and impairments.... (99.9) (3.8) (9.7) (6.3) (119.7)
Gain (loss) on disposition of
properties...................... 6.8 0.8 -- -- 7.6
------ --------- --------- ------- ---------
88.9 3.1 6.1 (10.3) 87.8
Income taxes....................... (31.0) (0.9) (2.6) -- (34.5)
------ --------- --------- ------- ---------
57.9 2.2 3.5 (10.3) 53.3
====== ========= ========= ======= =========
</TABLE>
Income taxes are computed by applying the appropriate statutory rate to the
results of operations before income taxes. Applicable tax credits and allowances
related to oil and gas producing activities have been taken into account in
computing income tax expenses. No deduction has been made for indirect cost such
as corporate overhead or interest expense.
98
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
SANTA FE ENERGY RESOURCES, INC.
By /s/ JANET F. CLARK
JANET F. CLARK
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Dated: March 11, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE AND TITLE
------------------------
JAMES L. PAYNE, Chairman
of the Board, President and
Chief Executive Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
JANET F. CLARK, Vice President
and Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
DIRECTORS
-----------
William E. Greehey By: /s/ JANET F. CLARK
Melvyn N. Klein JANET F. CLARK
Allan V. Martini VICE PRESIDENT AND
Marc J. Shapiro CHIEF FINANCIAL OFFICER
Kathryn D. Wriston ATTORNEY IN FACT
Dated: March 11, 1997
99
<PAGE>
SANTA FE ENERGY RESOURCES, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996
(IN MILLIONS OF DOLLARS)
===================================================================
1996 1995 1994
- -------------------------------------------------------------------
Accounts receivable
Balance at the beginning of
period........................ 2.0 3.1 6.3
Charge (credit) to
income.................. 0.5 -- 0.6
Net amounts written off... -- (1.1) (3.8)
----- ----- -----
Balance at the end of period.... 2.5 2.0 3.1
===== ===== =====
100
<PAGE>
INDEX OF EXHIBITS
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3(a) -- Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the Form S-2 Registration
Statement of Santa Fe Energy Resources, Inc. ("SFER,
Inc.") Commission File No. 33-32831).
3(b) -- Bylaws, as amended (incorporated by reference to Exhibit
3(b) to SFER, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1992).
4(a) -- Form of Certificate of Designation, Preferences and
Rights of the 7% Convertible Preferred Stock of SFER,
Inc. (incorporated by reference to Exhibit 3(b) of the
Form S-4 Registration Statement of SFER, Inc.,
Commission File No. 33-45043).
4(b) -- Rights Agreement dated as of March 3, 1997, between
SFER, Inc. and First Chicago Trust Company of New York,
as Rights Agent (incorporated by reference to Exhibit 1
to SFER, Inc.'s Form 8-A filed February 28, 1997.)
4(c) -- Form of Amended Certificate of Designations of Series A
Junior Participating Preferred Stock of SFER, Inc.
(incorporated by reference to Exhibit 1 to SFER, Inc.'s
Form 8-A filed February 28, 1997).
4(d) -- Note Agreement dated as of November 19, 1996 by and
among Monterey Resources, Inc. and various institutional
investors relating to the issuance of $175,000,000 of
Senior Notes maturing in 2005 (incorporated by reference
to Exhibit 10.15 to Monterey Resources, Inc.'s
[Commission File No. 1-12311] Annual Report on Form 10-K
for the year ended December 31, 1996).
4(e) -- Form of Certificate of Designation of the Dividend
Enhanced Convertible Stock, $.732 Series A Convertible
Preferred Stock of SFER, Inc. (incorporated by reference
to Exhibit 4.3 of the Form S-3 Registration Statement of
SFER, Inc., Commission File No. 33-52849).
4(f) -- Form of Indenture dated as of May 25, 1994 and Form of
Debenture relating to SFER, Inc.'s 11% Senior
Subordinated Debentures Due 2004 (incorporated by
reference to Exhibit 4.1 of the Form S-3 Registration
Statement of SFER, Inc. Commission File No. 33-52849).
4(g) -- First Supplemental Indenture, dated as of October 21,
1996, between SFER, Inc. and State Street Bank and Trust
Company, as Trustee, relating to SFER Inc.'s 11% Senior
Subordinated Debentures due 2004 (incorporated by
reference to Exhibit 10.1 to SFER Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996).
10(a) -- Agreement for the Allocation of the Consolidated Federal
Income Tax Liability Among the Members of the Santa Fe
Pacific Corporation Affiliated Group, as amended, dated
December 23, 1983 (incorporated by reference to Exhibit
10.8 of the Form S-2 Registration Statement of SFER,
Inc. Commission File No. 33-32831).
10(b) -- SFER, Inc. Incentive Compensation Plan, as amended
(incorporated by reference to Exhibit 10(b) to SFER,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995).
10(c) -- SFER, Inc. 1990 Incentive Stock Compensation Plan, Third
Amendment and Restatement (incorporated by reference to
Exhibit 10(a) to SFER Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
*10(d) -- Examples of Employment Agreements entered into with
executive officers of SFER, Inc.
*10(e) -- Example of Indemnification Agreements with SFER Inc.'s
directors and officers.
*10(f) -- Spin-Off Tax Indemnification Agreement between SFER,
Inc. and Santa Fe Pacific Corporation.
*10(g) -- Agreement Concerning Taxes among SFER, Inc., certain
subsidiaries of SFER, Inc. and Santa Fe Pacific
Corporation.
101
<PAGE>
INDEX OF EXHIBITS -- (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION
*10(h) -- Santa Fe Energy Resources Supplemental Retirement Plan
effective as of December 4, 1990.
10(i) -- SFER, Inc. Deferred Compensation Plan, effective as of
January 1, 1991 as amended and restated, effective
February 1, 1994 (incorporated by reference to Exhibit
10(p) to SFER Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1993).
10(j) -- Gas Marketing Agreement, dated as of December 14, 1993,
between SFER, Inc., Santa Fe Energy Operating Partners,
L.P. and Adobe Gas Pipeline Company (incorporated by
reference to Exhibit 10(t) to SFER Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1993).
*10(k) -- Credit Agreement dated as of November 13, 1996 among
SFER, Inc., the banks signatory thereto, and The Chase
Manhattan Bank, as Administrative Agent and ABN AMRO
Bank, N.V., as Co-Agent.
10(l) -- Credit Agreement dated as of November 13, 1996 among
Monterey Resources, Inc., the Banks signatory thereto
and The Chase Manhattan Bank, as Administrative Agent
(incorporated by reference to Exhibit 10.16 to Monterey
Resources, Inc.'s [Commission File No. 1-12311] Annual
Report on Form 10-K for the year ended December 31,
1996).
10(m) -- Agreement for the Allocation of Consolidated Federal
Income Tax Liability and State and Local Taxes among the
members of the SFER, Inc. affiliated Group dated
November 19, 1996 (incorporated by reference to Exhibit
10.2 to Monterey Resources Inc.'s [Commission File No.
1-12311] Annual Report on Form 10-K for the year ended
December 31, 1996).
10(n) -- Agreement Concerning Taxes and Tax Indemnifications upon
Spin-Off, dated November 19, 1996, between Monterey
Resources, Inc. and SFER, Inc. (incorporated by
reference to Exhibit 10.3 to Monterey Resources, Inc.'s
[Commission File No. 1-12311] Annual Report on Form 10-K
for the year ended December 31, 1996).
10(o) -- Registration Rights and Indemnification Agreement dated
November 19, , 1996, between Monterey Resources, Inc.
and SFER, Inc. (incorporated by reference to Monterey
Resources, Inc.'s [Commission File No. 1-12311] Annual
Report on Form 10-K for the year ended December 31,
1996).
10(p) -- Agreement Regarding Shelf Registration Statement dated
March 24, 1995 between SFER, Inc. and HC Associates, GKH
Partners, L.P., GKH Investments, L.P., Ernest H.
Cockrell Texas Testamentary Trust and Carol Cockrell
Jennings Texas Testamentary Trust (incorporated by
reference to Exhibit 10(o) to SFER Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995).
10(q) -- Conveyance and Contribution Agreement dated as of
November 1, 1996, between Monterey Resources, Inc. and
SFER, Inc. (incorporated by reference to Monterey
Resources, Inc.'s [Commission File No. 1-12311] Annual
Report on Form 10-K for the year ended December 31,
1996).
*21 -- Subsidiaries of the registrant.
*23(a) -- Consent of Independent Accountants with respect to
Registration Statements on Form S-8 (Nos. 33-37175,
33-44541, 33-44542, 33-58613, 33-59253, 33-59255 and
333-07949).
*23(b) -- Consent of Ryder Scott Company with respect to
Registration Statements on Form S-8 (Nos. 33-37175,
33-44541, 33-4452, 33-58613, 33-59253, 33-59255 and
333-07949).
*24 -- Powers of Attorney.
- ------------
* Included in this report
B. REPORTS ON FORM 8-K.
DATE ITEM
------------------ -----
February 28, 1997 5
102
EXHIBIT 10(d)
Attached are three (3) examples of Employment Agreements entered into
between Santa Fe Energy Resources Inc. and certain executive officers and other
key employees of the Company. The agreements vary in the potential amount of
payments to be made to the individuals but are otherwise substantially similar.
The individuals are listed below with the number of the form of agreement next
to their name.
NAME OF EMPLOYEE AGREEMENT NO.
---------------- -------------
James L. Payne ................................... 1
Hugh L. Boyt ..................................... 2
Jerry L. Bridwell ................................ 2
Dyabe C, Radtke .................................. 2
David L. Hicks ................................... 3
Charles G. Hain, Jr .............................. 3
E. Everett Deschner .............................. 3
John R. Womack ................................... 3
Janet F. Clark ................................... 3
Kathy E. Hager ................................... 3
Mark A. Older .................................... 3
<PAGE>
EMPLOYMENT AGREEMENT NO. 1
This Employment Agreement ("Agreement") is entered into effective as of
December 31, 1996 by and between Santa Fe Energy Resources, Inc., a Delaware
corporation ("Company"), and James L. Payne ("Employee").
WHEREAS, the Company employs Employee and desires to continue such
employment relationship and Employee desires to continue such employment;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties, and agreements contained herein, and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment by the Company, on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. Subject to the provisions for earlier termination
provided in the Agreement, the term of this Agreement (the "Term") shall
commence on the effective date of this Agreement as stated above and shall
terminate on December 31, 1999; PROVIDED, HOWEVER, commencing on January 1, 1998
and on each January 1 thereafter, the term of this Agreement shall automatically
be extended one additional year unless, not later than September 30 of the
preceding year, the Board of Directors of the Company (the "Board") shall give
written notice to Employee that the Term of the Agreement shall cease to be so
extended; PROVIDED, FURTHER, that if a Change in Control, as defined in Section
6, shall have occurred during the original or extended Term of this Agreement,
the Term shall continue in effect for a period of not less than three years from
the date of such Change in Control. In no event, however, shall the Term of this
Agreement extend beyond the end of the calendar month in which Employee's 65th
birthday occurs. Notwithstanding any provision of this Agreement to the
contrary, termination of this Agreement shall not alter or impair any rights of
Employee (or Employee's estate or beneficiaries) that have arisen under this
Agreement prior to such termination.
3. EMPLOYEE'S DUTIES. During the Term of this Agreement, Employee shall
serve as the Chairman of the Board, Chief Executive Officer and President of the
Company, with such customary duties and responsibilities as may from time to
time be assigned to him by the Board, provided that such duties are at all times
consistent with the duties of such position.
Employee agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the extent
necessary to discharge the duties and responsibilities assigned to Employee
hereunder, to use reasonable best efforts to perform faithfully and efficiently
such duties and responsibilities.
<PAGE>
4. BASE COMPENSATION. For services rendered by Employee under this
Agreement, the Company shall pay to Employee a base salary ("Base Compensation")
of $515,000 per annum payable in accordance with the Company's customary payroll
practice for its executive officers. The amount of Base Compensation shall be
reviewed periodically and may be increased to reflect inflation or such other
adjustments as the Board may deem appropriate but Base Compensation, as
increased, may not be decreased thereafter.
5. ADDITIONAL BENEFITS. In addition to the Base Compensation provided for
in Section 4 herein, Employee shall be entitled to receive all fringe benefits
and prerequisites offered by the Company to its executive officers, including,
without limitation, participation in the Company's Annual Incentive Compensation
Plan and other incentive plans offered generally to key employees, the various
employee benefit plans or programs provided to the employees of the Company in
general, subject to the regular eligibility requirements with respect to each
of such benefit plans or programs, and such other benefits or prerequisites as
may be approved by the Board during the Term of this Agreement. Nothing in this
paragraph shall be deemed to prohibit the Company from making any changes in any
of the plans, programs or benefits described in this Section 5, provided the
change similarly affects all executives of the Company similarly situated.
6. CHANGE IN CONTROL.
For purposes of this Agreement, a "Change in Control" shall mean the
occurrence of one of the following events:
(i) any "person" (as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any affiliate, or any corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the
Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
(ii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors of the Company,
and any new director (other than a director designated by a person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this Section) whose election by
the Board of Directors of the Company or 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 the period or whose election or nomination for election was
previously so approved (hereinafter referred to as "Continuing
Directors"), cease for any reason to constitute at least a majority
thereof;
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<PAGE>
(iii) 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) more than 65% of the combined voting
power of the voting securities of the Company (or such surviving entity)
outstanding immediately after such merger or consolidation; or
(iv) the stockholders of the Company 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. For
purposes of this clause (iv), the term "the sale or disposition by the
Company of all or substantially all of the Company's assets" shall mean a
sale or other disposition transaction or series of related transactions
involving assets of the Company or of any direct or indirect subsidiary of
the Company (including the stock of any direct or indirect subsidiary of
the Company) in which the value of the assets or stock being sold or
otherwise disposed of (as measured by the purchase price being paid
therefor or by such other method as the Board of Directors of the Company
determines is appropriate in a case where there is no readily
ascertainable purchase price) constitutes more than two-thirds of the
"fair market value of the Company" (as hereinafter defined). For purposes
of the preceding sentence, the "fair market value of the Company" shall be
the aggregate market value of the Company's outstanding common stock (on a
fully diluted basis) plus the aggregate market value of the Company's
other outstanding equity securities. The aggregate market value of the
Company's common stock shall be determined by multiplying the number of
shares of the Company's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery of a definitive
agreement with respect to the transaction or series of related
transactions (the "Transaction Date") by the average closing price for the
Company's common stock for the ten trading days immediately preceding the
Transaction Date. The aggregate market value of any other equity
securities of the Company shall be determined in a manner similar to that
prescribed in the immediately preceding sentence for determining the
aggregate market value of the Company's common stock or by such other
method as the Board of Directors of the Company shall determine is
appropriate. However, notwithstanding anything in this clause (iv) to the
contrary, a spinoff or distribution of the stock of a subsidiary of the
Company to those persons who were stockholders of the Company immediately
prior to such spinoff or distribution in substantially the same proportion
as their ownership of Company stock immediately prior to such spinoff or
distribution shall not constitute a "sale or disposition by the Company of
all or substantially all of the Company's assets."
7. TERMINATION. This Agreement may be terminated prior to the end of its
Term as set forth below.
(a) RESIGNATION. Employee may resign, including by reason of
retirement, his position at any time. In the event of such resignation,
except in the case of resignation for
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<PAGE>
Good Reason (as defined below) on or following a Change in Control, the
Company shall have no obligations to Employee with respect to this
Agreement other than the payment of any Base Compensation and vacation pay
which had accrued hereunder at the date of Employee's termination.
(b) DEATH. If Employee's employment is terminated due to his death,
this Agreement shall terminate and the Company shall have no obligations
to Employee's legal representatives with respect to this Agreement other
than the payment of any Base Compensation and vacation pay which had
accrued hereunder at the date of Employee's death.
(c) DISCHARGE.
(i) The Company may terminate Employee's employment for any
reason deemed sufficient by the Company upon notice as provided in
Section 10. In the event of such termination prior to a Change in
Control, the Company shall have no obligations to Employee with
respect to this Agreement other than the payment of any Base
Compensation and vacation pay which had accrued hereunder at the
date of Employee's termination. However, in the event that
Employee's employment is terminated during the Term by the Company
on or within two years following a Change in Control and for any
reason other than his Misconduct (as defined in Section 7(c)(ii)
below) then, subject to Sections 7(g) and (h): (A) the Company shall
pay in a lump sum in cash to Employee, within 15 days of the Date of
Termination, an amount equal to three times the sum of (1)
Employee's Base Compensation and (2) the greater of (i) Employee's
target incentive award under the Company's Annual Incentive Plan for
such year or (ii) the average award received by Employee under the
Annual Incentive Plan for the three fiscal years preceding the year
of termination; (B) for the 36-month period after such Date of
Termination, the Company shall provide or arrange to provide
Employee (and Employee's dependents) with life, disability, accident
and group health insurance benefits substantially similar to those
which Employee (and Employee's dependents) were receiving
immediately prior to the Notice of Termination, with the Employee
charged a monthly premium(s) for such coverage(s) that does not
exceed the premium(s) charged to an active employee for comparable
coverage(s); provided, however, the Company shall pay Employee each
month during such period of continued coverage an amount that, on a
net after-tax basis to Employee, is equal to the monthly premium
charged Employee for such coverage and to the extent coverage and/or
benefits received are taxable to Employee, the Company shall make
Employee "whole" on a net after tax basis; provided, however,
benefits otherwise receivable by Employee pursuant to this clause
(B) shall be reduced to the extent other comparable benefits are
actually received by Employee (and Employee's dependents) during the
36-month period following Employee's termination, and any such
benefits actually received by Employee shall be reported to the
Company; (C) within 15 days of the Date of
-4-
<PAGE>
Termination or, if later, the first date on which such payment would
not subject Employee to suit under Section 16(b) of the Securities
Exchange Act of 1934, if applicable, the Company shall pay to
Employee in cancellation of all outstanding Company stock-based
awards of Employee which are not vested on the Date of Termination
(collectively, "Awards"), a lump sum amount in cash equal to the sum
of the value (with respect to an option or stock appreciation right,
the "spread"; and with respect to restricted stock or phantom stock,
the value of an unrestricted share) determined as of the Date of
Termination of all such nonvested Awards, calculated, where
applicable, as if all corporate performance goals had been achieved
at the maximum level (thus warranting payment of the maximum value
of the Award); and (D) the Company shall provide to Employee
outplacement services by a nationally recognized firm.
(ii) Notwithstanding the foregoing provisions of this Section
7, in the event Employee is terminated because of Misconduct, the
Company shall have no compensation obligations pursuant to this
Agreement after the Date of Termination. As used herein,
"Misconduct" means (a) the willful and continued failure by Employee
to substantially perform his duties with the Company (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination by Employee for Good Reason),
after a written demand for substantial performance is delivered to
Employee by the Board, which demand specifically identifies the
manner in which the Board believes that Employee has not
substantially performed his duties, or (b) the willful engaging by
Employee in conduct which is demonstrably and materially injurious
to the Company, monetarily or otherwise. For purposes hereof, no
act, or failure to act, on Employee's part shall be deemed "willful"
unless done, or omitted to be done, by Employee not in good faith
and without reasonable belief that Employee's action or omission was
in the best interest of the Company. Notwithstanding the forgoing,
Employee shall not be deemed to have been terminated for Misconduct
unless and until there shall have been delivered to Employee a copy
of a resolution duly adopted by the affirmative vote of not less
than three-quarters of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after
reasonable notice to Employee and an opportunity for Employee,
together with Employee's counsel, to be heard before the Board),
finding that in the good faith opinion of the Board Employee was
guilty of conduct set forth above and specifying the particulars
thereof in detail.
(d) RESIGNATION FOR GOOD REASON. In the event of a Change in
Control, Employee shall be entitled to terminate his employment for Good
Reason as defined herein. If Employee terminates his employment for Good
Reason on or within two years following a Change in Control, Employee
shall be entitled to the compensation and benefits provided in Paragraph
7(c)(i) hereof. "Good Reason" shall mean (1) the material breach of any of
the Company's obligations under this agreement without Employee's express
written consent
-5-
<PAGE>
or (2) the occurrence of any of the following circumstances without
Employee's express written consent unless such breach or circumstances are
fully corrected prior to the Date of Termination specified in the Notice
of Termination pursuant to Subsections 7(e) and 7(f), respectively, given
in respect thereof:
(i) the assignment to Employee of any duties inconsistent with
the position in the Company that Employee held immediately prior to
the Change in Control, or a significant adverse alteration in the
nature or status of Employee's office, title, responsibilities,
including reporting responsibilities, or the conditions of
Employee's employment from those in effect immediately prior to such
Change in Control or a failure to reelect Employee as Chairman of
the Board;
(ii) a reduction in Employee's Base Compensation;
(iii) the failure by the Company to pay to Employee any
portion of Employee's current compensation or to pay to Employee any
portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven days of
the date such compensation is due;
(iv) the failure by the Company to continue in effect any
compensation plan in which Employee participates immediately prior
to the Change in Control that is material to Employee's total
compensation unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such
plan, or the failure by the Company to continue Employee's
participation therein (or in such substitute or alternative plan) on
a basis not materially less favorable, both in terms of the amount
of benefits provided and the level of Employee's participation
relative to other participants, as existed at the time of the Change
in Control;
(v) the failure by the Company to continue to provide Employee
with benefits substantially similar to those enjoyed by Employee
under any of the Company's life insurance, medical, health and
accident, or disability plans in which Employee was participating at
the time of the Change in Control; the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive Employee of any material fringe benefit
enjoyed by Employee at the time of the Change in Control, or the
failure by the Company to provide Employee with the number of paid
vacation days to which Employee is entitled on the basis of years of
service with the Company (and its predecessors) in accordance with
the Company's normal vacation policy in effect at the time of the
Change in Control;
-6-
<PAGE>
(vi) the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this
Agreement, as contemplated in Section 12 hereof;
(vii) the relocation of the Company's principal executive
offices to a location outside the greater Houston, Texas area, or
the Company's requiring Employee to relocate anywhere other than
the location of the Company's principal executive offices, except
for required travel on the Company's business to an extent
substantially consistent with Employee's business travel obligations
immediately prior to the Change in Control;
(viii) the amendment, modification or repeal of any provision
of the Certificate of Incorporation, or the Bylaws of the Company
which was in effect immediately prior to such Change in Control, if
such amendment, modification or repeal would materially adversely
effect Employee's right to indemnification by the Company; or
(ix) any purported termination of Employee's employment that
is not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection (f) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Notwithstanding anything in this Agreement to the contrary, if
Employee's employment with the Company terminates prior to, but within six
months of, the date on which a Change in Control occurs and it is
reasonably demonstrated by Employee that such termination of employment
was in connection with or anticipation of the Change in Control (i) by
the Company or (ii) by Employee under circumstances which would have
constituted Good Reason if the circumstances arose on or after the Change
in Control, then, for purposes of this Agreement, Employee shall be deemed
to have continued employment with the Company until the date of the Change
in Control and then terminated his employment on such date for Good Reason
(which such date for purposes of this Agreement shall be Date of
Termination). In addition, any Company stock-based awards forfeited by
Employee as a result of such termination shall be included as non-vested
awards for purposes of calculating the payment due Employee pursuant to
Section 7(e)(i)(C).
Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or
mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
(e) NOTICE OF TERMINATION. On or within two years after a Change in
Control, any purported termination of Employee's employment by the Company
or by Employee in the case of resignation for Good Reason shall be
communicated by written Notice of
-7-
<PAGE>
Termination to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall set forth in reasonable detail the Date of
Termination (which shall be no sooner than the 15th day from the date the
Notice of Termination is communicated), the reason for termination of
Employee's employment, or in the case of resignation for Good Reason, said
notice must specify in reasonable detail the basis for such resignation.
No purported termination which is not effected pursuant to this Section
7(e) shall be effective.
(f) DATE OF TERMINATION, ETC. "Date of Termination" shall mean the
date specified in the Notice of Termination. Either party may, within 10
days after any Notice of Termination is given, provide notice to the other
party pursuant to Section 10 hereof that a dispute exists concerning the
termination. Notwithstanding the pendency of any such dispute, the Company
will continue to pay Employee his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited
to, Base Compensation) and continue Employee as a participant in all
compensation, benefit and insurance plans in which Employee was
participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved, but in no event past the second
anniversary of the Change in Control except to the extent such plans
otherwise provide for continued participation by a similarly terminated
employee.
(g) MITIGATION. Employee shall not be required to mitigate the
amount of any payment provided for in this Section 7 by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement by reduced by any compensation earned by
Employee as a result of employment by another employer, self-employment
earnings, by retirement benefits, by offset against any amount claimed to
be owing by Employee to the Company, or otherwise, except that any
severance amounts otherwise payable to Employee pursuant to a Company
severance plan or policy for employees in general.
(h) GROSS-UP OF PARACHUTE PAYMENTS.
(1) To provide Employee with adequate protection in connection
with his ongoing employment with the Company, this Agreement
provides Employee with various benefits in the event of termination
of Employee's employment with the Company. If Employee's employment
is terminated following a "change in control" of the Company, within
the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), a portion of those benefits could be
characterized as "excess parachute payments" within the meaning of
Section 280G of the Code. The parties hereto acknowledge that the
protections set forth herein are important, and it is agreed that
Employee should not have to bear the burden of any excise tax that
might be levied under Section 4999 of the Code, in the event that a
portion of the benefits payable to Employee pursuant to this
Agreement are treated as an excess parachute payment. The parties,
therefore, have agreed as set forth herein.
-8-
<PAGE>
(2) Anything in this Agreement or in any plan or program of
the Company to the contrary notwithstanding, if it shall be
determined that any payment or distribution by the Company or any
other person to or for the benefit of Employee (whether paid or
payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise, but determined without regard to any
additional payments required hereunder (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred by Employee with respect to such
excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise
Tax"), then the Company shall pay an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Employee of all
taxes (including any interest or penalties imposed with respect to
such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, Employee retains an amount of
hte Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
(3) Subject to the provisions of subparagraph (4) below, all
determinations required to be made hereunder, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such
determination, shall be made by an independent public accounting
firm with a national reputation that is selected by Employee (the
"Accounting Firm") which shall provide detailed supporting
calculations both to the Company and to Employee within 15 business
days after the receipt of notice from Employee that there has been a
Payment, or such earlier time as is requested by the Company. In the
event that the Accounting Firm is serving as accountant or auditor
for the individual, entity or group effecting the change in control
of the Company, Employee shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall be
borne solely by the Company. (The Company shall indemnify and hold
harmless Employee, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed on Employee as a result of such payment of fees and
expenses.) Any Gross-Up Payment, as determined pursuant hereto,
shall be paid by the Company to Employee within five days of the
receipt of the Accounting Firm's determination. If the Accounting
Firm determines that no Excise Tax is payable by Employee, it shall
furnish Employee and the Company with a written opinion that failure
to report the Excise Tax on Employee's applicable federal income tax
return would not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding
upon the Company and Employee. As a result of uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments may not have been made by the Company which should
have been made
-9-
<PAGE>
("Underpayment"), consistent with the calculations required to be
made hereunder. If the Company exhausts its remedies pursuant to
subparagraph (4) below and Employee thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the
benefit of Employee.
(4) Employee shall notify the Company in writing of any claim
(including any threatened tax lien related to or based upon any such
claim) by the Internal Revenue Service that, if successful, would
require the payment of the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than
10 business days after Employee is informed in writing of such claim
(or threatened lien) and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid.
Employee shall not pay such claim prior to the expiration of the
30-day period following the date on which Employee gives such notice
to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due or such tax lien
would be imposed). If the Company notifies Employee in writing prior
to the expiration of such period that it desires to contest such
claim (or threatened lien), Employee shall:
(a) give the Company any information reasonably
requested by the Company relating to such claim (or threatened
lien);
(b) take such action in connection with contesting such
claim (or threatened lien) as the Company shall reasonably
request in writing from time to time, including, without
limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company;
(c) cooperate with the Company in good faith in order
effectively to contest such claim (or threatened lien); and
(d) permit the Company to participate in any proceedings
relating to such claim (or threatened lien);
PROVIDED, HOWEVER, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold Employee harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
subparagraph (4), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals,
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<PAGE>
proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct
Employee to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and Employee agrees to prosecute
such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate
courts, as Employee shall determine (but in no event shall the
Company permit or direct Employee to allow a tax lien to be imposed
on Employee's property); PROVIDED, FURTHER, that if the Company
directs Employee to pay such claim and sue for a refund, the Company
shall advance the amount of such payment to Employee, on an
interest-free basis, and shall indemnify and hold Employee harmless
on an after-tax basis, from any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to
such advance; and FURTHER, PROVIDED that any extension of the
statute of limitations relating to payment of taxes for the taxable
year of Employee with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. In
addition, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable
hereunder and Employee shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(5) If, after the receipt by Employee of an amount advanced by
the Company pursuant to subparagraph (4), Employee becomes entitled
to receive any refund with respect to such claim, Employee shall
(subject to the Company's complying with the requirements of
subparagraph (4) above) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If after the receipt by Employee of
an amount advanced by the Company pursuant to subparagraph (4)
above, a determination is made that Employee shall not be entitled
to any refund with respect to such claim and the Company does not
notify Employee in writing of its intent to contest such denial of
refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
(6) The Company hereby acknowledges that, as a consequence of
this full parachute tax gross-up to Employee under this Agreement,
any provision in a Company plan or program that provides for a
parachute payment, "cut-back" to 2.99, if such "cut-back" would
result in the employee being in a better net after-tax position,
shall be inapplicable to Employee.
(8) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Employee's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
affiliated companies and for which Employee may
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qualify, nor shall anything herein limit or otherwise adversely affect such
rights as Employee may have under any stock option or other agreements with the
Company or any of its affiliated companies.
(9) ASSIGNABILITY. The obligations of Employee hereunder are personal and
may not be assigned or delegated by him or transferred in any manner whatsoever,
nor are such obligations subject to involuntary alienation, assignment or
transfer. The Company shall have the right to assign this Agreement only
pursuant to the terms of Section 12(a).
(10) NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Company at its principal office address, directed to the attention of the Board
with a copy to the Secretary of the Company, and to Employee at Employee's
residence address on the records of the Company or to such other address as
either party may have furnished to the other in writing in accordance herewith
except that notice of change of address shall be effective only upon receipt.
(11) VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
(12) SUCCESSORS: BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect, by
merger, consolidation or otherwise or by acquisition of) all or substantially
all of the business and/or assets of the Company to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
The phrase "all or substantially all of the business and/or assets of the
Company" has the meaning as defined in Section 6(iv). Failure of the Company to
obtain such agreement no later than 30 days prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle Employee
to compensation from the Company in the same amount and on the same terms as
Employee would be entitled to hereunder if Employee terminated Employee's
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used herein, the term "Company" shall include
any successor to its business and/or assets as aforesaid which executes and
delivers the Agreement provided for in this Section 12 or which otherwise
becomes bound by all terms and provisions of this Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder shall inure to the
benefit of and be enforceable by Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. Any payments or benefits hereunder which have accrued to Employee at
the time of his death, unless otherwise provided herein, shall be paid
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in accordance with the terms of this Agreement to Employee's devisee, legatee,
or other designee or, if there be no such designee, to Employee's estate.
13. INDEMNIFICATION. In consideration of the premises and of the mutual
agreements set forth in this Agreement, the parties hereto further agree as
follows:
1. The Company shall pay on behalf of Employee and Employee's
executors, administrators or assigns, any amount which Employee is or
becomes legally obligated to pay as a result of any claim or claims made
against Employee by reason of the fact that Employee served as an
employee, director and/or officer of the Company or because of any actual
or alleged breach of duty, neglect, error, misstatement, misleading
statement, omission or other act done, or suffered or wrongfully attempted
by Employee in Employee's capacity as an employee, Director and/or Officer
of the Company. The payments that the Company will be obligated to make
hereunder shall include (without limitation) damages, judgments,
settlements, costs and expenses of investigation, costs and expenses of
defense of legal actions, claims and proceedings and appeals therefrom,
and costs of attachments and similar bonds; PROVIDED, HOWEVER, that the
Company shall not be obligated to pay fines or other obligations or fees
imposed by law or otherwise that it is prohibited by applicable law from
paying as indemnity or for any other reason.
2. Costs and expenses (including, without limitation, attorneys'
fees) incurred by Employee in defending or investigating any action, suit,
proceeding or claim shall be paid by the Company in advance of the final
disposition of such matter upon receipt of a written undertaking by or on
behalf of Employee to repay any such amounts if it is ultimately
determined that Employee is not entitled to indemnification under the
terms of this Agreement.
3. If the claim under this Section 13 is not paid by or on behalf of
the Company within ninety days after a written claim has been received by
the Company, Employee may at any time thereafter bring suit or commence
arbitration proceedings against the Company to recover the unpaid amount
of the claim and, if successful in whole or in part, Employee shall also
be entitled to be paid the expense of prosecuting such claim.
4. In the event of payment under this Section 13, the Company shall
be subrogated to the extent of such payment to all of the rights of
recovery of Employee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
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<PAGE>
5. The Company shall not be liable under this Agreement to make any
payment in connection with any claim made against Employee:
(a) for which payment is actually made to Employee under an
insurance policy maintained by the Company, except in respect of any
excess beyond the amount of payment under such insurance;
(b) for which payment is made to or on behalf of Employee by
the Company otherwise than pursuant to this Agreement;
(c) based upon or attributable to Employee gaining in fact any
personal profit or advantage to which Employee was not legally
entitled;
(d) for an accounting of profits made from the purchase or
sale by Employee of securities of the Company within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments
thereto; or
(e) brought about or contributed to by the dishonesty of
Employee; PROVIDED, HOWEVER, that notwithstanding the foregoing,
Employee shall be protected under this Agreement as to any claims
upon which suit may be brought alleging dishonesty on the part of
Employee, unless a judgment or other final adjudication thereof
adverse to Employee shall establish that Employee committed acts of
active and deliberate dishonesty with actual dishonest purpose and
intent, which acts were material to the cause of action so
adjudicated.
6. Employee, as a condition precedent to his right to be indemnified
under this Agreement, shall give to the Company notice in writing as soon
as practicable of any claim made against him for which indemnity will or
could be sought under this Agreement. Notice to the Company shall be
directed to the Company, 1616 S. Voss, Suite 1000, Houston, Texas 77057,
Attention: Secretary (or such other address as the Company shall designate
in writing to Employee). Notice shall be deemed received if sent by
prepaid mail properly addressed, the date of such notice being the date
postmarked. In addition, Employee shall give the Company such information
and cooperation as it may reasonably require and as shall be within
Employee's power.
7. Nothing herein shall operate or be construed to diminish or
otherwise restrict Employee's right to indemnification under any provision
of the Certificate of Incorporation or the Bylaws of the Company, the
Indemnification Agreement between the Company and Employee dated as of
March 1, 1990, or under Delaware law.
14. MISCELLANEOUS. This Agreement may not be amended unless such amendment
is agreed to in writing and signed by Employee and such officer as may be
specifically authorized by the Board. In addition, no provision of this
Agreement may be waived unless such waiver is in
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<PAGE>
writing and signed by the party entitled to the benefits of such provision. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or in compliance with, any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
16. RESOLUTION OF DISPUTES. Employee shall be permitted (but not required)
to elect that any dispute or controversy arising under or in connection with
this Agreement be settled by arbitration in Houston, Texas, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. All legal
fees and costs incurred by Employee in connection with the resolution of any
dispute or controversy under or in connection with this Agreement with the
exception of any dispute or controversy under or in connection with Section 13
of this Agreement shall be paid by the Company as bills for such services are
presented by Employee to the Company. With respect to any claim by Employee
arising under Section 13, Section 13.3 shall govern any payment of legal fees
and costs.
IN WITNESS WHEREOF, the parties have executed this Agreement on
______________, 1997, effective for all purposes as provided above.
SANTA FE ENERGY RESOURCES, INC.
By:________________________________
Name: _____________________________
Title: ____________________________
James L. Payne
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EMPLOYMENT AGREEMENT NO. 2
This Employment Agreement ("Agreement") is entered into effective as of
December 31, 1996 by and between Santa Fe Energy Resources, Inc., a Delaware
corporation ("Company"), and ______________ ("Employee").
WHEREAS, the Company employs Employee and desires to continue such
employment relationship and Employee desires to continue such employment;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties, and agreements contained herein, and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment by the Company, on the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. Subject to the provisions for earlier termination
provided in the Agreement, the term of this Agreement (the "Term") shall
commence on the effective date of this Agreement as stated above and shall
terminate on December 31, 1999; PROVIDED, HOWEVER, commencing on January 1, 1998
and on each January 1 thereafter, the term of this Agreement shall automatically
be extended one additional year unless, not later than September 30 of the
preceding year, the Board of Directors of the Company (the "Board") shall give
written notice to Employee that the Term of the Agreement shall cease to be so
extended; PROVIDED, FURTHER, that if a Change in Control, as defined in Section
6, shall have occurred during the original or extended Term of this Agreement,
the Term shall continue in effect for a period of not less than two years from
the date of such Change in Control. In no event, however, shall the Term of this
Agreement extend beyond the end of the calendar month in which Employee's 65th
birthday occurs. Notwithstanding any provision of this Agreement to the
contrary, termination of this Agreement shall not alter or impair any rights of
Employee (or Employee's estate or beneficiaries) that have arisen under this
Agreement prior to such termination.
3. EMPLOYEE'S DUTIES. During the Term of this Agreement, Employee shall
serve as _______________________ of the Company, with such customary duties and
responsibilities as may from time to time be assigned to him by the Chief
Executive Officer of the Company, provided that such duties are at all times
consistent with the duties of such position.
Employee agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the extent
necessary to discharge the duties and
<PAGE>
responsibilities assigned to Employee hereunder, to use reasonable best efforts
to perform faithfully and efficiently such duties and responsibilities.
4. BASE COMPENSATION. For services rendered by Employee under this
Agreement, the Company shall pay to Employee a base salary ("Base Compensation")
of $_______ per annum payable in accordance with the Company's customary payroll
practice for its executive officers. The amount of Base Compensation shall be
reviewed periodically and may be increased to reflect inflation or such other
adjustments as the Board may deem appropriate but Base Compensation, as
increased, may not be decreased thereafter.
5. ADDITIONAL BENEFITS. In addition to the Base Compensation provided for
in Section 4 herein, Employee shall be entitled to receive all fringe benefits
and perquisites offered by the Company to its executive officers, including,
without limitation, participation in the Company's Annual Incentive Compensation
Plan and other incentive plans offered generally to key employees, the various
employee benefit plans or programs provided to the employees of the Company in
general, subject to the regular eligibility requirements with respect to teach
of such benefit plans or programs, and such other benefits or prerequisites as
may be approved by the Board during the Term of this Agreement. Nothing in this
paragraph shall be deemed to prohibit the Company from making any changes in any
of the plans, programs or benefits described in this Section 5, provided the
change similarly affects all executives of the Company similarly situated.
6. CHANGE IN CONTROL.
For purposes of this Agreement, a "Change in Control" shall mean the
occurrence of one of the following events:
(i) any "person" (as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any affiliate, or any corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the
Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
(ii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors of the Company,
and any new director (other than a director designated by a person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this Section) whose election by
the Board of Directors of the Company or 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 the period or whose election or nomination for election was
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<PAGE>
previously so approved (hereinafter referred to as "Continuing
Directors"), cease for any reason to constitute at least a majority
thereof;
(iii) 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) more than 65% of the combined voting
power of the voting securities of the Company (or such surviving entity)
outstanding immediately after such merger or consolidation; or
(iv) the stockholders of the Company 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. For
purposes of this clause (iv), the term "the sale or disposition by the
Company of all or substantially all of the Company's assets" shall mean a
sale or other disposition transaction or series of related transactions
involving assets of the Company or of any direct or indirect subsidiary of
the Company (including the stock of any direct or indirect subsidiary of
the Company) in which the value of the assets or stock being sold or
otherwise disposed of (as measured by the purchase price being paid
therefor or by such other method as the Board of Directors of the Company
determines is appropriate in a case where there is no readily
ascertainable purchase price) constitutes more than two-thirds of the
"fair market value of the Company" (as hereinafter defined). For purposes
of the preceding sentence, the "fair market value of the Company" shall be
the aggregate market value of the Company's outstanding common stock (on a
fully diluted basis) plus the aggregate market value of the Company's
other outstanding equity securities. The aggregate market value of the
Company's common stock shall be determined by multiplying the number of
shares of the Company's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery of a definitive
agreement with respect to the transaction or series of related
transactions (the "Transaction Date") by the average closing price for the
Company's common stock for the ten trading days immediately preceding the
Transaction Date. The aggregate market value of any other equity
securities of the Company shall be determined in a manner similar to that
prescribed in the immediately preceding sentence for determining the
aggregate market value of the Company's common stock or by such other
method as the Board of Directors of the Company shall determine is
appropriate. However, notwithstanding anything in this clause (iv) to the
contrary, a spinoff or distribution of the stock of a subsidiary of the
Company to those persons who were stockholders of the Company immediately
prior to such spinoff or distribution in substantially the same proportion
as their ownership of Company stock immediately prior to such spinoff or
distribution shall not constitute a "sale or disposition by the Company of
all or substantially all of the Company's assets."
7. TERMINATION. This Agreement may be terminated prior to the end of its
Term as set forth below.
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<PAGE>
(a) RESIGNATION. Employee may resign, including by reason of
retirement, his position at any time. In the event of such resignation,
except in the case of resignation for Good Reason (as defined below) on or
following a Change in Control, the Company shall have no obligations to
Employee with respect to this Agreement other than the payment of any Base
Compensation and vacation pay which had accrued hereunder at the date of
Employee's termination.
(b) DEATH. If Employee's employment is terminated due to his death,
this Agreement shall terminate and the Company shall have no obligations
to Employee's legal representatives with respect to this Agreement other
than the payment of any Base Compensation and vacation pay which had
accrued hereunder at the date of Employee's death.
(c) DISCHARGE.
(i) The Company may terminate Employee's employment for any
reason deemed sufficient by the Company upon notice as provided in
Section 10. In the event of such termination prior to a Change in
Control, the Company shall have no obligations to Employee with
respect to this Agreement other than the payment of any Base
Compensation and vaction pay which had accrued hereunder at the date
of Employee's termination. However, in the event that Employee's
employment is terminated during the Term by the Company on or within
two years following a Change in Control and for any reason other
than his Misconduct (as defined in Section 7(c)(ii) below) then,
subject to Sections 7(g) and (h): (A) the Company shall pay in a
lump sum in cash to Employee, within 15 days of the Date of
Termination, an amount equal to two times the sum of (1)
Employee's Base Compensation and (2) the greater of (i) Employee's
target incentive award under the Company's Annual Incentive Plan for
such year or (ii) the average award received by Employee under the
Annual Incentive Plan for the three fiscal years preceding the year
of termination; (B) for the 24-month period after such Date of
Termination, the Company shall provide or arrange to provide
Employee (and Employee's dependents) with life, disability, accident
and group health insurance benefits substantially similar to those
which Employee (and Employee's dependents) were receiving
immediately prior to the Notice of Termination, with the Employee
charged a monthly premium(s) for the coverage(s) that does not
exceed the premium(s) charged to an active employee for comparable
coverage(s); PROVIDED, HOWEVER, the Company shall pay Employee each
month during such period of continued coverage an amount that, on a
net after-tax basis to Employee, is equal to the monthly premium
charged Employee for such coverage and to the extent coverage and/or
benefits received are taxable to Employee, the Company shall make
Employee "whole" on a net after tax basis; PROVIDED, HOWEVER,
benefits otherwise receivable by Employee pursuant to this clause
(B) shall be reduced to the extent other comparable benefits are
actually recieved by
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Employee (and Employee's dependents) during the 24-month period
following Employee's termination, and any such benefits actually
received by Employee shall be reported to the Company; (C) within 15
days of the Date of Termination or, if later, the first date on
which such payment would not subject Employee to suit under Section
16(b) of the Securities Exchange Act of 1934, if applicable, the
Company shall pay to Employee in cancellation of all outstanding
Company stock-based awards of Employee which are not vested on the
Date of Termination (collectively, "Awards"), a lump sum amount in
cash equal to the sum of the value (with respect to an option or
stock appreciation right, the "spread"; and with respect to
restricted stock or phantom stock, the vale of an unrestricted
share) determined as of the Date of Termination of all such
nonvested Awards, calculated, where applicable, as if all corporate
performance goals had been achieved at the maximum level (thus
warranting payment of the maximum value of the Award); and (D) the
Company shall provide to Employee outplacement services by a
nationally recognized firm.
(ii) Notwithstanding the foregoing provisions of this Section
7, in the event Employee is terminated because of Misconduct, the
Company shall have no compensation obligations pursuant to this
Agreement after the Date of Termination. As used herein,
"Misconduct" means (a) the willful and continued failure by Employee
to substantially perform his duties with the Company (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination by Employee for Good Reason),
after a written demand for substantial performance is delivered to
Employee by the Board, which demand specifically identifies the
manner in which the Board believes that Employee has not
substantially performed his duties, or (b) the willful engaging by
Employee in conduct which is demonstrably and materially injurious
to the Company, monetarily or otherwise. For purposes hereof, no
act, or failure to act, on Employee's part shall be deemed "willful"
unless done, or omitted to be done, by Employee not in good faith
and without reasonable belief that Employee's action or omission was
in the best interest of the Company. Notwithstanding the forgoing,
Employee shall not be deemed to have been terminated for Misconduct
unless and until there shall have been delivered to Employee a copy
of a resolution duly adopted by the affirmative vote of not less
than three-quarters of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after
reasonable notice to Employee and an opportunity for Employee,
together with Employee's counsel, to be heard before the Board),
finding that in good faith opinion of the Board Employee was guilty
of conduct set forth above and specifying the particulars thereof in
detail.
(d) RESIGNATION FOR GOOD REASON. In the event of a Change in
Control, Employee shall be entitled to terminate his employment for Good
Reason as defined herein. If Employee terminates his employment for Good
Reason on or within two years following a
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Change in Control, Employee shall be entitled to the compensation and
benefits provided in Paragraph 7(c)(i) hereof. "Good Reason" shall mean
(1) the material breach of any of the Company's obligations under this
Agreement without Employee's express written consent or (2) the occurrence
of any of the following circumstances without Employee's express written
consent unless such breach or circumstances are fully corrected prior to
the Date of Termination specified in the Notice of Termination pursuant to
Subsections 7(e) and 7(f), respectively, given in respect thereof:
(i) the assignment to Employee of any duties inconsistent with
the position in the Company that Employee held immediately prior to
the Change in Control, or a significant adverse alteration in the
nature or status of Employee's office, title, responsibilities,
including reporting responsibilities, or the conditions of
Employee's employment from those in effect immediately prior to such
Change in Control;
(ii) a reduction in Employee's Base Compensation;
(iii) the failure by the Company to pay to Employee any
portion of Employee's current compensation or to pay to Employee any
portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven days of
the date such compensation is due;
(iv) the failure by the Company to continue in effect any
compensation plan in which Employee participates immediately prior
to the Change in Control that is material to Employee's total
compensation unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such
plan, or the failure by the Company to continue Employee's
participation therein (or in such substitute or alternative plan) on
a basis not materially less favorable, both in terms of the amount
of benefits provided and the level of Employee's participation
relative to other participants, as existed at the time of the Change
in Control;
(v) the failure by the Company to continue to provide Employee
with benefits substantially similar to those enjoyed by Employee
under any of the Company's life insurance, medical, health and
accident, or disability plans in which Employee was participating at
the time of the Change in Control; the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive Employee of any material fringe benefit
enjoyed by Employee at the time of the Change in Control, or the
failure by the Company to provide Employee with the number of paid
vacation days to which Employee is entitled on the basis of years of
service with the Company (and its predecessors) in accordance with
the Company's normal vacation policy in effect at the time of the
Change in Control;
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(vi) the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this
Agreement, as contemplated in Section 12 hereof;
(vii) the relocation of the Company's principal executive
offices to a location outside the greater Houston, Texas area, or
the Company's requiring Employee to relocate anywhere other than
the location of the Company's principal executive offices, except
for required travel on the Company's business to an extent
substantially consistent with Employee's business travel obligations
immediately prior to the Change in Control;
(viii) the amendment, modification or repeal of any provision
of the Certificate of Incorporation, or the Bylaws of the Company
which was in effect immediately prior to such Change in Control, if
such amendment, modification or repeal would materially adversely
effect Employee's right to indemnification by the Company; or
(ix) any purported termination of Employee's employment that
is not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection (f) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Notwithstanding anything in this Agreement to the contrary, if
Employee's employment with the Company terminates prior to, but within six
months of, the date on which a Change in Control occurs and it is
reasonably demonstrated by Employee that such termination of employment
was in connection with or anticipation of the Change in Control (i) by
the Company or (ii) by Employee under circumstances which would have
constituted Good Reason if the circumstances arose on or after the Change
in Control, then, for purposes of this Agreement, Employee shall be deemed
to have continued employment with the Company until the date of the Change
in Control and then terminated his employment on such date for Good Reason
(which such date for purposes of this Agreement shall be Date of
Termination). In addition, any Company stock-based awards forfeited by
Employee as a result of such termination shall be included as non-vested
awards for purposes of calculating the payment due Employee pursuant to
Section 7(c)(i)(C).
Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or
mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
(e) NOTICE OF TERMINATION. On or within two years after a Change in
Control, any purported termination of Employee's employment by the Company
or by Employee in the
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case of resignation for Good Reason shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
10 hereof. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall set forth in reasonable detail the Date of
Termination (which shall be no sooner than the 15th day from the date the
Notice of Termination is communicated), the reason for termination of
Employee's employment, or in the case of resignation for Good Reason, said
notice must specify in reasonable detail the basis for such resignation.
No purported termination which is not effected pursuant to this Section
7(e) shall be effective.
(f) DATE OF TERMINATION, ETC. "Date of Termination" shall mean the
date specified in the Notice of Termination. Either party may, within 10
days after any Notice of Termination is given, provide notice to the other
party pursuant to Section 10 hereof that a dispute exists concerning the
termination. Notwithstanding the pendency of any such dispute, the Company
will continue to pay Employee his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited
to, Base Compensation) and continue Employee as a participant in all
compensation, benefit and insurance plans in which Employee was
participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved, but in no event past the second
anniversary of the Change in Control except to the extent such plans
otherwise provide for continued participation by a similarly terminated
employee.
(g) MITIGATION. Employee shall not be required to mitigate the
amount of any payment provided for in this Section 7 by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement by reduced by any compensation earned by
Employee as a result of employment by another employer, self-employment
earnings, by retirement benefits, by offset against any amount claimed to
be owing by Employee to the Company or otherwise, except that any
severance amounts otherwise payable to Employee pursuant to a Company
severance plan or policy for employees in general or the receipt by
Employee (and Employee's dependents) of other comparable benefits as
described in Section 7(c)(i)(B) shall reduce the amount or benefitts
otherwise payable or provided, respectively, pursuant to Section 7(c)(i).
(h) PARACHUTE PAYMENTS. The parties to this Agreement recognize that
certain provisions of the 1990 Incentive Stock Compensation Plan, as
amended, and the 1995 Incentive Stock Compensation Plan for Nonexecutive
Employees (the "Stock Plans") require a reduction in payments or benefits
under such Stock Plans to the extent necessary so that no portion thereof
shall be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"); such reduction
will be made, however, only if, by reason of such reduction, Employee's
net after-tax benefit shall exceed the net after-tax benefit if such
reduction were not made. It is the intent of the parties that,
notwithstanding the above or any provision of this Agreement or any other
plan or program of the Company to the contrary, in the event any payment
to be made and/or any benefits to be provided to or on behalf of Employee
pursuant to this Agreement, when aggregated with
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payments and/or benefits under the Stock Plans or any other plans or
programs, would constitute an "excess parachute payment", within the
meaning of Section 280G of the Code, Employee may elect in advance which
payment and/or benefit will be reduced in whole or in part so that the
aggregated payments and/or benefits received will not constitute excess
parachute payments. Such reduction will only be made, however, if by
reason of such reductions, Employee's net after-tax benefit shall exceed
Employee's net after-tax benefit if such reductions were not made. The
determination of whether any amount or benefit under this Agreement would
be such an excess parachute payment shall be made by tax counsel selected
by the Company and reasonably acceptable to Employee. The costs of
obtaining such determination shall be borne by the Company.
(8) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Employee's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
affiliated companies and for which Employee may qualify, nor shall anything
herein limit or otherwise adversely affect such rights as Employee may have
under any stock option or other agreements with the Company or any of its
affiliated companies.
(9) ASSIGNABILITY. The obligations of Employee hereunder are personal and
may not be assigned or delegated by him or transferred in any manner whatsoever,
nor are such obligations subject to involuntary alienation, assignment or
transfer. The Company shall have the right to assign this Agreement only
pursuant to the terms of Section 12(a).
(10) NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Company at its principal office address, directed to the attention of the Board
with a copy to the Secretary of the Company, and to Employee at Employee's
residence address on the records of the Company or to such other address as
either party may have furnished to the other in writing in accordance herewith
except that notice of change of address shall be effective only upon receipt.
(11) VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
(12) SUCCESSORS: BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect, by
merger, consolidation or otherwise or by acquisition of all or substantially
all of the business and/or assets of the Company) to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had taken
place. The phrase "all or substantially all of the business and/or assets of the
Company" has the
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meaning as defined in Section 6(iv). Failure of the Company to obtain such
agreement no later than 30 days prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms as
Employee would be entitled to hereunder if Employee terminated Employee's
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used herein, the term "Company" shall include
any successor to its business and/or assets as aforesaid which executes and
delivers the Agreement provided for in this Section 12 or which otherwise
becomes bound by all terms and provisions of this Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder shall inure to the
benefit of and be enforceable by Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. Any payments or benefits hereunder which have accrued to Employee at
the time of his death, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Employee's devisee, legatee, or
other designee or, if there be no such designee, to Employee's estate.
13. INDEMNIFICATION. In consideration of the premises and of the mutual
agreements set forth in this agreement, the parties hereto further agree as
follows:
1. The Company shall pay on behalf of Employee and Employee's
executors, administrators or assigns, any amount which Employee is or
becomes legally obligated to pay as a result of any claim or claims made
against Employee by reason of the fact that Employee served as an
employee, director and or/officer of the Company or because of any actual
or alleged breach of duty, neglect, error, misstatement, misleading
statement, omission or other act done, or suffered or wrongly attempted by
Employee in Employee's capacity as an employee, Director and/or Officer of
the Company. The payments that the Company will be obligated to make
hereunder shall include (without limitation) damages, judgments,
settlements, costs and expenses of investigation, costs and expenses of
defense of legal actions, claims and proceedings and appeals therefrom,
and costs of attachments and similar bonds; PROVIDED, HOWEVER, that the
Company shall not be obligated to pay fines or other obligations or fees
imposed by law or otherwise that it is prohibited by applicable law from
paying as indemnity or for any other reason.
2. Costs and expenses (including, without limitation, attorney's
fees) incurred by Employee in defending or investigating any action, suit,
proceeding or claim shall be paid by the Company in advance of the final
disposition of such matter upon receipt of a written undertaking by or on
the behalf of Employee to repay any such amounts if it is ultimately
determined that Employee is not entitled to indemnification under the
terms of this Agreement.
3. If a claim under this Section 13 is not paid by or on behalf of
the Company within ninety days after a written claim has been received by
the Company, Employee may
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at any time thereafter bring suit or commence arbitration proceedings
against the Company to recover the unpaid amount of the claim and, if
successful in whole or in part, Employee shall also be entitled to be paid
the expense of prosecuting such claim.
4. In the event of payment under this Section 13, the Company shall
be subrogated to the extent of such payment to all of the rights of
recovery of Employee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
5. The Company shall not be liable under this Agreement to make any
payment in connection with any claim made against Employee:
(a) for which payment is actually made to Employee under
insurance policy maintained by the Company, except in respect of any
excess beyond the amount of payment under such insurance;
(b) for which payment is made to or on behalf of Employee by
the Company otherwise than pursuant to this Agreement;
(c) based upon or attributable to Employee gaining in fact any
personal profit or advantage to which Employee was not legally
entitled;
(d) for an accounting of profits made from the purchase or
sale by Employee of securities of the Company within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments
thereto; or
(e) brought about or contributed to by the dishonesty of
Employee; PROVIDED, HOWEVER, that notwithstanding the foregoing,
Employee shall be protected under this Agreement as to any claims
upon which suit may be brought alleging dishonesty on the part of
Employee, unless a judgment or other final adjudication thereof
adverse to Employee shall establish that Employee committed acts of
active and deliberate dishonesty with actual dishonest purpose and
intent, which acts were material to the cause of action so
adjudicated.
6. Employee, as a condition precedent to his right to be indemnified
under this Agreement, shall give to the Company notice in writing as soon
as practicable of any claim made against him for which indemnity will or
could be sought under this Agreement. Notice to the Company shall be
directed to the Company, 1616 S. Voss, Suite 1000, Houston, Texas 77057,
Attention: Secretary (or such other address as the Company shall designate
in writing to Employee). Notice shall be deemed received if sent by
prepaid mail properly addressed, the date of such notice being the date
postmarked. In addition, Employee shall give the
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Company such information and cooperation as it may reasonably require and
shall be within Employee's power.
7. Nothing herein shall operate or be construed to diminish or
otherwise restrict Employee's right to indemnification under any provision
of the Certificate of Incorporation or the Bylaws of the Company, the
Indemnification Agreement between the Company and Employee dated as of
March 1, 1990, or under Delaware law.
14. MISCELLANEOUS. This Agreement may not be amended unless such amendment
is agreed to in writing and signed by Employee and such officer as may be
specifically authorized by the Board. In addition, no provision of this
Agreement may be waived unless such waiver is in writing and signed by the party
entitled to the benefits of such provision. No waiver by either party hereto at
any time of any breach by other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the state of Delaware.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
16. RESOLUTION OF DISPUTES. Employee shall be permitted (but not required)
to elect that any dispute or controversy arising under or in connection with
this Agreement be settled by arbitration in Houston, Texas, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. All legal
fees and costs incurred by Employee in connection with the resolution of any
dispute or controversy under or in connection with this Agreement with the
exception of any dispute or controversy under or in connection with Section 13
of this Agreement shall be paid by the Company as bills for such services are
presented by Employee to the Company. With respect to any claim by Employee
arising under Section 13, Section 13.3 shall govern any payment of legal fees
and costs.
17. PRIOR AGREEMENTS. This Agreement shall supersede and replace in full
that certain Employment Agreement entered into effective March 1, 1990 between
the Company and Employee and such agreement is hereby terminated and of no
further force or effect as of the effective date of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
______________, 1997, effective for all purposes as provided above.
SANTA FE ENERGY RESOURCES, INC.
By:________________________________
Name: _____________________________
Title: ___________________________
Jerry L. Bridwell
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EMPLOYMENT AGREEMENT NO. 3
This Employment Agreement ("Agreement") is entered into effective as of
December 31, 1996 by and between Santa Fe Energy Resources, Inc., a Delaware
corporation ("Company"), and ______________ ("Employee").
WHEREAS, the Company employs Employee and desires to continue such
employment relationship and Employee desires to continue such employment;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties, and agreements contained herein, and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
accepts employment by the Company, on the terms and condition set forth in this
Agreement.
2. TERM OF EMPLOYMENT. Subject to the provisions for earlier termination
provided in the Agreement, the term of this Agreement (the "Term") shall
commence on the effective date of this Agreement as stated above and shall
terminate on December 31, 1999; PROVIDED, HOWEVER, commencing on January 1, 1998
and on each January 1 thereafter, the term of this Agreement shall automatically
be extended one additional year unless, not later than September 30 of the
preceding year, the Board of Directors of the Company (the "Board") shall give
written notice to Employee that the Term of the Agreement shall cease to be so
extended; PROVIDED, FURTHER, that if a Change in Control, as defined in Section
6, shall have occurred during the original or extended Term of this Agreement,
the Term shall continue in effect for a period of not less than three years from
the date of such Change in Control. In no event, however, shall the Term of this
Agreement extend beyond the end of the calendar month in which Employee's 65th
birthday occurs. Notwithstanding any provision of this Agreement to the
contrary, termination of this Agreement shall not alter or impair any rights of
Employee (or Employee's estate or beneficiaries) that have arisen under this
Agreement prior to such termination.
3. EMPLOYEE'S DUTIES. During the Term of this Agreement, Employee shall
serve as the _______________________ of the Company, with such customary duties
and responsibilities as may from time to time be assigned to him by the Chief
Executive Officer of the Company, provided that such duties are at all times
consistent with the duties of such position.
Employee agrees to devote reasonable attention and time during normal
business hours to the business and affairs of the Company and, to the extent
necessary to discharge the duties and
<PAGE>
responsibilities assigned to Employee hereunder, to use reasonable best efforts
to perform faithfully and efficiently such duties and responsibilities.
4. BASE COMPENSATION. For services rendered by Employee under this
Agreement, the Company shall pay to Employee a base salary ("Base Compensation")
of $_______ per annum payable in accordance with the Company's customary payroll
practice for its executive officers. The amount of Base Compensation shall be
reviewed periodically and may be increased to reflect inflation or such other
adjustments as the Board may deem appropriate but Base Compensation, as
increased, may not be decreased thereafter.
5. ADDITIONAL BENEFITS. In addition to the Base Compensation provided for
in Section 4 herein, Employee shall be entitled to receive all fringe benefits
and perquisites offered by the Company to its executive officers, including,
without limitation, participation in the Company's Annual Incentive Compensation
Plan and other incentive plans offered generally to key employees, the various
employee benefit plans or programs provided to the employees of the Company in
general, subject to the regular eligibility requirements with respect to each
of such benefit plans or programs, and such other benefits or prerequisites as
may be approved by the Board during the Term of this Agreement. Nothing in this
paragraph shall be deemed to prohibit the Company from making any changes in any
of the plans, programs or benefits described in this Section 5, provided the
change similarly affects all executives of the Company similarly situated.
6. CHANGE IN CONTROL.
For purposes of this Agreement, a "Change in Control" shall mean the
occurrence of one of the following events:
(i) any "person" (as such term is used in Section 13(d) and 14(d) of
the Secutiries Exchange Act of 1934, as amended (the "Exchange Act")),
other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any affiliate, or any corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly of securities of the
Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
(ii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of Directors of the Company,
and any new director (other than a director designated by a person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this Section) whose election by
the Board of Directors of the Company or 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 the period or whose election or nomination for election was
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<PAGE>
previously so approved (hereinafter referred to as "Continuing
Directors"), cease for any reason to constitute at least a majority
thereof;
(iii) 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) more than 65% of the combined voting
power of the voting securities of the Company (or such surviving entity)
outstanding immediately after such merger or consolidation; or
(iv) the stockholders of the Company 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. For
purposes of this clause (iv), the term "the sale or disposition by the
company of all or substantially all of the Company's assets" shall mean a
sale or other disposition transaction or series of related transactions
involving assets of the Company or of any direct or indirect subsidiary of
the Company (including the stock of any direct or indirect subsidiary of
the Company) in which the value of the assets or stock being sold or
otherwise disposed of (as measured by the purchase price being paid
therefor or by such other method as the Board of Directors of the Company
determines is appropriate in a case where there is no readily
ascertainable purchase price) constitutes more than two-thirds of the
"fair market value of the Company" (as hereinafter defined). For purposes
of the preceding sentence, the "fair market value of the Company" shall be
the aggregate market value of the Company's outstanding common stock (on a
fully diluted basis) plus the aggregate market value of the Company's
other outstanding equity securities. The aggregate market value of the
Company's common stock shall be determined by multiplying the number of
shares of the Company's common stock (on a fully diluted basis)
outstanding on the date of the execution and delivery of a definitive
agreement with respect to the transaction or series of related
transactions (the "Transaction Date") by the average closing price for the
Company's common stock for the ten trading days immediately preceding the
Transaction Date. The aggregate market value of any other equity
securities of the Company shall be determined in a manner similar to that
prescribed in the immediately preceding sentence for determining the
aggregate market value of the Company's common stock or by such other
method as the Board of Directors of the Company shall determine is
appropriate. However, notwithstanding anything in this clause (iv) to the
contrary, a spinoff or distribution of the stock of a subsidiary of the
Company to those persons who were stockholders of the Company immediately
prior to such spinoff or distribution in substantially the same proportion
as their ownership of Company stock immediately prior to such spinoff or
distribution shall not constitute a "sale or disposition by the Company of
all or substantially all of the Company's assets."
7. TERMINATION. This Agreement may be terminated prior to the end of its
Term as set forth below.
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<PAGE>
(a) RESIGNATION. Employee may resign, including by reason of
retirement, his position at any time. In the event of such resignation,
except in the case of resignation for Good Reason (as defined below) on or
following a Change in Control, the Company shall have no obligations to
employee with respect to this Agreement other than the payment of any Base
Compensation and vacation pay which had accrued hereunder at the date of
Employee's termination.
(b) DEATH. If Employee's employment is terminated due to his death,
this Agreement shall terminate and the Company shall have no obligations
to Employee's legal representatives with respect to this Agreement other
than the payment of any Base Compensation and vacation pay which had
accrued hereunder at the date of employee's death.
(c) DISCHARGE.
(i) The Company may terminate Employee's employment for any
reason deemed sufficient by the Company upon notice as provided in
Section 10. In the event of such termination prior to a Change in
Control, the Company shall have no obligations to Employee with
respect to this Agreement other than the payment of any Base
Compensation and vacation pay which had accrued hereunder at the
date of Employee's termination. However, in the event that
Employee's employment is terminated during the Term by the Company
on or within two years following a Change in Control and for any
reason other than his Misconduct (as defined in Section 7(c)(ii)
below) then, subject to Sections 7(g) and (h): (A) the Company shall
pay in a lump sum in cash to Employee, within 15 days of the Date of
Termination, an amount equal to two times the sum of (1) Employee's
Base Compensation and (2) the maximum incentive award payable to
Employee under the Company's Annual Incentive Compensation Plan for
such year in lieu of any payment thereunder, assuming for purposes
hereof that all performance objectives for such year had been met at
the maximum level and that Employee is entitled to a full award
thereunder; (B) for the 24-month period after such Date of
Termination, the Company shall provide or arrange to provide
Employee (and Employee's dependents) with life, disability, accident
and group health insurance benefits substantially similar to those
which Employee (and Employee's dependents) were receiving
immediately prior to the Notice of Termination, with the Employee
charged a monthly premium(s) for the coverage(s) that does not
exceed the premium(s) charged to an active employee for comparable
coverage(s); PROVIDED, HOWEVER, the Company shall pay Employee each
month during such period of continued coverage an amount that, on a
net after-tax basis to Employee, is equal to the monthly premium
charged Employee for such coverage and to the extent coverage and/or
benefits received are taxable to Employee, the Company shall make
Employee "whole" on a net after tax basis; PROVIDED, HOWEVER,
benefits otherwise receivable by Employee pursuant to this clause
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(B) shall be reduced to the extent other comparable benefits are
actually received by Employee (and Employee's dependents) during the
24-month period following Employee's termination, and any such
benefits actually received by Employee shall be reported to the
Company; (C) within 15 days of the Date of Termination or, if later,
the first date on which such payment would not subject Employee to
suit under Section 16(b) of the Securities Exchange Act of 1934, if
applicable, the Company shall pay to Employee in cancellation of all
outstanding Company stock-based awards of Employee which are not
vested on the Date of Termination (collectively, "Awards"), a lump
sum amount in cash equal to the sum of the value (with respect to an
option or stock appreciation right, the "spread"; and with respect
to restricted stock or phantom stock, the value of an unrestricted
share) determined as of the Date of Termination of all such
nonvested Awards, calculated, where applicable, as if all corporate
performance goals had been achieved at the maximum level (thus
warranting payment of the maximum value of the Award); and (D) the
Company shall provide to Employee outplacement services by a
nationally recognized firm.
(ii) Notwithstanding the foregoing provisions of this Section
7, in the event Employee is terminated because of Misconduct, the
Company shall have no compensation obligations pursuant to this
Agreement after the Date of Termination. As used herein,
"Misconduct" means (a) the willful and continued failure by Employee
to substantially perform his duties with the Company (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination by Employee for Good Reason),
after a written demand for substantial performance is delivered to
Employee by the Board, which demand specifically identifies the
manner in which the Board believes that Employee has not
substantially performed his duties, or (b) the willful engaging by
Employee in conduct which is demonstrably and materially injurious
to the Company, monetarily or otherwise. For purposes hereof, no
act, or failure to act, on Employee's part shall be deemed "willful"
unless done, or omitted to be done, by Employee not in good faith
and without reasonable belief that Employee's action or omission was
in the best interest of the Company. Notwithstanding the foregoing,
Employee shall not be deemed to have been terminated for Misconduct
unless and until there shall have been delivered to Employee a copy
of a resolution duly adopted by the affirmative vote of not less
than three-quarters of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after
reasonable notice to Employee and an opportunity for Employee,
together with Employee's counsel, to be heard before the Board),
finding that in good faith opinion of the Board Employee was guilty
of conduct set forth above and specifying the particulars thereof in
detail.
(d) RESIGNATION FOR GOOD REASON. In the event of a Change in
Control, Employee shall be entitled to terminate his employment for Good
Reason as defined herein. If
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Employee terminates his employment for Good Reason on or within two years
following a Change in Control, Employee shall be entitled to the
compensation and benefits provided in Paragraph 7(c)(i) hereof. "Good
Reason" shall mean (1) the material breach of any of the Company's
obligations under this Agreement without Employee's express written
consent or (2) the occurrence of any of the following circumstances
without Employee's express written consent unless such breach or
circumstances are fully corrected prior to the Date of Termination
specified in the Notice of Termination pursuant to Subsections 7(e) and
7(f), respectively, given in respect thereof:
(i) the assignment to Employee of any duties inconsistent with
the position in the Company that Employee held immediately prior to
the Change in Control, or a significant adverse alteration in the
nature or status of Employee's office, title, responsibilities,
including reporting responsibilities, or the conditions of
Employee's employment from those in effect immediately prior to such
Change in Control;
(ii) a reduction in Employee's Base Compensation;
(iii) the failure by the Company to pay to Employee any
portion of Employee's current compensation or to pay to Employee any
portion of an installment of deferred compensation under any
deferred compensation program of the Company within seven days of
the date such compensation is due;
(iv) the failure by the Company to continue in effect any
compensation plan in which employee participates immediately prior
to the Change in Control that is material to Employee's total
compensation unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such
plan, or the failure by the Company to continue Employee's
participation therein (or in such substitute or alternative plan) on
a basis not materially less favorable, both in terms of the amount
of benefits provided and the level of Employee's participation
relative to other participants, as existed at the time of the Change
in Control;
(v) the failure by the Company to continue to provide Employee
with benefits substantially similar to those enjoyed by Employee
under any of the Company's life insurance, medical, health and
accident, or disability plans in which Employee was participating at
the time of the Change in Control; the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive Employee of any material fringe benefit
enjoyed by Employee at the time of the Change in Control, or the
failure by the Company to provide Employee with the number of paid
vacation days to which employee is entitled on the basis of years of
service with the Company (and its predecessors) in
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accordance with the Company's normal vacation policy in effect at
the time of the Change in Control;
(vi) the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this
Agreement, as contemplated in Section 12 hereof;
(vii) the relocation of the Company's principal executive
offices to a location outside the greater Houston, Texas area, or
the Company's requiring Employee to relocate anywhere other than
the location of the Company's principal executive offices, except
for required travel on the Company's business to an extent
substantially consistent with Employee's business travel obligations
immediately prior to the Change in Control;
(viii) the amendment, modification or repeal of any provision
of the Certificate of Incorporation, or the Bylaws of the Company
which was in effect immediately prior to such Change in Control, if
such amendment, modification or repeal would materially adversely
effect Employee's right to indemnification by the Company; or
(ix) any purported termination of Employee's employment that
is not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection (f) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Notwithstanding anything in this Agreement to the contrary, if
Employee's employment with the Company terminates prior to, but within six
months of, the date on which a Change in Control occurs and it is
reasonably demonstrated by Employee that such termination of employment
was in connection with or anticipation of the Change in Control (i) by
the Company or (ii) by Employee under circumstances which would have
constituted Good Reason if the circumstances arose on or after the Change
in Control, then, for purposes of this Agreement, Employee shall be deemed
to have continued employment with the Company until the date of the Change
in Control and then terminated his employment on such date for Good Reason
(which such date for purposes of this Agreement shall be Date of
Termination). In addition, any Company stock-based awards forfeited by
Employee as a result of such termination shall be included as non-vested
awards for purposes of calculating the payment due Employee pursuant to
Section 7(e)(i)(C).
Employee's right to terminate his employment pursuant to this
subsection shall not be affected by his incapacity due to physical or
mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
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<PAGE>
(e) NOTICE OF TERMINATION. On or within two years after a Change in
Control, any purported termination of Employee's employment by the Company
or by Employee in the case of resignation for Good Reason shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 10 hereof. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall set forth in
reasonable detail the Date of Termination (which shall be no sooner than
the 15th day from the date the Notice of Termination is communicated), the
reason for termination of Employee's employment, or in the case of
resignation for Good Reason, said notice must specify in reasonable detail
the basis for such resignation. No purported termination which is not
effected pursuant to this Section 7(e) shall be effective.
(f) DATE OF TERMINATION, ETC. "Date of Termination" shall mean the
date specified in the Notice of Termination. Either party may, within 10
days after any Notice of Termination is given, provide notice to the other
party pursuant to Section 10 hereof that a dispute exists concerning the
termination. Notwithstanding the pendency of any such dispute, the Company
will continue to pay Employee his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited
to, Base Compensation) and continue Employee as a participant in all
compensation, benefit and insurance plans in which Employee was
participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved, but in no event past the second
anniversary of the Change in Control except to the extent such plans
otherwise provide for continued participation by a similarly terminated
employee.
(g) MITIGATION. Employee shall not be required to mitigate the
amounts of any payment provided for in this Section 7 by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement by reduced by any compensation earned by
Employee as a result of employment by another employer, self-employment
earnings, by retirement benefits, by offset against any amount claimed to
be owing by Employee to the Company or otherwise, except that any
severance amounts otherwise payable to Employee pursuant to a Company
severance plan or policy for employees in general or the receipt by
Employee (and Employee's dependents) of other comparable benefits as
described in Section 7(c)(i)(B) shall reduce the amount or benefits
otherwise payable or provided, respectively, pursuant to Section 7(c)(i).
(h) PARACHUTE PAYMENTS. The parties to this Agreement recognize that
certain provisions of the 1990 Incentive Stock Compensation Plan, as
amended, and the 1995 Incentive Stock Compensation Plan for Nonexecutive
Employees (the "Stock Plans") require a reduction in payments or benefits
under such Stock Plans to the extent necessary so that no portion thereof
shall be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"); such reduction
will be made, however, only if, by reason of such reduction, Employee's
net after-tax benefit shall exceed the net after-tax benefit if such
reduction were not made. It is the intent of the parties that,
notwithstanding the above or any provision of this Agreement or any other
plan or program
-8-
<PAGE>
of the Company to the contrary, in the event any payment to be made and/or
any benefits to be provided to or on behalf of Employee pursuant to this
Agreement, when aggregated with payments and/or benefits under the Stock
Plans or any other plans or programs, would constitute an "excess
parachute payment", within the meaning of Section 280G of the Code,
Employee may elect in advance which payment and/or benefit will be reduced
in whole or in part so that the aggregated payments and/or benefits
received will not constitute excess parachute payments. Such reduction
will only be made, however, if by reason of such reductions, Employee's
net after-tax benefit shall exceed Employee's net after-tax benefit if
such reductions were not made. The determination of whether any amount or
benefit under this Agreement would be such an excess parachute payment
shall be made by tax counsel selected by the Company and reasonably
acceptable to Employee. The costs of obtaining such determination shall be
borne by the Company.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Employee's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
affiliated companies and for which Employee may qualify, nor shall anything
herein limit or otherwise adversely affect such rights as Employee may have
under any stock option or other agreements with the Company or any of its
affiliated companies.
9. ASSIGNABILITY. The obligations of Employee hereunder are personal and
may not be assigned or delegated by him or transferred in any manner whatsoever,
nor are such obligations subject to involuntary alienation, assignment or
transfer. The Company shall have the right to assign this Agreement only
pursuant to the terms of Section 12(a).
10. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Company at its principal office address, directed to the attention of the Board
with a copy to the Secretary of the Company, and to Employee at Employee's
residence address on the records of the Company or to such other address as
either party may have furnished to the other in writing in accordance herewith
except that notice of change of address shall be effective only upon receipt.
11. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
12. SUCCESSORS: BINDING AGREEMENT.
(a) The Company will require any successor (whether direct or indirect, by
merger, consolidation or otherwise or by acquisition of all or substantially
all of the business and/or the assets of the Company) to expressly assume and
agree to perform this Agreement in the same manner and
-9-
<PAGE>
to the same extent that the Company would be required to perform it if no such
succession had taken place. The phrase "all or substantially all of the business
and/or assets of the Company" has the meaning as defined in Section 6(iv).
Failure of the Company to obtain such agreement no later than 30 days prior to
the effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Employee to compensation from the Company in the same amount and
on the same terms as Employee would be entitled to hereunder if Employee
terminated Employee's employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used herein, the term
"Company" shall include any successor to its business and/or assets as aforesaid
which executes and delivers the Agreement provided for in this Section 12 or
which otherwise becomes bound by all terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of Employee hereunder shall inure to the
benefit of and be enforceable by Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. Any payments or benefits hereunder which have accrued to Employee at
the time of his death, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Employee's devisee, legatee, or
other designee or, if there be no such designee, to Employee's estate.
13. INDEMNIFICATION. In consideration of the premises and of the mutual
agreements set forth in this Agreement, the parties hereto further agree as
follows:
1. The Company shall pay on behalf of Employee and Employee's
executors, administrators or assigns, any amount which Employee is or
becomes legally obligated to pay as a result of any claim or claims made
against Employee by reason of the fact that Employee served as an
employee, director and or/officer of the Company or because of any actual
or alleged breach of duty, neglect, error, misstatement, misleading
statement, omission or other act done, or suffered or wrongly attempted by
Employee in Employee's capacity as an employee, Director and/or Officer of
the Company. The payments that the Company will be obligated to make
hereunder shall include (without limitation) damages, judgments,
settlements, costs and expenses of investigation, costs and expenses of
defense of legal actions, claims and proceedings and appeals therefrom,
and costs and expenses of defense of legal actions, claims and proceedings
and appeals therefrom, and costs of attachments and similar bonds;
PROVIDED, HOWEVER, that the Company shall not be obligated to pay fines or
other obligations or fees imposed by law or otherwise that it is
prohibited by applicable law from paying as indemnity or for any other
reason.
2. Costs and expenses (including, without limitation, attorney's
fees) incurred by Employee in defending or investigating any action, suit,
proceeding or claim shall be paid by the Company in advance of the final
disposition of such matter upon receipt of a written undertaking by or on
the behalf of Employee to repay any such amounts if it is ultimately
determined that Employee is not entitled to indemnification under the
terms of this Agreement.
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<PAGE>
3. If the claim under this Section 13 is not paid by or on behalf of
the Company within ninety days after a written claim has been received by
the Company, Employee may at any time thereafter bring suit or commence
arbitration proceedings against the Company to recover the unpaid amount
of the claim and, if successful in whole or in part, Employee shall also
be entitled to be paid the expense of prosecuting such claim.
4. In the event of payment under this Section 13, the Company shall
be subrogated to the extent of such payment to all of the rights of
recovery of Employee, who shall execute all papers required and shall do
everything that may be necessary to enable the Company effectively to
bring suit to enforce such rights.
5. The Company shall not be liable under this Agreement to make any
payment in connection with any claim made against Employee:
(a) for which payment is actually made to Employee under an
insurance policy maintained by the Company, except in respect of any
excess beyond the amount of payment under such insurance;
(b) for which payment is made to or on behalf of Employee by
the Company otherwise than pursuant to this Agreement;
(c) based upon or attributable to Employee gaining in fact any
personal profit or advantage to which Employee was not legally
entitled;
(d) for an accounting of profits made from the purchase or
sale by Employee of securities of the Company within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments
thereto; or
(e) brought about or contributed to by the dishonesty of
Employee; PROVIDED, HOWEVER, that notwithstanding the foregoing,
Employee shall be protected under this Agreement as to any claims
upon which suit may be brought alleging dishonesty on the part of
Employee, unless a judgment or other final adjudication thereof
adverse to Employee shall establish that Employee committed acts of
active and deliberate dishonesty with actual dishonest purpose and
intent, which acts were material to the cause of action so
adjudicated.
6. Employee, as a condition precedent to his right to be indemnified
under this Agreement, shall give to the Company notice in writing as soon
as practicable of any claim made against him for which indemnity will or
could be sought under this Agreement. Notice to the Company shall be
directed to the Company, 1616 S. Voss, Suite 1000, Houston, Texas 77057,
Attention: Secretary (or such other address as the Company shall designate
in writing to Employee). Notice shall be deemed received if sent by
prepaid mail properly addressed,
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<PAGE>
the date of such notice being the date postmarked. In addition, Employee
shall give the Company such information and cooperation as it may
reasonably require and shall be within Employee's power.
7. Nothing herein shall operate or be construed to diminish or
otherwise restrict Employee's right to indemnification under any provision
of the Certificate of Incorporation or the Bylaws of the Company, the
Indemnification Agreement between the Company and Employee dated as of
March 1, 1990, or under Delaware law.
14. MISCELLANEOUS. This Agreement may not be amended unless such amendment
is agreed to in writing and signed by Employee and such officer as may be
specifically authorized by the Board. In addition, no provision of this
Agreement may be waived unless such waiver is in writing and signed by the party
entitled to the benefits of such provision. No waiver by either party hereto at
any time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be preformed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Delaware.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrumant.
16. RESOLUTION OF DISPUTES. Employee shall be permitted (but not required)
to elect that any dispute or controversy arising under or in connection with
this Agreement be settled by arbitration in Houston, Texas, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. All legal
fees and costs incurred by Employee in connection with the resolution of any
dispute or controversy under or in connection with this Agreement with the
exception of any dispute or controversy under or in connection with Section 13
of this Agreement shall be paid by the Company as bills for such services are
presented by Employee to the Company. With respect to any claim by Employee
arising under Section 13, Section 13.3 shall govern any payment of legal fees
and costs.
17. PRIOR AGREEMENTS. This Agreement shall supersede and replace in full
that certain Employment Agreement entered into effective March 1, 1990 between
the Company and Employee and such agreement is hereby terminated and of no
further force or effect as of the effective date of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
______________, 1997, effective for all purposes as provided above.
SANTA FE ENERGY RESOURCES, INC.
By:________________________________
Name: _____________________________
Title: ___________________________
David L. Hicks
-13-
EXHIBIT 10(e)
SANTA FE ENERGY RESOURCES, INC.
INDEMNITY AGREEMENT
Agreement dated as of __________by and between Santa Fe Energy
Resources, Inc., a Delaware corporation (the "Corporation"), and the undersigned
Indemnitee.
Indemnitee currently is serving as an Officer of the Corporation and the
Corporation desires that Indemnitee continue to serve in such capacity.
Indemnitee is willing to continue to serve in such capacity if Indemnitee is
adequately protected against the risks associated with such service.
Accordingly, the indemnity provided by this Agreement is offered as an
inducement for Indemnitee's agreeing to continue to serve as an Officer;
provided, however, that Indemnitee's service to the Corporation may be
terminated at the option of either party at any time as further discussed at
paragraph 8 of this Agreement.
In addition to the indemnification to which Indemnitee is entitled
pursuant to the Bylaws of the Corporation, and as additional consideration for
Indemnitee's continued service, the Corporation has furnished at its expense
directors and officers liability insurance protecting Indemnitee in connection
with such service. Such insurance excludes or limits coverage for certain types
of claims for which coverage applied in prior years.
The Corporation and Indemnitee have concluded that the indemnities
available under the Corporation's Bylaws and the insurance currently in effect
need to be supplemented to more fully protect Indemnitee against the risks
associated with Indemnitee's service to the Corporation.
In consideration of the premises and of the mutual agreements
hereinafter set forth, the parties hereto agree as follows:
1. The Corporation shall pay on behalf of Indemnitee and Indemnitee's
executors, administrators or assigns, any amount which Indemnitee is
or becomes legally obligated to pay as a result of any claim or claims
made against Indemnitee by reason of the fact that Indemnitee served
as an Officer of the Corporation or because of any actual or alleged
breach of duty, neglect, error, misstatement, misleading statement,
omission or other act done, or suffered or wrongfully attempted by
Indemnitee in Indemnitee's capacity as an Officer of the Corporation.
The payments that the Corporation will be obligated to make hereunder
shall include (without limitation) damages, judgments, settlements,
costs and expenses of investigation, costs and expenses of defense of
legal actions, claims and proceedings and appeals therefrom, and costs
of attachments and similar bonds; provided, however, that the
Corporation shall not be obligated to pay fines or other obligations
or fees imposed by law or otherwise that it is prohibited by
applicable law from paying as indemnity or for any other reason.
2. Costs and expenses (including, without limitation, attorneys' fees)
incurred by the Indemnitee in defending or investigating any action,
suit, proceeding or claim shall be paid by the Corporation in advance
of the final disposition of such matter upon
<PAGE>
receipt of a written undertaking by or on behalf of Indemnitee to
repay any such amounts if it is ultimately determined that Indemnitee
is not entitled to indemnification under the terms of this Agreement.
3. If a claim under this Agreement is not paid by or on behalf of the
Corporation within ninety days after a written claim has been received
by the Corporation, Indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and,
if successful in whole or in part, Indemnitee shall also be entitled
to be paid the expense of prosecuting such claim.
4. In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the
Corporation effectively to bring suit to enforce such rights.
5. The Corporation shall not be liable under this Agreement to make any
payment in connection with any claim made against Indemnitee:
(a) for which payment is actually made to Indemnitee under an
insurance policy maintained by the Corporation, except in respect
of any excess beyond the amount of payment under such insurance;
(b) for which Indemnitee is indemnified by the Corporation otherwise
than pursuant to this Agreement;
(c) based upon or attributable to Indemnitee gaining in fact any
personal profit or advantage to which Indemnitee was not legally
entitled;
(d) for an accounting of profits made from the purchase or sale by
Indemnitee of securities of the Corporation within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto; or
(e) brought about or contributed to by the dishonesty of Indemnitee;
provided, however, that notwithstanding the foregoing, Indemnitee
shall be protected under this Agreement as to any claims upon
which suit may be brought alleging dishonesty on the part of
Indemnitee, unless a judgment or other final adjudication thereof
adverse to Indemnitee shall establish that Indemnitee committed
acts of active and deliberate dishonesty with actual dishonest
purpose and intent, which acts were material to the cause of
action so adjudicated.
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<PAGE>
6. Indemnitee, as a condition precedent to his right to be indemnified
under this Agreement, shall give to the Corporation notice in writing
as soon as practicable of any claim made against him for which
indemnity will or could be sought under this Agreement. Notice to the
Corporation shall be directed to Santa Fe Energy Resources, Inc., 1616
S. Voss, Suite 1000, Houston, Texas 77057, Attention: Secretary (or
such other address as the Corporation shall designate in writing to
Indemnitee). Notice shall be deemed received if sent by prepaid mail
properly addressed, the date of such notice being the date postmarked.
In addition, Indemnitee shall give the Corporation such information
and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
7. Nothing herein shall be deemed to diminish or otherwise restrict
Indemnitee's right to indemnification under any provision of the
Certificate of Incorporation or Bylaws of the Corporation or under
Delaware law.
8. Indemnitee agrees to serve as an Officer of the Corporation to the
best of Indemnitee's ability; however, nothing in this Agreement is
intended to create a contract of employment and Indemnitee's
employment may be terminated at the option of either party at any
time, with or without cause.
9. This Agreement shall be governed by and construed in accordance with
Delaware law.
10. This Agreement shall be binding upon all successors and assigns of the
Corporation (including any transferee of all or substantially all of
its assets and any successor by merger or operation of law) and shall
inure to the benefit of the heirs, personal representatives and estate
of Indemnitee.
11. If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever (i) the
validity, legality and enforceability of the remaining provisions of
this Agreement (including without limitation, all portions of any
paragraphs of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that are not by themselves,
invalid, illegal or unenforceable) shall not in any way be affected or
impaired thereby, and (ii) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such
provision held to be invalid, illegal or unenforceable that are not
themselves invalid, illegal or unenforceable) shall be construed so as
to give effect to the intent of the parties that the Corporation
provide protection to Indemnitee to the fullest enforceable extent.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
ATTEST: SANTA FE ENERGY RESOURCES, INC.
____________________________ By:_________________________________
Secretary James L. Payne
President
INDEMNITEE
____________________________________
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EXHIBIT 10(f)
SPIN-OFF TAX INDEMNIFICATION AGREEMENT
THIS SPIN-OFF TAX INDEMNIFICATION AGREEMENT (this "Agreement") is made
and entered into this 20th day of April, 1990 by and between SANTA FE PACIFIC
CORPORATION ("SFP"), a Delaware corporation, and SANTA FE ENERGY RESOURCES,
INC. ("SFER"), a Delaware corporation.
RECITALS:
WHEREAS, SFP is the common parent of an affiliated group of corporations
(the "SFP Group") under Section 1504 of the Internal Revenue Code of 1986, as
amended (the "Code"), and owns shares of common stock, par value $0.01 per
share ("Common Stock"), of SFER constituting "control" within the meaning of
Section 368(c) of the Code; and
WHEREAS, SFP is considering, among various alternatives, distributing to
its shareholders all the stock of SFER that it owns (the "Spin-Off"); and
WHEREAS, the parties hereto are entering into this Agreement to indemnify
SFP as hereinafter provided in the event the Spin-Off fails to qualify under
Section 355 due to actions by SFER after the Spin-Off;
NOW, THEREFORE, for and in consideration of $10.00 paid to SFER upon
execution hereof and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged by the parties, SFP and SFER
hereby agree as follows:
1. CONTINUED CONDUCT OF BUSINESS. During the one-year period commencing
with the Spin-Off (the "Restricted Period"), SFER agrees that it will not
cease the active conduct of its trade or business within the meaning of
Section 355(b) of the Code.
2. OPINION REQUIREMENT FOR MAJOR TRANSACTIONS UNDERTAKEN BY SFER DURING
THE RESTRICTED PERIOD. SFER agrees that during the Restricted Period it will
not (i) merge or consolidate with or into any other corporation, (ii)
liquidate or partially liquidate (within the meaning of such terms as defined
in Sections 346 and Section 302, respectively, of the Code), (iii) sell or
transfer all or substantially all its assets (within the meaning of Rev. Proc.
77-37, 1977 - 2 C.B. 568) in a single transaction or series of related
transactions, (iv) redeem or otherwise repurchase any of SFER's capital stock,
or (v) except in connection with capital stock issued to the officers,
directors or employees of SFER and its subsidiaries pursuant to employee
benefit or compensation plans of SFER, issue additional shares of SFER's
capital stock, unless SFER first obtains, and permits SFP to review, an
opinion of Andrews & Kurth or other law firm of similar repute, or a
supplemental ruling from the Internal Revenue Service, that such transaction,
and any transaction related thereto, will not affect the qualification of the
Spin-Off (or the distribution by SFP Properties, Inc. to SFP of the capital
stock of SFER that was made on December 27, 1989 (the "Initial Spin" and
together with the Spin-Off, the "Spinoffs")) under Section 355 of the Code.
<PAGE>
3. INDEMNIFICATION.
3.1. INDEMNITY. If during the Restricted Period
(A) SFER takes any action or enters into any agreement to take
any action, including, without limitation, (i) any merger or
consolidation of SFER with or into another corporation, (ii) any
complete or partial liquidation of SFER (within the meaning of such
terms as defined in Sections 346 and 302, respectively, of the
Code), (iii) a sale or transfer of all or substantially all SFER's
assets (within the meaning of Rev. Proc. 77-37, 1977-2 C.B. 568) in
a single transaction or series of related transactions, (iv) ceasing
to actively conduct its trade or business within the meaning of
Section 355 of the Code, (v) redeeming or otherwise repurchasing any
of SFER's outstanding capital stock, or (vi) issuing any additional
shares of SFER stock, and the Spin-Off or the Initial Spin shall
fail to qualify under Section 355 of the Code primarily as a result
of such action or actions; or
(B) SFER amends any Shareholder Rights Plan implemented by
SFER prior to, and in effect at the time of, the Spin-Off ("Rights
Plan"), or redeems any outstanding common share purchase rights (the
"Rights") issued pursuant to such Rights Plan, and the Spin-Off or
the Initial Spin shall fail to qualify under Section 355 of the Code
primarily as a result of any person thereafter, but within the
Restricted Period, acquiring stock of SFER which acquisition would
have caused the Rights to become exercisable had the Rights remained
outstanding under the Rights Plan as originally adopted; or
(C) any person shall consummate a Qualifying Offer (as such
term is defined in a Rights Plan in effect at the time of the
Spin-Off) for the stock of SFER, and the Spin-Off or the Initial
Spin shall fail to qualify under Section 355 of the Code primarily
as a result of the consummation of such Qualifying Offer;
then SFER shall indemnify and hold harmless SFP and each member of the
SFP Group against any and all federal, state and local taxes, interest,
penalties and additions to tax imposed upon or incurred by the SFP Group
or any member thereof as a result of the failure of the Spin-Off or the
Initial Spin to so qualify to the extent provided herein. SFP and each
other member of the SFP Group shall be indemnified and held harmless
under this Paragraph 3.1 without regard to the fact that SFP or any other
member of the SFP Group may have reviewed an opinion or supplemental
ruling pertaining to the action pursuant to Paragraph 2.
3.2 INDEMNIFIED LIABILITY. For purposes of this Agreement, the term
"Indemnified Liability" means any liability imposed upon or incurred by
the SFP Group or any member of the SFP Group for which SFP or any other
member of the SFP Group is indemnified and held harmless under Paragraph
3.1, but shall not refer to the amount of such liability.
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<PAGE>
3.3 AMOUNT OF INDEMNIFIED LIABILITY FOR INCOME TAXES. The amount of
an Indemnified Liability for a federal or state tax based on or
determined with reference to income shall be deemed to be the amount of
tax computed by multiplying (i) the taxing jurisdiction's highest
marginal tax rate applicable to taxable income of corporations such as
SFP of the character subject to tax as a result of the failure of the
Spin-Off (or the Initial Spin) to qualify under Section 355 of the Code
for the taxable period in which the Spin-Off occurs, times (ii) the gain
or income of the SFP Group or member thereof which is subject to tax in
the taxing jurisdiction as a result of the failure of the Spin-Off (or
the Initial Spin) to qualify under Section 355 of the Code, and, in the
case of a state, times (iii) the percentage representing the extent to
which such gain or income is apportioned or allocated to such state;
PROVIDED, HOWEVER, that in the case of a state tax determined as a
percentage of federal income tax liability, the amount of Indemnified
Liability shall be deemed to be the amount of tax computed by multiplying
(i) that state's highest percentage rate applicable to the taxable income
of corporations such as SFP of the character subject to tax as a result
of the failure of the Spin-Off (or the Initial Spin) to qualify under
Section 355 of the Code for the taxable period in which the Spin-Off
occurs, times (ii) the amount of deemed federal income tax (whether or
not incurred) imposed upon the SFP Group or any member thereof from the
failure of the Spin-Off (or the Initial Spin) to qualify under Section
355 of the Code computed in accordance with this Paragraph 3.3, times
(iii) the percentage representing the extent to which the gain or income
required to be recognized on the Spin-Off (or the Initial Spin) is
apportioned or allocated to such state.
3.4 INDEMNITY REDUCED BY INCOME TAX BENEFITS FROM INDEMNIFIED
LIABILITY. If an Indemnified Liability is of a type that constitutes a
deduction from income in any taxable period in determining the SFP
Group's or any of its member's liability for a federal or state tax based
upon or determined with reference to income, the amount that SFER would
otherwise be required to pay as indemnification for such Indemnified
Liability shall be reduced by the aggregate deemed reduction, on account
of such deduction of the Indemnified Liability, in the tax liability of
the SFP Group or any member to all taxing jurisdictions over all taxable
periods in which the Indemnified Liability is deductible. The deemed
reduction in tax liability to a taxing jurisdiction for any taxable
period in which all or a portion of the Indemnified Liability is
deductible shall be deemed to be the amount computed by multiplying (i)
such taxing jurisdiction's highest marginal tax rate applicable to the
taxable income of corporations such as SFP of the character against which
the Indemnified Liability is deductible, times (ii) the portion of the
Indemnified Liability that constitutes a deduction in such taxing
jurisdiction in such taxable period, and, in the case of a state, times
(iii) the percentage representing the extent to which the deduction for
the Indemnified Liability is apportioned or allocated to such state;
PROVIDED, HOWEVER, that in the case of a state tax determined as a
percentage of federal income tax liability, the amount of deemed
reduction in tax liability to such state for any taxable period in which
all or a portion of the Indemnified Liability is deductible shall be
deemed to be the amount computed by multiplying (i) such state's highest
percentage rate applicable to the taxable income of corporations such as
SFP in such taxable period of such character against which the
Indemnified Liability is deductible, times (ii) the deemed reduction in
federal income tax in such taxable period resulting from the
deductibility of the Indemnified Liability computed in accordance with
this Paragraph 3.4, times (iii) the percentage representing the extent to
which the deduction for the Indemnified Liability is apportioned or
allocated to such state. The amount of such reduction in SFER's liability
shall be unaffected by any interest
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paid to the SFP Group, or any member thereof, by a taxing authority by
reason of any such deduction.
3.5 INDEMNITY AMOUNT. With respect to any Indemnified Liability, the
amount which SFER shall pay to or on behalf of SFP as indemnification
(the "Indemnity Amount") shall be the amount of the Indemnified
Liability, as determined and adjusted under Paragraphs 3.3 and 3.4.
4. PROCEDURAL MATTERS.
4.1 NOTICE. If either SFP or SFER receives any written notice of
deficiency, claim or adjustment or any other written communication from a
taxing authority that may result in an Indemnified Liability, the party
receiving such notice or communication shall promptly give written notice
thereof to the other party, PROVIDED that any delay by SFP in so
notifying SFER shall not relieve SFER of any liability to SFP hereunder
except to the extent SFER is materially and adversely prejudiced by such
delay. SFP undertakes and agrees that from and after such time as SFP
obtains knowledge that any representative of a taxing authority has begun
to investigate or inquire into the Spin-Off or the Initial Spin (whether
or not such investigation or inquiry is a formal or informal
investigation or inquiry), SFP shall (i) notify SFER thereof, PROVIDED
that any delay by SFP in so notifying SFER shall not relieve SFER of any
liability to SFP hereunder, (ii) consult with SFER from time to time as
to the conduct of such investigation or inquiry, (iii) provide SFER with
copies of all correspondence between SFP or its representatives and such
taxing authority or any representative thereof pertaining to such
investigation or inquiry and (iv) arrange for a representative of SFER to
be present at (but not participate in) all meetings with such taxing
authority or any representative thereof pertaining to such investigation
or inquiry.
4.2 WRITTEN ACKNOWLEDGMENT. Promptly upon receipt of notice as
provided in Paragraph 4.1, SFER shall confirm in writing to SFP that the
liability asserted in the notice of deficiency, claim or adjustment or
other written communication would, if imposed upon or incurred by the SFP
Group or any member thereof, be an Indemnified Liability, unless SFER
believes in good faith that such liability would not be an Indemnified
Liability in which case SFER shall set forth in writing to SFP the
grounds for such belief.
4.3 TAX PROCEEDINGS CONTROLLED BY SFER. Any tax proceeding that may
result in an Indemnified Liability, which is acknowledged as such by
SFER, shall be conducted in accordance with this Paragraph 4.3.
Promptly upon SFER's written acknowledgment that the asserted
liability is an Indemnified Liability, SFER shall assume and direct the
defense or settlement of the proceeding. If the Indemnified Liability is
grouped with other unrelated asserted liabilities or issues in the
proceeding, SFP and SFER shall use their respective best efforts to cause
the Indemnified Liability to be the subject of a separate proceeding. If
such severance is not possible, SFER shall assume and direct and be
responsible only for the matters relating to the Indemnified Liability.
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Upon request, during the course of the tax proceedings, SFER shall from
time to time furnish SFP with evidence reasonably satisfactory to SFP of its
ability to pay the full amount of the Indemnified Liability. If at any time
during such tax proceedings SFP reasonably determines, after due investigation,
that SFER could not pay the full amount of the Indemnified Liability, if
required, then SFP may assume control of the tax proceedings in accordance with
Paragraph 4.4.
SFER shall pay all expenses related to the Indemnity Liability, including
but not limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by it. To the extent that any such expenses have been or
are paid by SFP or any member of the SFP Group, SFER shall promptly reimburse
SFP or such member therefor.
SFP shall not pay (unless otherwise required by a proper notice of levy and
after prompt notification to SFER of SFP's receipt of notice and demand for
payment), settle, compromise or concede any portion of the Indemnified Liability
without the written consent of SFER. SFP shall, at SFER's sole cost (including
but not limited to any reasonable out-of-pocket costs incurred by SFP), take
such action as SFER may reasonably request (including but not limited to the
execution of powers of attorney for one or more persons designated by SFER, and
the filing of a petition, complaint, amended return or claim for refund) in
contesting the Indemnified Liability. SFER shall, on a timely basis, keep SFP
informed of all developments in the proceedings and provide SFP with copies of
all pleadings, briefs, orders, and other written papers pertaining thereto.
Subject to satisfaction of the conditions herein set forth, SFER may direct
SFP to settle the Indemnified Liability on such terms and for such amount as
SFER may direct. SFP may condition such settlement on receipt, prior to the
settlement, from SFER of the Indemnity Amount less any amounts to be paid
directly by SFER to the taxing authority. SFER may direct SFP, at SFER's
expense, to pay an asserted deficiency for the Indemnified Liability out of
funds provided by SFER, and to file a claim for refund. If SFER pays SFP the
Indemnified Amount pursuant to Paragraph 4.5 and SFP or any other member of the
SFP Group receives a refund of any portion of amounts paid to a taxing
jurisdiction in respect of the Indemnified Liability, SFP shall pay any and all
such refund proceeds to SFER, together with interest thereon for each day and
the actual number of days commencing on the date such refund is received by SFP
at the rate of one (1) percentage point above the monthly average of the daily
Effective Funds Rate, as stated by The Federal Reserve Bank of New York;
PROVIDED, HOWEVER, that the provision for interest herein shall not be construed
to give SFP the right to defer payment to SFER of any refund proceeds hereunder.
4.4 TAX PROCEEDINGS CONTROLLED BY SFP. Should SFER not provide SFP with
the confirmation contemplated by Section 4.2 within thirty (30) days following
receipt of notice provided in Section 4.1 or, following such confirmation,
should SFER fail within thirty (30) days following request therefor to furnish
to SFP evidence of its ability to pay the full amount of the Indemnified
Liability or should SFP reasonably believe after due investigation that SFER
could not pay the full amount of the Indemnified Liability if required, then SFP
may assume control of the tax proceeding upon the following terms: (i) SFP will
diligently defend against the claim of any taxing authority that the Spin-Off
(or the Initial Spin) resulted in taxable income to it or any other member of
the SFP Group, without regard to the indemnification provided herein, including
the pursuit of the appeal of any adverse determinations to the appropriate
tribunal (unless advised by
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independent counsel in its reasonable judgment that SFP or such other member of
the SFP Group would not prevail upon any such appeal) and shall employ such
resources, including independent counsel, in conducting such defense as are
reasonably commensurate to the nature and magnitude of the claim; (ii) SFP will
consult with SFER as to the conduct of all proceedings, will provide SFER with
copies of all protests, pleadings, briefs, filings, correspondence and similar
materials relative to the proceedings and will arrange for a representative of
SFER to be present at (but not to participate in) all meetings with the relevant
taxing authorities and all hearings before any court; and (iii) neither SFP nor
any other member of the SFP Group will settle, compromise or concede any claim
that would result in an Indemnified Liability unless SFP has made the
determination, and has been so advised by independent counsel, that such
settlement is fair to SFER and its stockholders and is reasonable in the
circumstance. Subject to the above, any such tax proceeding shall be controlled
and directed exclusively by SFP and may be contested, defended, paid, settled,
compromised or conceded by SFP and any related expenses incurred by SFP or any
member of the SFP Group, including but not limited to, fees for attorneys,
accountants, expert witnesses or other consultants shall be reimbursed by SFER,
if SFER admits or is found to have incorrectly failed to acknowledge the
asserted liability as an Indemnified Liability as provided in Paragraph 4.2;
PROVIDED, HOWEVER, that if after SFP's assumption of control of the proceedings,
SFER acknowledges in writing that the asserted liability is an Indemnified
Liability or demonstrates its ability to pay the full amount of the Indemnified
Liability if required, SFER shall (if practical and upon its request) promptly
assume and direct a proceeding which shall thenceforth be conducted in
accordance with Paragraph 4.3, PROVIDED, FURTHER HOWEVER, that SFP will not be
required to pursue the claim in the federal district court, Court of Claims or
any state court if as a prerequisite to such Court's jurisdiction, it is
required to pay the asserted liability unless the funds necessary to invoke such
jurisdiction are provided by SFER.
4.5 TIME AND MANNER OF PAYMENT. Unless otherwise agreed in writing, SFER
shall pay to SFP the Indemnity Amount (less any amount paid directly by SFER to
the taxing authority) within seven (7) business days after the date payment of
the Indemnified Liability is made, whether by SFP or SFER, to the taxing
authority. Such payment shall be paid by SFER to SFP by wire transfer of
immediately available funds to an account designated by SFP by written notice to
SFER prior to the due date of such payment. If SFER delays making payment beyond
the due date hereunder, SFER shall pay interest to SFP on the amount unpaid at
the rate of one (1) percentage point above the monthly average of the daily
Effective Federal Funds Rate, as stated by The Federal Reserve Bank of New York
for each day and the actual number of days for which any amount due hereunder is
unpaid; PROVIDED, HOWEVER, that this provision for interest shall not be
construed to give SFER the right to defer payment beyond the due date hereunder.
4.6 REFUND OF AMOUNTS PAID BY SFER. Should SFP or any other member of the
SFP Group receive a refund in respect of amounts paid by SFER to any taxing
authority on SFP's behalf, or should any such amounts that would otherwise be
refundable to SFER be applied by the taxing authority to obligations of SFP or
any other member of the SFP Group unrelated to the Spinoffs, then SFP shall,
promptly following receipt (or notification of credit), remit such refund,
together with interest thereon, which interest shall be paid at the rate of one
(1) percentage point above the monthly average of the daily Effective Federal
Funds Rate, as stated by The Federal Reserve Bank of New York for each day and
the actual number of days commencing on the date such refund is received (or
credit
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<PAGE>
applied); PROVIDED, HOWEVER, that the provision for interest herein shall to be
construed to give SFP the right to defer payment to SFER of any refund proceeds
hereunder.
4.7 COOPERATION. SFP and SFER shall cooperate with one another in a timely
manner in any administrative or judicial proceeding involving any matter that
may result in an Indemnified Liability. SFP and SFER agree that such cooperation
shall include, without limitation, making available to the other party, during
normal business hours, all books, records and information, officers and
employees (without substantial interruption of employment) necessary or useful
in connection with any such judicial or administration proceeding. The party
requesting or otherwise entitled to any books, records, information, officers or
employees pursuant to this Paragraph 4.7 shall bear all reasonable out-of-pocket
costs and expenses (except reimbursement of salaries, employee benefits and
general overhead) incurred in connection with providing such books, records,
information, officers or employees.
4.8 DISPUTE RESOLUTION. In an effort to resolve informally and amicably any
claim or controversy arising out of or related to the interpretation or
performance of this Agreement without resorting to litigation, each party shall
first notify the other in writing of its position with respect to any difference
or dispute hereunder that requires resolution. SFP and SFER shall each designate
an employee to investigate, discuss and seek to settle the matter between them.
If the two are unable to settle the matter within 30 days after the latest such
notification (or, if one party gives such notification and the other party fails
to do so within 15 days after receipt of such notification, within 30 days after
such notification), the matter shall be submitted to a senior officer of each of
SFP and SFER for consideration. If settlement cannot be reached through their
efforts within an additional 30 days, or such longer time period as they shall
agree upon, the parties shall consider arbitration or other alternative means to
resolve the dispute; PROVIDED, HOWEVER, that the parties hereby agree that any
disputes concerning the calculation of amounts (E.G., an Indemnity Amount) or
similar accounting matter shall be resolved by a nationally recognized public
accounting firm selected by the parties, whose fees and expenses shall be shared
equally by SFP and SFER. With respect to any dispute concerning other matters,
if they are unable to agree on an alternative dispute resolution mechanism,
either party may initiate legal proceedings to resolve such matter.
5. MISCELLANEOUS.
5.1 NOTICES. Any notice, request, instruction or other document to be
given under this Agreement by any party to another party shall be in writing,
and shall be deemed to have been duly given or delivered when delivered
personally, or telecopied (receipt confirmed, with a copy sent by certified or
registered mail as set forth in this Agreement) or, upon receipt (as indicated
by return receipt), when sent by certified or registered mail, postage prepaid,
return receipt requested, or by Federal Express or other overnight delivery
service, to the address of the party set forth below or to such address as the
party to whom notice is to be given may provide in a written notice to the other
party to this Agreement:
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If to SFP, to:
Santa Fe Pacific Corporation
224 South Michigan Avenue
Chicago, Illinois 60604-2401
Telecopier No.: (312) 786-6846
Telephone No.: (312) 786-6000
Attention: Daniel Westerbeck
Vice President - Tax Counsel
If to SFER, to:
Santa Fe Energy Resources, Inc.
1616 South Voss Road
Suite No. 1000
Houston, Texas 77057
Telecopier No.: (713) 268-5341
Telephone No.: (713) 783-2401
Attention: James L. Payne, President
and
David L. Hicks, Esq., General Counsel
5.2 TERMINATION. The parties hereto agree that if the Spin-Off has not
occurred prior to 5:00 p.m., Chicago time, on December 31, 1991, this Agreement
shall terminate and cease to be of any force or effect.
5.3 GOVERNING LAW: JURISDICTION. This Agreement shall be governed by and
construed under the laws of the State of Illinois as applied to agreements made
and to be performed in the State of Illinois without regard to the conflict of
laws principles thereof. Each of the parties consents to personal jurisdiction
in respect of any action arising under or in connection with this Agreement
instituted in the United States District Court for the Northern District of
Illinois, and to service of process upon it in any manner permitted under the
laws of the State of Illinois.
5.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively) only with
the written consent of each of the parties.
5.7 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its terms
to the fullest extent permitted by law.
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<PAGE>
5.8 FURTHER ASSURANCE. Each of the parties shall, without further
consideration, use reasonable efforts to execute and deliver such additional
documents and take such other action, as the other parties, or any of them may
reasonably request to carry out the intent of this Agreement and the
transactions contemplated by this Agreement.
5.9 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties in respect of the actions and transactions
contemplated by this Agreement. There are no restrictions, promises,
inducements, representations, warranties, covenants or undertakings, other than
those expressly set forth or referred to in this Agreement.
5.10 SPECIFIC PERFORMANCE. Each of the parties acknowledges and agrees
that in the event of any breach of this Agreement, except for the failure of
SFER to pay any Indemnity Amount, the non-breaching party would be irreparably
harmed and could not be made whole by monetary damages. It is accordingly agreed
that the parties will waive the defense in any action for specific performance
that a remedy at law would be adequate and that the parties, in addition to any
other remedy to which they may be entitled at law or in equity, shall be
entitled to compel specific performance of this Agreement in any action
instituted in any court of the United States or any state thereof having
jurisdiction for such action.
5.11 PARTIES IN INTEREST. Neither party may assign its rights or
delegate any of its duties under this Agreement (except to another person
acquiring substantially all of the assets of such party by purchase, merger,
consolidation or otherwise) without the prior written consent of the other. This
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and, except as otherwise prohibited, their respective successors and
assigns. Nothing contained in this Agreement, express or implied, is intended to
confer upon any other person or entity any benefits, rights or remedies
PROVIDED, HOWEVER, that other members of the SFP Group shall be deemed third
party beneficiaries of this Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
SANTA FE PACIFIC CORPORATION SANTA FE ENERGY RESOURCES, INC.
By: /s/ SIGNATURE ILLEGIBLE By: /s/ J. L. PAYNE
Title: Title:
EXHIBIT 10(g)
AGREEMENT CONCERNING TAXES
THIS AGREEMENT (this "Agreement"), dated as of [March] 20, 1990, is by and
between SANTA FE PACIFIC CORPORATION ("SFP") and SANTA FE ENERGY RESOURCES, INC.
("Energy"), and those subsidiaries of Energy signatory hereto (the "Energy
Subsidiaries").
WHEREAS, Energy and the Energy Subsidiaries are members of an affiliated
group of corporations within the meaning of Section 1504 (a) of the Internal
Revenue Code of 1986, as amended (the "Code"), of which SFP is the common parent
(the "SFP Group"), and which files consolidated federal income tax returns as
well as certain consolidated, combined or unitary state tax returns;
WHEREAS, SFP, Energy and the Energy Subsidiaries are parties to the
Agreement for the Allocation of the Consolidated Federal Income Tax Liability
Among the Members of the Santa Fe Pacific Corporation Affiliated Group (the "Tax
Sharing Agreement") as well as the Agreement for the Allocation of the Combined
Arizona Income Tax Liability Among the Members of the Santa Fe Pacific
Corporation Affiliated Group, the Agreement for the Allocation of the Combined
California Franchise Tax Liability Among the Members of the Santa Fe Pacific
Corporation Affiliated Group, the Agreement for the Allocation of the Combined
Illinois Income Tax Liability Among the Members of the Santa Fe Pacific
Corporation Affiliated Group, the Agreement for the Allocation of the Combined
Kansas Income Tax Liability Among the Members of the Santa Fe Pacific
Corporation Affiliated
<PAGE>
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Group, the Agreement for the Allocation of the Consolidated New Mexico Income
Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated
Group, the Agreement for the Allocation of the Combined Oregon Excise Tax
Liability Among the Members of the Santa Fe Pacific Corporation Affiliated
Group, and the Agreement for the Allocation of the Combined Utah Franchise Tax
Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group
(the "State Tax Sharing Agreements"); and
WHEREAS, the parties desire to set forth their agreements with regard to
their respective liabilities for federal, state and local taxes as well as their
agreements if Energy and the Energy Subsidiaries cease to be members of the SFP
Group;
NOW THEREFORE, it is agreed as follows:
1. DEFINITIONS.
For all purposes of this Agreement, the terms defined in this Section 1
shall have the meanings assigned to them in this Section 1.
"Code" shall have the meaning specified in the preamble hereof.
"Disaffiliation" means the Energy Companies ceasing to be members of
the SFP Group.
"Disaffiliation Date" means the date Disaffiliation shall occur as
determined in conformity with Treasury Regulation Section 1.1502-76(b).
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"Energy Companies" means Energy, the Energy Subsidiaries, their respective
divisions and their successors and assigns.
"Return" shall mean any SFP Consolidated Return and any State and Local
Return.
"SFP Consolidated Return" means any consolidated federal income tax return
of the SFP Group which includes one or more of the Energy Companies.
"SFP Consolidated Return Year" means any taxable period of the SFP Group
ending on or before the Disaffiliation Date.
"SFP Group" shall have the meaning specified in the preamble hereof.
"SFP Subsidiary" means any corporation (other than an Energy Company) the
stock of which is owned directly or indirectly by SFP and which joins in the
filing of State and Local Returns.
"State and Local Returns" shall have the meaning specified in paragraph 3
of Section 3 hereof.
2. TAX SHARING AGREEMENT TO CONTINUE IN EFFECT.
Except to the extent that it is expressly modified or supplemented herein,
the Tax Sharing Agreement, including Article 8.4 thereof, shall continue in full
force and effect, and the State Tax Sharing Agreements, as modified by SFP's
agreement with regard to tax consolidation in connection with
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the Credit Agreement dated as of December 29, 1989, among SFER and various
banks, shall continue in full force and effect. Consequently, for example, for
taxable periods ending on or before the Disaffiliation Date, payments to SFP or
any Energy Company, as the case may be, shall continue to be made in accordance
with the Tax Sharing Agreement and the State Tax Sharing Agreements. The
provisions of the Tax Sharing Agreement and the State Tax Sharing Agreements
shall fix the rights and obligations of the parties as to the matters covered
thereby whether or not followed for federal income tax or other purposes by the
SFP Group including but not limited to the computation of earnings and profits
for federal income tax purposes.
3. TAX RETURN FILING.
A. FEDERAL RETURNS. If at any time and from time to time SFP so elects,
Energy and each Energy Subsidiary agree to continue to join in the filing of
consolidated federal income tax returns for the calendar year 1989 and for any
subsequent taxable periods of SFP ending before, on or after the Disaffiliation
Date for which the SFP Group is eligible to file a consolidated federal income
tax return including any Energy Company with respect to pre-Disaffiliation
operations. SFP shall continue to prepare and file all consolidated federal
income tax returns which are required to be filed by the SFP Group for all such
taxable periods and pay all taxes due thereon. Such returns shall include all
income, gains, losses, deductions and credits of the Energy Companies. SFP will
make all decisions relating to the preparation and filing of such returns.
Energy and each Energy Subsidiary further agree to file, or join in the filing
of such authorizations, elections, consents and other documents and take such
other actions as may
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be necessary or appropriate in the opinion of SFP to carry out the purposes and
intent of this paragraph A of Section 3. Energy shall furnish SFP at least forty
five (45) days before such return is due (with extensions) with its completed
section of each year's consolidated federal income tax return, prepared in
accordance with instructions from SFP, on the Price Waterhouse Domestic Tax
Management System ("DTMS"). Energy shall also furnish DTMS workpapers and such
other information and documentation as is requested by SFP. Such information
shall have been reviewed and approved by Energy's independent auditors prior to
its submission to SFP. SFP and Energy shall each pay one half of the cost of
such review and approval by Energy's independent auditors, provided, however,
that Energy's portion of such costs shall not exceed $10,000.
B. STATE AND LOCAL RETURNS. For the calendar year 1989 and for any
subsequent taxable periods ending before, on or after the Disaffiliation Date,
SFP will prepare and file all combined, consolidated or unitary state or local
income or franchise tax returns (herein "State and Local Returns") which are
required to be filed and which include the pre-Disaffiliation operations of any
Energy Company and SFP or any SFP subsidiary. SFP will pay all taxes due on such
returns. SFP will timely advise Energy of the inclusion of any Energy Companies
in any State and Local Returns and the states and localities in which such
returns will be filed. Each of the Energy Companies whose tax information is
included in any State and Local Return will evidence its agreement to be
included in such return on the appropriate form and take such other action as
may be appropriate, in the opinion of SFP, to carry out the purposes and intent
of this paragraph B of Section 3. Energy shall furnish SFP with a final copy of
the information necessary for SFP to complete such combined, consolidated or
unitary returns at least forty five (45) days before such returns are due (with
extension).
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4. CARRYOVERS OF ENERGY TAX BENEFITS.
SFP shall notify Energy, after Disaffiliation, of any consolidated
carryover item which may be partially or totally attributed to and carried over
by an Energy Company and will notify such Energy Company of subsequent
adjustments which may effect such carryover item.
5. AUDIT ADJUSTMENTS.
Pursuant to Article 8.4 of the Tax Sharing Agreement, if an Energy Company
ceases to be a member of the SFP Group, the Tax Sharing Agreement shall apply
with respect to any period in which the income of the terminating member is
included in the SFP Consolidated Return. The terminating member shall remain
liable to SFP for payments required under the Tax Sharing Agreement, including,
but not limited to, payments of tax and estimated tax for periods in which the
member's income is included in the SFP Consolidated Return and payments
attributable to adjustments referred to in Article 7.1 of the Tax Sharing
Agreements and to interest and penalties referred to in Articles 5.3 and 7.2 of
the Tax Sharing Agreement. Additionally, the terminating member shall cooperate
and provide reasonable access to books, records and other information needed in
connection with audits, administrative proceedings, litigation and other similar
matters related to periods in which the member was a member of the SFP Group.
However, Article 8.4 of the Tax Sharing Agreement and any similar Article
contained in the State Tax Sharing Agreements is hereby modified so that an
Energy Company that ceases to be a member of the SFP Group shall be entitled to
compensation or reimbursement with respect to any tax refund, overpayment,
benefit or other similar item realized by the SFP Group after such member leaves
the SFP Group, including carrybacks into a return of the SFP Group, which is
attributable to such Energy Company. Nothing
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contained herein or in the Tax Sharing Agreement shall be construed to prevent
Energy and the Energy Subsidiaries from making an election in a
post-Disaffiliation year under Section 172(b)(3)(C) of the Code or under similar
provisions of applicable state law. Any such payments or reimbursements shall be
made in accordance with Article 7.1 and Article 7.3 of the Tax Sharing
Agreement. Notwithstanding the foregoing, Energy and the Energy Subsidiaries
will not be required under the State Tax Sharing Agreements to pay more tax on a
combined or consolidated basis than that which they would have been required to
pay had Energy and the Energy Subsidiaries filed combined or consolidated State
and Local Returns with Energy as the common parent. If for any period in which
an Energy Company was included in the State and Local Returns there is a final
determination that any Energy Company should not have been included in one or
more of such returns, SFP shall refund to such Energy Company any sums paid by
such Energy Company to the SFP Group with respect to such returns which are not
credited against such Energy Company's separate state or local tax liability as
well as any interest that the SFP Group receives from a state or local
government with respect to sums paid by such Energy company to the SFP Group
with respect to such returns which are credited against the SFP Group's separate
state or local tax liability, and such Energy Company shall have no further
rights or obligations with respect to such State and Local Returns, including
the right to compensation, reimbursement or refund with respect to such returns.
6. CONTEST.
If an audit adjustment is proposed or any other claim is made by any
taxing authority with respect to a tax liability of Energy or an Energy
Subsidiary with regard to an SFP Consolidated Return or a State and Local Tax
Return, SFP shall promptly notify Energy of such proposed adjustment or claim
(unless Energy previously was notified directly by the relevant
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tax authority). If Energy so requests and at Energy's expense. SFP shall contest
or shall permit the relevant Energy Company to contest such claim on audit or in
a related administrative or judicial proceeding or by appropriate claim for
refund or credit of taxes, subject, however to SFP's right to control the
prosecution of any such audit or refund claim or related administrative or
judicial proceeding with respect to those matters which could affect SFP's tax
liability, including its liability under this Agreement and, where deemed
necessary by SFP, the relevant entity shall authorize by appropriate powers of
attorney such persons as SFP shall designate to represent such entity with
respect to such audit or refund claim or related administrative or judicial
proceeding.
7. ALLOCATION; INFORMATION AND COOPERATION.
A. ALLOCATION. Federal income taxes will be calculated for the taxable
period ending on the Disaffiliation Date on the basis of allocations made in
accordance with the Tax Sharing Agreement. State and local taxes will be
calculated for such period in accordance with the State Tax Sharing Agreements
with regard to the allocation of state and local tax liabilities where combined,
consolidated or unitary state and local tax returns are filed.
B. INFORMATION AND COOPERATION. From and after the Disaffiliation Date,
Energy shall deliver to SFP, as soon as practicable after SFP's request, such
information and data concerning the pre-Disaffiliation operations of Energy and
the Energy Subsidiaries and make available such knowledgeable employees of
Energy or the Energy Subsidiaries as SFP may reasonably request, including
providing the information and data required by SFP's customary internal tax and
accounting
<PAGE>
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procedures, in order to enable SFP to complete and file all tax forms or reports
that it may be required to file with respect to the activities of Energy and the
Energy Subsidiaries for taxable periods ending on, prior to or including the
Disaffiliation Date, to respond to audits by any taxing authorities with respect
to such activities, to prosecute or defend any administrative or judicial
proceeding and to otherwise enable SFP to satisfy its accounting and tax
requirements. From and after the Disaffiliation Date, SFP shall deliver to
Energy as soon as practical after Energy's request, such information and data
concerning any tax attributes which were allocated to Energy or the Energy
Subsidiaries that is reasonably necessary in order to enable Energy to complete
and file all tax forms or reports that it may be required to file with respect
to such activities of Energy and the Energy Subsidiaries from and after the
Disaffiliation Date, to respond to audits by any tax authorities with respect to
such activities, to prosecute or defend claims for taxes in any administrative
or judicial proceeding, and to otherwise enable Energy to satisfy its accounting
and tax requirements. In addition, SFP shall make available to Energy such of
its knowledgeable employees for such purposes.
8. PAYMENTS.
Payments with respect to federal income taxes shall be made in accordance
with the Tax Sharing Agreement. Any interest or penalties for underpayment of
estimated taxes which are allocated to an Energy Company shall be paid no later
than 30 days after billing by SFP. Energy shall pay the portion of the taxes
shown on each State and Local Tax Return which is allocable to the Energy
Companies in accordance with the State Tax Sharing Agreement no later than 30
days after such return
<PAGE>
- 10 -
is filed. All payments in excess of $50,000 to be made hereunder shall be made
in immediately available funds. All payments not made when due hereunder or
under the Tax Sharing Agreement or the State Tax Sharing Agreements shall bear
interest from the due date until paid at a rate per annum equal to one (1)
percentage point above the monthly average of the daily Effective Federal Funds
Rate as stated by The Federal Reserve Bank of New York.
9. NOTICES.
Any notice, request, instruction or other document to be given under this
Agreement by any party to another party shall be in writing, shall be deemed to
have been duly given or delivered personally, or telecopied (receipt confirmed,
with a copy sent by certified or registered mail as set forth in this Agreement)
or, upon receipt (as indicated by return receipt), when sent by certified or
registered mail, postage prepaid, return receipt requested, or by Federal
Express or other overnight delivery service, to the address of the party set
forth below or to such address as the party to whom notice is to be given may
provide in a written notice to each of the other parties to this Agreement:
If to SFP, to:
Santa Fe Pacific Corporation
224 South Michigan Avenue
Chicago, Illinois 60604-2401
Telecopier No.: (312) 786-6977
Telephone No.: (312) 786-6901
Attention: Daniel J. Westarbeck
Vice President and Tax Counsel
<PAGE>
- 11 -
If to Energy or any Energy Company:
Santa Fe Energy Resources, Inc.
1616 South Voss Road, Suite 1000
Houston, Texas 77057
Telecopier No.: (713) 268-5341
Telephone No.: (713) 783-2401
Attention: Mr. James L. Payne, President
and
David L. Hicks, General Counsel
10. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of any
successor to the parties hereto as if such successor had been a party to this
agreement; provided, nothing in this agreement is intended to confer any rights
or impose any obligations on any third parties.
11. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Illinois and
shall be construed in accordance with such laws.
12. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
13. TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
<PAGE>
- 12 -
14. AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any term
of this Agreement may be waived (either generally or in a particular instance
and either retroactively or prospectively) only with the written consent of each
of the parties.
15. SEVERABILITY.
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement and
the balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms to the fullest
extent permitted by law.
16. FURTHER ASSURANCES.
Each of the parties shall, without further consideration, use reasonable
efforts to execute and deliver such additional documents and take such other
action, as the other parties, or any of them may reasonably request to carry out
the intent of this Agreement and the transactions contemplated by this
Agreement.
17. ENTIRE AGREEMENT.
This Agreement, embodies the entire agreement and understanding of the
parties in respect of the actions and transactions contemplated by this
Agreement. There are no restrictions, promises, inducements, representations,
warranties, covenants or undertakings, other than those expressly set forth or
referred to in this Agreement.
<PAGE>
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18. SPECIFIC PERFORMANCE.
Each of the parties acknowledges and agrees that in the event of any
breach of this Agreement, the non-breaching party or parties would be
irreparably harmed and could not be made whole by monetary damages. It is
accordingly agreed that the parties will waive the defense in any action for
specific performance that a remedy at law would be adequate and that the
parties, in addition to any other remedy to which they may be entitled at law or
in equity, shall be entitled to compel specific performance of this Agreement in
any action instituted in the United States District Court for the Northern
District of Illinois or, in the event said Court would not have jurisdiction for
such action, in any court of the United States or any state thereof having
jurisdiction for such action.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to the
executed by their respective duly authorized officers as of the date first above
written.
SANTA FE PACIFIC CORPORATION
SFELP, Inc.
By: /s/ R. D. KREBS
R. D. Krebs
Its President
SANTA FE ENERGY RESOURCES, INC.
SANTA FE ENERGY PRODUCTS COMPANY
SANTA FE OIL COMPANY
SANTA FE PACIFIC EXPLORATION COMPANY
SANTA FE PACIFIC FUELS COMPANY
SF ENERGY COMPANY OF ARGENTINA
SF ENERGY COMPANY OF BOLIVIA
SF ENERGY COMPANY OF COLOMBIA
SF ENERGY COMPANY OF INDONESIA
SF ENERGY COMPANY OF INDONESIA-BUNYU BLOCK
SF ENERGY COMPANY OF PAKISTAN
SF ENERGY COMPANY OF TUNISIA
By: /s/ J. L. PAYNE
J. L. Payne
Its President
EXHIBIT 10(h)
SANTA FE ENERGY RESOURCES
SUPPLEMENTAL RETIREMENT PLAN
1. THE PLAN:
The Santa Fe Energy Resources Supplemental Retirement Plan (the
"Supplemental Plan") evidenced hereby is an unfunded, non-contributory,
defined benefit plan designed to provide supplemental retirement benefits to
certain highly compensated employees of Santa Fe Energy Resources, Inc. (the
"Company") and its subsidiaries which participate in the Santa Fe Energy
Resources Retirement Income Plan (the "Plan"). The provisions of the
Supplemental Plan shall apply to those participants in the Plan whose benefits
under the Plan:
(a) would exceed the limits imposed thereon by Section 415 of the
Internal Revenue Code of 1986, as amended (the "Code"); and/or
(b) would be limited as a result of the limitation on annual compensation
that may be considered under the Plan as imposed by Section 401(a)(17) of
the Code; and/or
(c) would be reduced as a result of the participant making elective
deferrals under the Company's Deferred Compensation Plan or other similar
programs.
The above limitations and reductions are hereafter referred to collectively as
the "Reductions." References to the Code and to Sections 401(a)(17) and 415
thereunder shall include any successors thereto.
2. SUPPLEMENTAL RETIREMENT BENEFITS:
A participant in the Supplemental Plan eligible for retirement benefits
pursuant to the Plan shall be entitled to a monthly supplemental retirement
benefit
<PAGE>
under this Supplemental Plan commencing on the first day of the month coincident
with the participant's retirement date pursuant to the Plan and his surviving
spouse or contingent annuitant, as the case may be, shall be entitled to a
monthly benefit commencing on the first day of the month coincident with or next
following the date of participant's death after such retirement date or, in the
event of the participant's death prior to his actual retirement date, the date
his surviving spouse begins receiving a preretirement survivor's benefit under
the Plan, provided such spouse or contingent annuitant is entitled to a benefit
pursuant to the Plan. Such monthly supplemental retirement benefit shall be
equal to the amount determined by the following method:
(a) by calculating the amount of the monthly benefit to which the
participant, surviving spouse, or contingent annuitant, as the case may
be, would be entitled to receive under the Plan but for the Reductions,
which amount shall not be less than that amount determined under section
2(a) of the Santa Fe Pacific Corporation Supplemental Executive
Retirement Plan for such participant as of the effective date of this
Supplemental Plan; and
(b) by subtracting from the amount computed under (a) the monthly benefit
payable to such participant, surviving spouse, or contingent annuitant
pursuant to the Plan, including (i) any subsequent increases therein due
to increases in the maximum benefit permitted under Section 415 of the
Code as such increases are recognized under the Plan and (ii) any benefit
paid to an alternate payee pursuant to a qualified domestic relations
order issued to the Plan with respect to the participant's benefits
thereunder.
Such calculations shall be made utilizing the form of benefits actually
paid pursuant to the Plan.
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<PAGE>
3. PAYMENTS OF SUPPLEMENTAL BENEFITS:
Payments of supplemental benefits shall be made by the Company from its
general assets or, in its discretion, through a "rabbi" trust or other similar
arrangement. However, at no time shall this Supplemental Plan be funded in any
manner which would cause the Supplemental Plan to be subject to the funding
requirements of the Employee Retirement Income Security Act of 1974, as
amended.
4. TERMINATION OF SUPPLEMENTAL RETIREMENT BENEFITS:
The entitlement of a participant, surviving spouse or contingent
annuitant, as the case may be, to supplemental retirement benefits hereunder
shall terminate on:
(a) Subject to Section 7 below, the date that benefits cease to be
payable to the participant, surviving spouse or contingent annuitant
pursuant to the terms of the Plan, other than by termination of the Plan;
or
(b) The effective date of any change in existing federal or state
statutes which would cause the Plan to lose its qualified status because
of the existence of the Supplemental Plan.
5. LUMP SUMS:
Notwithstanding anything above, the Company, in its sole discretion, may
direct at any time on or after a participant's termination of employment or
death that the actuarial present value of any supplemental benefits expected
to be paid (or remaining to be paid if already in pay status) under this
Supplemental Plan, as determined in accordance with the appropriate actuarial
factors and rates in effect at the beginning of the calendar year for an
immediate or deferred annuity (as the case may be) upon a plan termination
under Pension Benefit Guaranty Corporation requirements, be immediately paid
to the participant, his surviving spouse or contingent annuitant, as the case
may be, in a lump sum in cash (by check).
- 3 -
<PAGE>
6. ADMINISTRATION:
This Supplemental Plan shall be administered by the Plan Administrator of
the Plan with the same powers, duties and protections as set forth in the Plan
with respect to its administration being incorporated herein by reference,
including, without limitation, the power to interpret and construe the
Supplemental Plan and any such interpretation or construction shall be binding
for purposes of the Supplemental Plan. The Plan Administrator shall determine
the amount and manner of payment of the benefits due to, or on behalf of, each
participant under the Supplemental Plan and the commencement and termination
dates of such benefit payments. In the absence of a Plan Administrator, the
Supplemental Plan shall be administered by the Board of Directors of the
Company.
A participant, surviving spouse or contingent annuitant who has been
denied a benefit hereunder, either in whole or in part, may appeal that
decision to the Plan Administrator. The appeals procedures shall be the same
as those under the Plan.
7. AMENDMENT AND TERMINATION:
The Company by action of its Board of Directors may amend and/or
terminate the Supplemental Plan at any time for whatever reasons it may deem
appropriate. However, no such amendment or termination of the Supplemental
Plan shall reduce or eliminate any participant's, spouse's or contingent
annuitant's right to a benefit accrued hereunder as of the date of such
amendment or termination; provided, however, that subsequent increases in the
benefit payable to the participant, spouse or contingent annuitant, as the
case may be, under the Plan can operate to reduce the supplemental benefit
accrued hereunder as of the date of such amendment or termination of this
Supplemental Plan.
- 4 -
<PAGE>
8. LIQUIDATION AND SUCCESSION:
In the event that the Company is liquidated or dissolved, the value of all
benefits accrued under the Supplemental Plan as of the date of such event shall
become immediately payable to the participant, surviving spouse or contingent
annuitant, as the case may be, in a lump sum. For purposes of this Supplemental
Plan, the benefit accrued will be determined in accordance with Sections 2 and 5
and, if not already in pay status, will be assumed to be payable at either (1)
the participant's normal retirement date as defined under the Plan (or
immediately if the participant has attained such normal retirement date) or (2)
the earliest date upon which benefits are payable under the Plan, whichever
produces the greater benefit.
The Company shall require any successor, whether direct or indirect, by
purchase, merger, consolidation or otherwise, to all or substantially all of
the business or assets of the Company, expressly to assume and agree to pay
the benefits accrued under this Supplemental Plan as of the date of such
succession in the same manner and to the same extent as the Company would have
been required if no such succession had taken place. If a successor fails to
assume such obligations, such failure shall entitle a participant (surviving
spouse or contingent annuitant, as the case may be, if then in pay status) to
be paid from the Company the lump sum amount determined in the preceding
paragraph as if the Company had been liquidated.
9. NO EMPLOYMENT RIGHTS:
Nothing contained in the Supplemental Plan shall be construed as a contract
of employment between the Company (or any affiliate) and any employee, or as
creating a right in any employee to be continued in the employment of the
Company (or any affiliate) or as a limitation of the right of the Company (or
any affiliate) to discharge any employee, with or without cause.
- 5 -
<PAGE>
10. ASSIGNMENT:
The benefits payable under this Supplemental Plan may not be assigned,
alienated, pledged, transferred or hypothecated in any manner.
11. WITHHOLDING OF TAXES:
The Company shall have the right to deduct from all payments made under the
Supplemental Plan, any federal, state or local taxes required by law to be
withheld from such payments.
12. LAW APPLICABLE:
This Supplemental Plan shall be governed by the laws of the State of Texas
except to the extent preempted by applicable federal law.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Supplemental Plan this December 4, 1990, effective for all purposes
as of December 4, 1990.
SANTA FE ENERGY RESOURCES, INC.
By: /s/ JAMES L. PAYNE
Title: President
EXHIBIT 10(k)
CREDIT AGREEMENT
DATED AS OF NOVEMBER 13, 1996
AMONG
SANTA FE ENERGY RESOURCES, INC.,
THE BANKS SIGNATORY HERETO
THE CHASE MANHATTAN BANK
AS ADMINISTRATIVE AGENT
AND
ABN AMRO BANK N.V.
AS CO-AGENT
<PAGE>
TABLE OF CONTENTS
Section 1. DEFINITIONS AND ACCOUNTING MATTERS........................1
1.1. CERTAIN DEFINED TERMS.....................................1
1.2. ACCOUNTING TERMS AND DETERMINATIONS......................21
1.3. TYPES OF LOANS...........................................22
Section 2. COMMITMENTS..............................................22
2.1. LOANS....................................................22
2.2. LETTERS OF CREDIT........................................23
2.3 BORROWING BASE AND AVAILABLE BORROWING BASE..............25
2.4 BORROWING BASE DEFICIENCIES..............................26
2.5. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS......26
2.6. FEES.....................................................26
2.7. AFFILIATES; LENDING OFFICES..............................27
2.8. SEVERAL OBLIGATIONS......................................27
2.9. NOTES....................................................27
2.10. USE OF PROCEEDS..........................................28
Section 3. BORROWINGS AND PREPAYMENTS...............................28
3.1. BORROWINGS...............................................28
3.2. PREPAYMENTS..............................................28
Section 4. PAYMENTS OF PRINCIPAL AND INTEREST.......................29
4.1. REPAYMENT OF LOANS AND REIMBURSEMENT OBLIGATIONS.........29
4.2. INTEREST.................................................29
4.3. SELECTION OF INTEREST RATES..............................29
Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC..........30
5.1. PAYMENTS.................................................30
5.2. PRO RATA TREATMENT.......................................31
5.3. COMPUTATIONS.............................................31
5.4. MINIMUM AND MAXIMUM AMOUNTS..............................31
5.5. CERTAIN ACTIONS, NOTICES, ETC............................32
5.6. NON-RECEIPT OF FUNDS BY THE AGENT........................33
5.7. SHARING OF PAYMENTS, ETC.................................33
Section 6. YIELD PROTECTION AND ILLEGALITY..........................34
6.1. ADDITIONAL COSTS.........................................34
6.2. LIMITATION ON TYPES OF LOANS.............................36
6.3. ILLEGALITY...............................................36
6.4. SUBSTITUTE ALTERNATE BASE RATE LOANS.....................37
<PAGE>
6.5. COMPENSATION.............................................38
6.6. ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT.........38
6.7. CAPITAL ADEQUACY.........................................40
Section 7. CONDITIONS PRECEDENT.....................................41
7.1. INITIAL CONDITIONS PRECEDENT.............................41
7.2. ALL LOANS AND LETTERS OF CREDIT..........................42
7.3. CONVERSIONS AND CONTINUATIONS OF EURODOLLAR LOANS........43
Section 8. REPRESENTATIONS AND WARRANTIES...........................44
8.1. CORPORATE EXISTENCE......................................44
8.2. INFORMATION..............................................44
8.3. LITIGATION; COMPLIANCE...................................44
8.4. NO BREACH................................................45
8.5. NECESSARY ACTION.........................................45
8.6. APPROVALS................................................45
8.7. REGULATIONS G, T, U AND X................................45
8.8. ERISA....................................................46
8.9. TAXES....................................................46
8.10. SUBSIDIARIES.............................................46
8.11. INVESTMENT COMPANY ACT...................................47
8.12. PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT....47
8.13. ENVIRONMENTAL MATTERS....................................47
8.14. TITLE....................................................48
Section 9. COVENANTS................................................48
9.1. FINANCIAL STATEMENTS AND CERTIFICATES....................48
9.2. INSPECTION OF PROPERTY...................................51
9.3. COMPLIANCE WITH ENVIRONMENTAL LAWS.......................51
9.4. PAYMENT OF TAXES.........................................52
9.5. MAINTENANCE OF INSURANCE.................................52
9.6. RESTRICTED PAYMENTS......................................52
9.7. INDEBTEDNESS, LIEN AND OTHER RESTRICTIONS................54
9.8. ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES.............61
9.9. CAPITALIZATION...........................................61
9.10. INTEREST COVERAGE........................................61
9.11. SENIOR TOTAL DEBT; SPECIAL DEBT..........................61
9.12. RESTRICTED AND UNRESTRICTED SUBSIDIARIES.................62
Section 10. DEFAULTS.................................................62
10.1. EVENTS OF DEFAULT........................................62
Section 11. THE AGENT................................................66
<PAGE>
11.1. APPOINTMENT, POWERS AND IMMUNITIES.......................66
11.2. RELIANCE BY AGENT........................................66
11.3. DEFAULTS.................................................66
11.4. RIGHTS AS A BANK.........................................67
11.5. INDEMNIFICATION..........................................67
11.6. NON-RELIANCE ON THE AGENT AND OTHER BANKS................68
11.7. FAILURE TO ACT...........................................68
11.8. RESIGNATION OR REMOVAL OF THE AGENT......................68
Section 12. MISCELLANEOUS............................................69
12.1. WAIVER...................................................69
12.2. NOTICES..................................................69
12.3. EXPENSES.................................................69
12.4. INDEMNIFICATION..........................................70
12.5. AMENDMENTS, ETC..........................................71
12.6. SUCCESSORS AND ASSIGNS...................................72
12.7. SURVIVAL; TERMINATION; REINSTATEMENT.....................75
12.8. LIMITATION OF INTEREST...................................75
12.9. CAPTIONS.................................................76
12.10. COUNTERPARTS.............................................76
12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL.....................................76
12.12. CONFIDENTIALITY..........................................77
12.13. ENTIRE AGREEMENT.........................................77
12.14. CONSTRUCTION.............................................78
12.15. SEVERABILITY.............................................78
12.16. SFER MRI LOANS...........................................78
12.17. EXISTING CREDIT FACILITY TERMINATED......................78
PRICING SCHEDULE
APPENDIX I
EXHIBITS:
A - Form of Note
B - Form of Request for Extension of Credit
C - Form of Assignment Agreement
D -Form of Application
E - Form of Rate Designation Notice
<PAGE>
SCHEDULES:
I - Restricted and Unrestricted Subsidiaries
II - Liens and Total Debt and Guaranties
III - Opinion of Andrews & Kurth L.L.P.
IV - Opinion of David L. Hicks
V - Subordination Provisions
VI - Jurisdictions for which Certificates are to be Provided
<PAGE>
CREDIT AGREEMENT
This Credit Agreement (as amended, modified, supplemented or restated
from time to time, this "AGREEMENT") dated as of November 13, 1996, is by and
among SANTA FE ENERGY RESOURCES, INC. (the "COMPANY"), a Delaware corporation;
each of the financial institutions which is or may from time to time become a
party hereto (individually a "BANK" and collectively the "BANKS"); ABN AMRO BANK
N.V. as Co-Agent (in such capacity, the "CO- AGENT"); and THE CHASE MANHATTAN
BANK ("CHASE"), a New York banking corporation, as Administrative Agent for the
Banks (in such capacity, together with any other Person who becomes the Agent
pursuant to SECTION 11.8, the "AGENT").
AGREEMENTS.
The parties agree as follows:
Section 1. DEFINITIONS AND ACCOUNTING MATTERS.
1.1. CERTAIN DEFINED TERMS. As used in this Agreement or the other
Credit Documents, the following terms shall have the following meanings:
"ADDITIONAL COSTS" shall have the meaning ascribed to such term in
SECTION 6.1.
"ADJUSTED EBITDA" shall mean, for any period, EBITDA for such period
minus the aggregate of all Restricted Distributions made by the Company and the
Restricted Subsidiaries in such period.
"AFFILIATE" shall mean, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person; and with respect to an individual, "AFFILIATE" shall
also mean any individual related to such individual by blood or marriage. As
used in this definition, "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH" shall mean the possession, directly or indirectly, of power to direct or
cause the direction of the management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise).
"AGENT" shall have the meaning ascribed to such term in the introduction.
"AGGREGATE COMMITMENT" shall mean the total of all Commitments of all Banks.
"AGREEMENT" shall have the meaning ascribed to such term in the introduction.
"ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded
upwards, if necessary, to the next higher 1/100%) equal to the greater of (a)
the Prime Rate in effect on such
<PAGE>
day or (b) the Fed Funds Rate in effect for such day plus 1/2%. Any change in
the Alternate Base Rate due to a change in the Fed Funds Rate or the Prime Rate
shall be effective on the effective date of such change in the Fed Funds Rate or
the Prime Rate. If for any reason the Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is unable to
ascertain the Fed Funds Rate for any reason, including the inability or failure
of the Agent to obtain sufficient bids or publications in accordance with the
terms hereof, the Alternate Base Rate shall be the Prime Rate until the
circumstances giving rise to such inability no longer exist.
"ALTERNATE BASE RATE LOANS" shall mean Loans which bear interest at a
rate based upon the Alternate Base Rate.
"APPLICABLE ENVIRONMENTAL LAWS" shall mean all applicable environmental
or pollution-control Legal Requirements governing, without limitation,
wastewater effluent, solid and hazardous waste or substances, and air emissions,
together with any applicable requirements for conducting, on a timely basis,
reporting, record-keeping, periodic tests and monitoring for contamination of
ground water, surface water, air and land and for biological toxicity of the
aforesaid, including, without limitation, the Resource Conservation and Recovery
Act of 1976, The Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (as amended by the Superfund Amendments and
Reauthorization Act), the Emergency Planning and Community Right-to-Know Act,
the Toxic Substances Control Act, the Solid Waste Disposal Act, the Safe
Drinking Water Act, the Hazardous Materials Transportation Act, the Clean Air
Act, the Clean Water Act, the Oil Pollution Act, and the Federal Insecticide,
Fungicide and Rodenticide Act, in each case as amended from time to time.
"APPLICABLE LENDING OFFICE" shall mean, for each Bank and for each Type
of Loan, the lending office of such Bank (or of an Affiliate of such Bank)
designated for such Type of Loan below its name on the signature pages hereof or
such other office of such Bank (or of an Affiliate of such Bank) as such Bank
may from time to time specify to the Agent and the Company as the office by
which its Loans of such Type are to be made and/or issued and maintained.
"APPLICABLE MARGIN" shall mean (a) on any day during any Margin Period,
with respect to any Eurodollar Loan, the percent per annum determined for each
day during such Margin Period according to the Pricing Schedule; (b) on any day
during any Margin Period, with respect to any Letter of Credit, the percent per
annum determined for each day during such Margin Period according to the Pricing
Schedule; and (c) if no Margin Period is in effect, the rate determined from
time to time according to SECTION 4.3(B).
"APPLICATION" shall mean an application for a letter of credit
substantially in the form of EXHIBIT D.
"ASSET SALE OF PETROLEUM PROPERTIES" shall mean any transfer, sale or
other disposition (including pursuant to any consolidation or merger) by the
Company or any Restricted Subsidiary in any single transaction or series of
transactions of (a) shares of capital stock or other ownership
2
<PAGE>
interests of a Restricted Subsidiary which owns Petroleum Properties or (b) any
Petroleum Properties; PROVIDED, HOWEVER, that the term "Asset Sale of Petroleum
Properties" shall not include (i) a transfer, sale or other disposition of
Hydrocarbons in the ordinary course of the oil and gas production or marketing
operations conducted by the Company and the Restricted Subsidiaries; (ii) any
transfer, sale or other disposition effected in connection with the Monterey
Transactions; or (iii) the transfer, sale or other disposition of any capital
stock or Petroleum Properties by the Company to a Restricted Subsidiary or by a
Restricted Subsidiary to the Company or by a Restricted Subsidiary to a
Restricted Subsidiary.
"ASSIGNMENT AGREEMENT" shall mean an Assignment and Acceptance Agreement
substantially in the form of EXHIBIT C.
"ATTRIBUTABLE DEBT" shall mean the lesser of (a) the fair market value
of the assets sold pursuant to any Sale and Leaseback Transaction (which
determination shall be based upon a written opinion (the cost of which shall be
borne exclusively by the Company) as to valuation from an independent valuation
expert selected by the Company) or (b) the present value (discounted according
to GAAP at the interest rate implicit in the lease) of the obligations of the
lessee for rental payments during the term of any lease constituting a part of
such Sale and Leaseback Transaction; PROVIDED, that no Attributable Debt shall
be assigned to Sale and Leaseback Transactions of the type described in SECTION
9.7(E)(2).
"AVAILABLE BORROWING BASE" shall mean the lesser of (a) the Aggregate
Commitment and (b) the Borrowing Base minus Other Liabilities.
"BANKS" shall have the meaning ascribed to such term in the
introduction.
"BOARD" shall mean the Board of Governors of the Federal Reserve System
of the United States or any entity succeeding to all or part of its functions.
"BORROWING BASE" shall mean, as of the most recent determination
pursuant to this Agreement and continuing until the next determination of a
Borrowing Base in accordance with this Agreement, the amount of Total Debt which
the Agent (with the consent of the Required Banks) shall determine in its sole
discretion (using its normal and customary oil and gas lending practices) can be
supported by the proved producing and proved non-producing oil and gas reserves
of the Company and the Restricted Subsidiaries, based on the Most Recent
Engineering Report and the Most Recent Other Liabilities Report.
"BORROWING BASE DEFICIENCY" shall mean at any time the amount, if any,
by which the sum of (a) the aggregate outstanding principal balance of the Notes
and (if the Available Borrowing Base at such time shall be determined by
reference to the Aggregate Commitment as provided in CLAUSE (A) of the
definition of "Available Borrowing Base") the SFER MRI Loans at such time PLUS
(b) the aggregate Letter of Credit Liabilities at such time shall exceed the
Available Borrowing Base then in effect.
3
<PAGE>
"BUSINESS DAY" shall mean any day other than a day on which commercial
banks are authorized or required to close in New York, New York, and where such
term is used in the definition of "QUARTERLY DATE" or, if such day relates to a
borrowing of, a payment or prepayment of principal of or interest on, or an
Interest Period for, a Eurodollar Loan or a notice by the Company with respect
to any such borrowing, payment, prepayment or Interest Period, which is also a
day on which dealings in Dollar deposits are carried out in the relevant
Eurodollar interbank market.
"BUSINESS ENTITY" shall mean a corporation, partnership, limited
partnership, limited liability company, joint stock association, business trust
or other separate business entity.
"CAPITAL GAINS" shall mean gains (net of expenses and income taxes
applicable thereto) in excess of losses resulting from the sale, conversion or
other disposition of capital assets (I.E., assets other than current assets).
"CAPITALIZATION" shall mean the aggregate of stockholders equity of the
Company and the Restricted Subsidiaries as shown on the most recent balance
sheet furnished pursuant to SECTION 9.1(A) OR (B) and Total Debt of the Company
and the Restricted Subsidiaries.
"CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which,
under GAAP, is or will be required to be capitalized on the books of the Company
or any Restricted Subsidiary, taken at the amount thereof accounted for as
indebtedness (net of interest expense) in accordance with GAAP.
"CHANGE OF CONTROL" shall mean (a) any change so that any Person (or any
Persons acting together which would constitute a Group), together with any
Affiliates or Related Persons thereof, other than Permitted Holders, shall at
any time either (1) Beneficially Own more than 50% of the aggregate voting power
of all classes of Voting Stock of the Company or (2) succeed in having
sufficient of its or their nominees elected to the Board of Directors of the
Company such that such nominees, when added to any existing director remaining
on the Board of Directors of the Company after such election who is an Affiliate
or Related Person of such Person or Group, shall constitute a majority of the
Board of Directors of the Company; or (b) the Company shall convey, exchange,
transfer or otherwise dispose of all or substantially all of its assets except
as permitted by SECTION 9.7(E); PROVIDED that the Monterey Transactions shall
not constitute a Change of Control. As used herein (a) "BENEFICIALLY OWN" shall
mean beneficially own as defined in Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), or any successor provision thereto; (b)
"GROUP" shall mean a "group" for purposes of Section 13(d) of the Exchange Act;
(c) "RELATED PERSON" of any Person shall mean any other Person owning (1) 5% or
more of the outstanding common stock of such Person or (2) 5% or more of the
Voting Stock of such Person, and (d) "VOTING STOCK" of any Person shall mean
capital stock of such Person which ordinarily has voting power for the election
of directors (or persons performing similar functions) of such Person, whether
at all times or only so long as no senior class of securities has such voting
power by reason of any contingency.
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"CHASE" shall have the meaning ascribed to such term in the
introduction.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, or any
successor statute, together with all publicly available written regulations,
rulings and interpretations thereof or thereunder by the Internal Revenue
Service or any entity succeeding to all or part of its functions.
"COMBINED GROUP" shall mean the Company and the Restricted Subsidiaries.
"COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such
Bank to extend credit to the Company in the form of Loans and Letter of Credit
Liabilities in an aggregate principal amount at any one time outstanding up to
but not exceeding the amount set forth opposite such Bank's name on the
signature pages hereof under the caption "Commitment" or in its Assignment
Agreement (as the same may be reduced from time to time or terminated pursuant
to SECTION 2.5 or modified pursuant to SECTION 12.6).
"COMMITMENT FEE" shall have the meaning ascribed to such term in SECTION
2.6.
"COMMITMENT PERCENTAGE" shall mean, as to any Bank at any time, the
percentage equivalent of a fraction, the numerator of which is such Bank's
Commitment at such time and the denominator of which is the Aggregate Commitment
at such time.
"COMPANY" shall have the meaning ascribed to such term in the
introduction.
"COMPANY REPORT" shall mean one or more reports, in form satisfactory to
the Agent and the Required Banks, prepared by petroleum engineers employed by
the Company or its Subsidiaries, which shall evaluate (i) at least 85% of the
present value of the producing and non-producing proved oil and gas reserves of
the Company and the Restricted Subsidiaries evaluated in the Most Recent
Engineering Report and (ii) any other properties as to which the Company has
conducted successful exploration activities subsequent to the Most Recent
Engineering Report, in each case effective as of the immediately preceding July
1. Each Company Report shall set forth production, drilling and acquisition
information and other information requested by the Agent and shall be based upon
updated economic assumptions acceptable to the Agent.
"CONSOLIDATED NET EARNINGS" shall mean consolidated gross revenues
(including Capital Gains) of the Company and the Restricted Subsidiaries less
all operating and non-operating expenses of the Company and the Restricted
Subsidiaries including all charges of a proper character (including current and
deferred taxes on income, provision for taxes on unremitted foreign earnings
which are included in gross revenues, and current additions to reserves), but
not including in gross revenues any gains resulting from write-up of assets, any
equity of the Company or any Restricted Subsidiary in the unremitted earnings of
any Person which is not a Restricted Subsidiary, any earnings of any Person
acquired by the Company or any Restricted Subsidiary through purchase, merger or
consolidation or otherwise for any year prior to the year
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of acquisition, or any deferred credit representing the excess of equity in any
Restricted Subsidiary at the date of acquisition over the cost of the investment
in such Restricted Subsidiary; all determined in accordance with GAAP.
"CONSOLIDATED NET WORTH" shall mean, at any date, the consolidated
stockholders' equity of the Company and the Restricted Subsidiaries MINUS (to
the extent included in the calculation of consolidated shareholders' equity) the
aggregate amount of Investments in Unrestricted Subsidiaries, all determined in
accordance with the last sentence of the definition of "Investment" and GAAP.
"CONTINUATION" shall have the meaning ascribed to such term in SECTION
4.3.
"CONVERSION" shall have the meaning ascribed to such term in SECTION
4.3.
"COVER" for Letter of Credit Liabilities shall be effected by paying to
the Agent immediately available funds in the amount of such Letter of Credit
Liabilities, such amount to be held by the Agent until such time as such Letter
of Credit Liabilities expire according to their terms or become Letter of Credit
Advances, whereupon the Agent may use such funds to repay such Letter of Credit
Advances.
"CREDIT DOCUMENTS" shall mean this Agreement, the Notes, all
Applications, all Letters of Credit, the Notice of Entire Agreement, and all
instruments, certificates and agreements now or hereafter executed or delivered
to the Agent or any Bank pursuant to any of the foregoing.
"DEFAULT" shall mean an Event of Default or an event, circumstance or
condition which with notice or lapse of time or both would, unless cured or
waived, become an Event of Default; PROVIDED that a Borrowing Base Deficiency
shall not be a Default so long as the Company complies with SECTION 2.4.
"EBITDA" shall mean for any period Consolidated Net Earnings for such
period (calculated, for purposes of this definition only, without taking into
account extraordinary items under GAAP or capital gains or capital losses), plus
the aggregate amounts deducted in deter mining Consolidated Net Earnings in
respect of (a) all provisions for any federal, state or other income taxes made
by the Company and the Restricted Subsidiaries during such period; (b) Fixed
Charges of the Company and the Restricted Subsidiaries during such period; (c)
depreciation, depletion and amortization charges of the Company and the
Restricted Subsidiaries for such period, and (d) all other non-cash charges of
the Company and the Restricted Subsidiaries for such period, all determined in
accordance with GAAP; PROVIDED, HOWEVER, that EBITDA shall mean, for any
calculation, $47,500,000, $31,800,000, $35,200,000 and $39,700,000 for the
fiscal quarters ended December 31, 1995, March 31, 1996, June 30, 1996 and
September 30, 1996, respectively; PROVIDED FURTHER, that on and after the
Financial Statement Delivery Date for the fiscal quarter ended December 31,
1996, EBITDA for the fiscal quarter ended December 31, 1996, shall be
$16,200,000.00 plus EBITDA (determined in accordance with the first clause of
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this sentence) for the two months ended December 31, 1996.
"ELIGIBLE ASSIGNEE" shall mean (a) a commercial bank organized or
licensed under the laws of the United States of America, or a state thereof, and
having total assets in excess of $1,000,000,000, (b) a commercial bank organized
under the laws of any other country which is a member of the OECD, or a
political subdivision of any such country, and having total assets in excess of
$1,000,000,000; provided that such bank is acting through a branch or agency
located in the country in which it is organized or another country that also is
a member of the OECD, and (c) a finance company, insurance company, other
financial institution or fund, acceptable to the Agent and the Company, which is
regularly engaged in making, purchasing or investing in loans and having total
assets in excess of $1,000,000,000.
"ENVIRONMENTAL CLAIM" shall mean any claim, demand, action, cause of
action, suit, judgment, Governmental or private investigation or proceeding
relating to remediation or compliance with Applicable Environmental Laws, or any
proceeding or lien, whether threatened, sought, brought or imposed, that seeks
to recover costs, damages, punitive damages, expenses, fines, criminal
liability, judgments, response costs, investigative and monitoring costs,
abatement costs, attorney's fees, expert's fees or consultant's fees, or seeks
to impose liability regarding the Company or any of its Subsidiaries, or any of
their sites or properties for violations of Applicable Environmental Laws or for
pollution, contamination, investigation, preservation, protection, remediation
or clean up of the air, surface water, ground water, soil or wetlands, or
otherwise in relation to the use, storage, generation, release, handling or
disposal of materials and substances that are regulated by or subject to
Applicable Environmental Laws.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute, and all rules,
regulations and interpretations by the Internal Revenue Service or the
Department of Labor, or any entity succeeding to all or part of their respective
functions.
"ERISA AFFILIATE" shall mean any trade or business (whether or not
incorporated) which is a member of a group of which the Company is a member and
which is under common control with the Company within the meaning of the
regulations under Section 414 of the Code.
"EURODOLLAR LOANS" shall mean Loans which bear interest at a rate based
on a rate referred to in the definition of "EURODOLLAR RATE".
"EURODOLLAR RATE" shall mean, for any Interest Period for any Eurodollar
Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/100%)
determined by the Agent based upon rates quoted at approximately 10:00 a.m.
(local time in the relevant Eurodollar interbank market) (or as soon thereafter
as practicable) on the day two Business Days prior to the first day of such
Interest Period for the offering by Chase to leading dealers in such Eurodollar
interbank market of Dollar deposits for delivery on the first day of such
Interest Period, in immediately available funds and having a term comparable to
such Interest Period and in an amount
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comparable to the principal amountof the respective Eurodollar Loan to which
such Interest Period relates. Each determination of the Eurodollar Rate shall be
conclusive and binding, absent manifest error, and may be computed using any
reasonable averaging and attribution method.
"EXISTING CREDIT FACILITY" shall mean the Second Amended and Restated
Revolving Credit Agreement dated as of April 1, 1995, by and among the Company;
Texas Commerce Bank National Association as the Agent; Texas Commerce Bank
National Association and NationsBank of Texas, N.A. as Co-Agents; and the
financial institutions from time to time party thereto.
"EVENT OF DEFAULT" shall have the meaning assigned to such term in
SECTION 10.
"FDIC" shall mean the Federal Deposit Insurance Corporation or any
entity succeeding to any or all of its functions.
"FED FUNDS RATE" shall mean, for any day, the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) on the
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Agent from three
federal funds brokers of recognized standing selected by it.
"FINANCIAL STATEMENT DELIVERY DATE" shall mean the date on which the
quarterly or annual financial statements of the Company are delivered pursuant
to SECTION 9.1(A) or SECTION 9.1(B), as the case may be.
"FIXED CHARGES" shall mean (without duplication) for any period the sum
of interest expense in respect of all Total Debt of the Person for which the
determination is made, including imputed interest expense in respect of
Capitalized Lease Obligations; PROVIDED, that Fixed Charges shall mean, for any
calculation, $3,400,000 for each of the fiscal quarters ended December 31, 1995,
March 31, 1996, June 30, 1996 and September 30, 1996, respectively; PROVIDED
FURTHER, that Fixed Charges of the Combined Group for the fiscal quarter ended
December 31, 1996, shall be $1,100,000 plus Fixed Charges (determined in
accordance with the first clause of this sentence) of the Combined Group for the
two months ended December 31, 1996.
"GAAP" shall mean, as to a particular Person, such accounting practice
as, in the opinion of the independent accountants of recognized national
standing regularly retained by such Person and acceptable to the Agent, conforms
at the time to United States generally accepted accounting principles,
consistent with those applied in the preparation of the financial statements
referred to in SECTION 8.2(A), together with changes with which the Company's
independent auditors concur and which are noted in the financial statements
provided pursuant to SECTION 9.1(B).
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"GOVERNMENTAL AUTHORITY" shall mean any sovereign governmental
authority, the United States of America, any State of the United States and any
political subdivision of any of the foregoing, and any agency, instrumentality,
department, commission, board, bureau, central bank, authority, court or other
tribunal, in each case whether executive, legislative, judicial, regulatory or
administrative, having jurisdiction over the Company, any of the Company's
Subsidiaries, any of their respective property, the Agent or any Bank.
"GUARANTY" shall mean and include, without limitation, any obligation of
the Company or a Restricted Subsidiary
(a) constituting a guaranty, endorsement (other than an endorsement of a
negotiable instrument for collection in the ordinary course of business) or
other contingent liability (whether direct or indirect) in connection with the
obligations, stock or dividends of any Person (other than the Company or a
Restricted Subsidiary);
(b) payable under any contract (other than the Tax Indemnification
Agreement and any other tax indemnification or tax sharing agreement) providing
for the making of loans, advances or capital contributions to any Person (other
than the Company or a Restricted Subsidiary), or for the purchase of any
property from any Person, in each case in order primarily to enable such Person
to maintain working capital, net worth or any other balance sheet condition or
to pay debts, dividends or expenses;
(c) payable under any contract for the purchase of materials, supplies
or other property or services (OTHER THAN any natural gas transportation
contract or any electrical, water supply, steam purchase, natural gas purchase
or other utility supply contract) if such contract (or any related document)
requires that payment for such materials, supplies or other property or services
shall be made regardless of whether or not delivery of such materials, supplies
or other property or services is ever made or tendered; PROVIDED that the
exceptions contained in this CLAUSE (C) shall not apply to any contract for the
purchase or transportation of natural gas where payment is required regardless
of whether the delivery of such natural gas is ever made or tendered, unless at
the time such contract is entered into the aggregate of such payments under such
contract and all such existing contracts would not exceed $10,000,000 in any
calendar year based on existing rates and automatic escalations in such rates
under such contracts.
(d) payable under any contract to rent or lease (as lessee) any real or
personal property (other than any oil and gas leases) if such contract (or any
related document) provides that the obligation to make payments thereunder is
absolute and unconditional under conditions not customarily found in commercial
leases then in general use or requires that the lessee purchase or otherwise
acquire securities or obligations of the lessor; or
(e) payable under any other contract which, in economic effect, is
substantially equivalent to a guarantee for any payment or performance of an
obligation of a Person other than the Company or a Restricted Subsidiary.
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"HIGHEST LAWFUL RATE" shall mean, on any day, the maximum nonusurious
rate of interest permitted for that day by whichever of applicable federal or
state law permits the higher interest rate, stated as a rate per annum.
"HYDROCARBONS" shall mean crude oil, condensate, natural gas, natural
gas liquids and associated substances.
"INDEMNIFIED PERSON" shall mean the Agent (including the Agent in its
capacity as the Issuer), Chase, each of the Banks, each Affiliate of any such
Person, and their respective directors, officers, employees, agents and counsel.
"INDENTURE" shall mean the Indenture between the Company and The First
National Bank of Boston, as Trustee, dated as of May 25, 1994, providing for
issuance by the Company of its 11% Senior Subordinated Notes Due 2004 in the
aggregate principal amount of up to $100,000,000 (the "SENIOR SUBORDINATED
NOTES"), as amended and supplemented by the First Supplemental Indenture dated
as of October 18, 1996.
"INDEPENDENT ENGINEERING REPORT" shall mean a report prepared by an
Independent Petroleum Engineer which sets forth the gross and net volume of
Hydrocarbons projected to be produced from the Petroleum Properties, the Net
Proceeds of Production and the present net worth of the Net Proceeds of
Production, using assumptions provided by the Agent and the Required Banks
(through the Agent), in each case by calendar year, for the remaining economic
life of the Petroleum Properties. Each Independent Engineering Report shall also
contain a list of Petroleum Properties of the members of the Combined Group and
shall identify which of the Petroleum Properties covered thereby are "proved
developed producing", "proved developed non-producing" and "proved undeveloped"
(as defined in the "Definitions for Oil and Gas Reserves" as published by the
Society of Petroleum Engineers). Each such report shall be prepared in
accordance with established criteria generally accepted in the oil and gas
industry and standards customarily used by independent petroleum engineers well
regarded in the industry in making reserve determinations or appraisals, and
shall be based on such assumptions, estimates and projections as are fully
disclosed in such Independent Engineering Report.
"INDEPENDENT PETROLEUM ENGINEER" shall mean Ryder Scott Company
Petroleum Engineers or another independent petroleum engineer retained by the
Company acceptable to the Required Banks.
"INTEREST PAYMENT DATE" shall mean with respect to any Eurodollar Loan
or Alternate Base Rate Loan, the last day of each Interest Period applicable
thereto; PROVIDED that in the case of a Eurodollar Loan with an Interest Period
of six months, the Interest Payment Dates shall be the days that would have been
the Interest Payment Dates for such Loan had two successive Interest Periods of
three months been applicable to such Loan.
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"INTEREST PERIOD" shall mean:
(a) with respect to any Eurodollar Loan, the period commencing on (i)
the date such Loan is made or designated as, or the effective date of any
Conversion into, a Eurodollar Loan or (ii) in the case of a Continuation to a
successive Interest Period, the last day of the immediately preceding Interest
Period, and in each case ending on the numerically corresponding day in the
first, second, third or sixth calendar month thereafter, as the Company may
select as provided in SECTION 4.3, except that each such Interest Period which
commences on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month shall end on the last Business Day of the
appropriate subsequent calendar month; and
(b) with respect to any Alternate Base Rate Loan, the period commencing
on the date such Loan is made as, or converted into, an Alternate Base Rate Loan
and on each Quarterly Date thereafter and ending on each next succeeding
Quarterly Date or, if earlier, the date such Loan is converted into a Eurodollar
Loan;
PROVIDED that (x) each Interest Period which would otherwise end on a day which
is not a Business Day shall end on the next succeeding Business Day unless, with
respect to Eurodollar Loans only, such next succeeding Business Day falls in the
next calendar month, in which case such Interest Period shall end on the next
preceding Business Day; and (y) no Interest Period may be selected for any Loan
that ends later than the Termination Date. Interest shall accrue from and
including the first day of an Interest Period to but excluding the last day of
such Interest Period.
"INVESTMENT" shall mean any purchase or other acquisition of the stock,
obligations or securities of, or any interest in, or any capital contribution,
loan or advance to, or any Guaranty in respect of the obligations of any Person,
but in any event shall include as an investment in any Person the amount of all
Total Debt owed to any member of the Combined Group by such Person, and all
accounts receivable from such Person which are not current assets or did not
arise from sales to such Person in the ordinary course of business. As used
herein, any capital contribution of assets by the Company or any Restricted
Subsidiary shall be valued at the book value of such assets as reflected in the
consolidated financial statements of the Company and the Restricted Subsidiaries
as at the end of the quarter ending immediately prior to such contribution.
"ISSUER" shall mean the Agent in its capacity as the issuer of Letters
of Credit.
"LEGAL REQUIREMENT" shall mean any applicable law, statute, ordinance,
decree, requirement, order, judgment, rule, regulation (or official
interpretation by any Governmental Authority of any of the foregoing) of, and
the terms of any license or permit issued by, any Governmental Authority, in
each case as now or hereafter in effect.
"LETTER OF CREDIT" shall mean a letter of credit issued pursuant to
SECTION 2.2.
"LETTER OF CREDIT ADVANCES" shall mean all sums which are from time to
time paid by the
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Agent pursuant to Letters of Credit, or any of them, together
with all other sums, fees, reimbursements or other obligations which are due to
the Agent pursuant to the Letters of Credit, or any of them.
"LETTER OF CREDIT FEE" shall mean, with respect to any Letter of Credit,
a fee equal to, for each day during the term thereof, the product of (a) the
Applicable Margin for Letters of Credit in effect on such day multiplied by (b)
the amount available on such day for drawings under such Letter of Credit.
"LETTER OF CREDIT LIABILITIES" shall mean, at any time, the sum of (a)
the aggregate undrawn amount of all Letters of Credit outstanding at such time
plus (b) the aggregate unpaid amount of all Letter of Credit Advances for which
the Agent shall not have been reimbursed and which remain unpaid at such time. .
"LIEN" shall mean any mortgage, pledge, security interest, collateral
assignment, encumbrance, lien or charge of any kind (including any agreement to
give any of the foregoing) and shall include conditional sale and other title
retention agreements, leases intended as security, and the filing of, or
agreement to give, any financing statement under the Uniform Commercial Code of
any jurisdiction or any other type of preferential arrangement.
"LOAN" shall mean a loan made pursuant to SECTION 2.1(A).
"MARGIN PERIOD" shall mean (a) the period commencing on the date of this
Agreement and ending on the earlier of (i) the first Financial Statement
Delivery Date and (ii) March 31, 1997, and (b) thereafter, each period beginning
on a Financial Statement Delivery Date and ending on the earlier of (x) the next
Financial Statement Delivery Date and (y) the date on which financial statements
are next required to be delivered pursuant to SECTION 9.1(A) OR (B).
"MATERIAL ADVERSE CHANGE" shall mean an occurrence of whatever nature
(including any adverse determination in any litigation, arbitration or
governmental investigation or proceeding), which after taking into account
actual insurance coverage and effective indemnification with respect to such
occurrence, (a) has a material adverse effect on the financial condition,
business, operations or properties of the Company and its Subsidiaries taken as
a whole and (b) impairs in any material respect either (1) the ability of the
Company to perform any of its obligations under the Credit Documents or (2) the
ability of the Agent and the Banks to enforce any of such obligations or any of
their rights and remedies under or in connection with the Credit Documents.
"MATURITY DATE" shall mean the earlier of (a) the date the principal
amount then outstanding of and accrued interest on the Loans, all Letter of
Credit Liabilities, all fees and all other amounts payable hereunder and under
the Notes become due and payable pursuant to SECTION 10.1 or (b) November 13,
2001.
"MONTEREY" shall mean Monterey Resources, Inc., a Delaware corporation.
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"MONTEREY CREDIT AGREEMENT" shall mean that certain Credit Agreement
dated as of November 13, 1996, by and among Monterey, Chase as the Agent, and
the Banks from time to time party thereto, as in effect on the date hereof
without giving effect to any subsequent amendment, waiver or termination
thereof.
"MONTEREY TRANSACTIONS" shall mean the "Other Transactions" as such term
is defined in the Indenture.
"MOODY'S" shall mean Moody's Investors Service, Inc.
"MOST RECENT ENGINEERING REPORT" shall mean, as of any date of
determination, the most recent Independent Engineering Report delivered pursuant
to this Agreement on or before such date.
"MOST RECENT OTHER LIABILITIES REPORT" shall mean, as of any date of
determination, the most recent Other Liabilities Report delivered pursuant to
SECTION 9.1 on or before such date.
"NET PROCEEDS OF PRODUCTION" shall mean, for any period and for any
Person, (a) an amount of projected gross revenues received by or otherwise
credited to the account of such Person from the sale of Hydrocarbons produced
from the Petroleum Properties, subject to no entitlement of any other Person but
including appropriate adjustments for over- and under-produced status, during
such period as set forth in the Most Recent Engineering Report LESS (b) the
amount of projected royalties, overriding royalties, windfall profit,
production, ad valorem, severance and all other similar taxes, and operating and
capital expenditures required to be incurred during such period in order to
generate such gross revenues (but not including general and administrative
expenses or principal and interest payable with respect to Total Debt), as set
forth in the Most Recent Engineering Report.
"NOTES" shall mean the promissory notes of the Company evidencing the
Loans, substantially in the form of EXHIBIT A.
"NOTICE OF ENTIRE AGREEMENT" shall mean that certain Notice of Entire
Agreement and Release of Claims of even date herewith between the Company and
the Agent.
"OBLIGATIONS" shall mean, as at any date of determination thereof, the
sum of (a) the aggregate principal amount of Loans outstanding on such date PLUS
(b) the aggregate outstanding amount of all Letter of Credit Liabilities on such
date PLUS (c) all accrued and unpaid interest thereon PLUS (d) all fees and
other indebtedness of the Company to the Banks or the Agent in connection with
the Credit Documents on such date.
"OECD" shall mean the Organization for Economic Cooperation and
Development (or any successor).
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"OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of
the Company by its Chief Executive Officer, President, Chief Financial Officer
or Treasurer.
"ORGANIZATIONAL DOCUMENTS" shall mean, with respect to a corporation,
the certificate of incorporation or articles of incorporation and bylaws of such
corporation; with respect to a partnership or a limited partnership, the
partnership agreement establishing such partnership; with respect to a limited
liability company, the regulations or limited liability company agreement; with
respect to a joint venture, the joint venture agreement establishing such joint
venture; and with respect to a trust, the instrument establishing such trust; in
each case including any and all modifications thereof as of the date of the
Credit Document referring to such Organizational Document.
"OTHER LETTERS OF CREDIT" shall mean all letters of credit issued for
the account of any member of the Combined Group, OTHER THAN AND EXCEPT FOR the
Letters of Credit.
"OTHER LIABILITIES" shall mean, at any time, the sum of (a) the
aggregate principal balance of the Total Debt of the Combined Group (including
SFER MRI Loans) at such time PLUS (b) all liabilities, contingent and otherwise,
in respect of Other Letters of Credit at such time; PROVIDED, HOWEVER, that
Other Liabilities shall never include the Obligations or the Senior Subordinated
Notes.
"OTHER LIABILITIES REPORT" shall mean a report in a form to be agreed on
by the Company and the Agent setting forth the aggregate Other Liabilities and
such other information with respect thereto as may from time to time be
reasonably requested by the Agent, certified as true and correct by the Chief
Executive Officer, President, the Chief Financial Officer or the Treasurer of
the Company.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ENCUMBRANCES" shall mean:
(a) liens for taxes, assessments, levies or other governmental
charges not yet due and delinquent, and for taxes, assessments,
levies or other governmental charges already due, but the
validity of which is being contested by the Company in good faith
by appropriate proceedings diligently conducted for which
reserves have been established in accordance with GAAP;
(b) materialmen's, mechanics', repairmen's, employees', operators',
landlords' and other similar liens and charges incidental to the
conduct of the Company's business or the ownership of its
property which are not incurred in connection with the borrowing
of money or the obtaining of advances or credit (other than
advances or credit on open account, includable in current
liabilities, for goods and services in
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the ordinary course of business and on terms and conditions which
are customary in the oil, gas and mineral exploration and
development business) or the guaranteeing of the obligations of
another Person, and which do not in the aggregate materially
detract from the value of the property covered thereby or
materially impair the use thereof in the operation of the
Company's business;
(c) royalties, overriding royalties, net profits interests,
production sharing interests, production payment interests,
carried interests and other burdens on production of a scope and
nature customary in the conduct of the Company's business;
(d) defects, imperfections and irregularities in title;
(e) liens, security interests, charges, claims and encumbrances that
arise under operating agreements or pooling and unitization
designations, declarations, orders and agreements and other
similar agreements of a scope and nature customary in the oil and
gas industry;
(f) the terms of concessions, production sharing agreements,
operating agreements, assignments, farmout agreements,
hydrocarbon sales, purchase, exchange and processing agreements,
area-of-mutual-interest agreements, gas balancing and deferred
production agreements, plant agreements, pipeline gathering and
transportation agreements, injection, repressuring and recycling
agreements, salt water or other disposal agreements, seismic or
geophysical permits and agreements, and other contracts, division
orders and agreements of a scope and nature customary in the oil
and gas industry;
(g) the right of third parties under oil and gas leases to take
production in kind;
(h) all liens, charges, claims, encumbrances, contracts and other
matters consented to in writing from time to time by the Agent;
(i) all rights to consent by, required notices to, and filings with
or other actions by governmental or tribal entities, if any, in
connection with the change of ownership or control of an interest
in federal, state, tribal or other foreign or domestic
governmental oil and gas leases or properties, if the same are
customarily obtained after such change of ownership or control,
but only insofar as such consents, notices, filings and other
actions are obtained within the time required under applicable
Legal Requirements;
(j) required third-party consents to assignments, to the extent they
could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect;
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(k) liabilities for royalty suspense accounts, to the extent they
could not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect; and
(l) easements, rights-of-way and the like, incidental to the conduct
of the Company's business or the ownership of its property which
are not incurred in connection with the borrowing of money or
the obtaining of advances or credit (other than advances or
credit on open account, includable in current liabilities, for
goods and services in the ordinary course of business and on
terms and conditions which are customary in the oil, gas and
mineral exploration and development business) or the
guaranteeing of the obligations of another Person, and which do
not in the aggregate materially detract from the value of the
property covered thereby or materially impair the use thereof in
the operation of the Company's business;
PROVIDED that all Permitted Encumbrances shall not in the aggregate have a
Material Adverse Effect.
"PERSON" shall mean any individual, Business Entity, voluntary
association, trust, unincorporated organization, Governmental Authority or other
form of entity. The term "Person" shall not, however, mean or include an
arrangement that is not a separate legal entity, such as the legal arrangement
between two or more parties owning interests in the same property or unit.
"PETROLEUM PROPERTIES" shall mean all proved reserves of Hydrocarbons in
place which are (a) owned by a member of the Combined Group; (b) estimated to be
recoverable with reasonable certainty and are otherwise consistent with the
"Definitions for Oil and Gas Reserves" published by the Society of Petroleum
Engineers, and (c) covered in the Most Recent Engineering Report.
"PLAN" shall mean an employee benefit plan which is covered by ERISA
which is either (a) maintained by the Company or any ERISA Affiliate for
employees of the Company or such ERISA Affiliate or (b) a multiemployer plan as
defined in Section 4001(a)(3) of ERISA to which (i) the Company, (ii) any ERISA
Affiliate or (iii) any trade or business which was previously under common
control with the Company within the meaning of Section 414 of the Code (but only
with respect to such period of common control with the Company), has an
obligation to make contributions (or with respect to (iii) above, had an
obligation to make contributions during any portion of time that the limitations
period under Section 4301(f) of ERISA with respect to such obligation has not
expired).
"POST-DEFAULT RATE" shall mean a rate per annum on each day equal to the
lesser of (a) the sum of (i) 2% per annum PLUS (ii) the Alternate Base Rate as
in effect for that day or (b) the Highest Lawful Rate for that day.
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"PRICING SCHEDULE" shall mean the schedule of that name attached to this
Agreement. As used in the Pricing Schedule, "TOTAL DEBT" shall mean the Total
Debt of the Company and the Restricted Subsidiaries at the end of the fiscal
quarter of the Company then most recently ended, and "ADJUSTED EBITDA" shall
mean Adjusted EBITDA of the Company and the Restricted Subsidiaries for the four
fiscal quarters ending with that fiscal quarter.
"PRIME RATE" shall mean, as of a particular date, the generally
applicable prime rate most recently determined by Chase. Without notice to the
Company or any other Person, the Prime Rate shall change automatically from time
to time as and in the amount by which said prime rate shall fluctuate. The prime
rate is a reference rate and may not necessarily represent the lowest or best
rate actually charged to any customer. Chase may make commercial loans or other
loans at rates of interest at, above or below the prime rate.
"PRINCIPAL OFFICE" shall mean the principal banking office of the Agent,
presently located at 270 Park Avenue, New York, New York 10017.
"PROPER FORM" shall mean in form and substance satisfactory to the Agent
in its discretion.
"QUARTERLY DATES" shall mean the last day of each March, June, September
and December; PROVIDED that if any such date is not a Business Day, the relevant
Quarterly Date shall be the next succeeding Business Day.
"RATE DESIGNATION NOTICE" shall mean (a) in the case of a new Loan, the
Request for Extension of Credit with respect to such Loan and (b) in the case of
Conversions and Continuations, a notice in the form of EXHIBIT E, executed by an
authorized officer of the Company.
"REGULATION D" shall mean Regulation D of the Board as the same may be
amended or supplemented from time to time and any successor or other regulation
relating to reserve requirements.
"REGULATORY CHANGE" shall mean, with respect to any Bank, any change on
or after the date of this Agreement in any Legal Requirement (including
Regulation D) or the adoption or making on or after such date of any official
interpretation, directive or request applying to a class of banks including such
Bank under any Legal Requirement (whether or not having the force of law) by any
Governmental Authority charged with the interpretation or administration
thereof.
"REIMBURSEMENT OBLIGATIONS" shall mean, as at any date, the obligations
of the Company then outstanding to reimburse the Agent for Letter of Credit
Advances.
"REQUEST FOR EXTENSION OF CREDIT" shall mean a request for extension of
credit duly executed by the Chief Executive Officer, President, Chief Financial
Officer or Treasurer of the Company, or such other officer of the Company as its
Chief Financial Officer may from time to
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time designate in a writing delivered to the Agent, appropriately
completed and substantially in the form of EXHIBIT B.
"REQUIRED BANKS" shall mean, at any time that no Obligations are
outstanding, Banks having equal to or greater than 66-2/3% of the Aggregate
Commitment, and at any time that Obligations are outstanding, Banks holding
equal to or greater than 66-2/3% of the aggregate amount of such Obligations.
"RESTRICTED DISTRIBUTION" shall mean, with respect to the Company and
the Restricted Subsidiaries, any payment of any dividend on any class of stock
of such Person or any other distribution on account of any class of stock or
other indicia of equity ownership of such Person, and any redemption, purchase
or acquisition, direct or indirect, of any shares of stock or other indicia of
equity ownership of such Person; PROVIDED, that Restricted Distributions shall
not include (x) dividends paid or declared by the Company or any of the
Restricted Subsidiaries in respect of stock thereof held by any Person, or
distributions made to any Person in stock of the Company or any Restricted
Subsidiary; (y) exchanges of stock of one or more classes of the Company or any
Restricted Subsidiary for common stock of the Company or such Restricted
Subsidiary, as the case may be, or for stock of the Company or such Restricted
Subsidiary, as the case may be, of the same class, except to the extent that
cash or other value is paid by the Company or a Restricted Subsidiary in such
exchange; or (z) dividends paid or declared in respect of stock held by, or
distributions made to, or redemptions, purchases or other acquisitions of stock
made from, the Company or a wholly-owned Restricted Subsidiary; PROVIDED
FURTHER, that "Restricted Distribution" shall mean, with respect to the Company
and the Restricted Subsidiaries, for any calculation, $1,958,000 for each of the
fiscal quarters ended December 31, 1995, March 31, 1996, June 30, 1996 and
September 30, 1996, respectively, and the Restricted Distributions of the
Company and the Restricted Subsidiaries for the fiscal quarter ended December
31, 1996, shall be $652,667.00 plus the Restricted Distributions (determined in
accordance with the first sentence of this definition) of the Combined Group for
the two months ended December 31, 1996. The term "stock" as used in this
definition shall include warrants, options to purchase stock and redeemable
rights.
"RESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company
designated as a Restricted Subsidiary on SCHEDULE I, as supplemented from time
to time by notice from the Company to the Agent, together with any Subsidiary of
the Company hereafter created or acquired and, at the time of creation or
acquisition, not designated by the Board of Directors of the Company as an
Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" shall mean any arrangement in which any
member of the Combined Group shall sell any building, equipment or surface real
property and thereafter enter into a lease as lessee of such building, equipment
or surface real property.
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"SENIOR SUBORDINATED NOTES" shall have the meaning ascribed to such term
in the definition of "Indenture".
"SFP GROUP" shall mean Santa Fe Pacific Corporation and its successors,
and their affiliated group of corporations which together constitute an
affiliated group of corporations within the meaning of Section 1504(a) of the
Code.
"SFER MRI LOANS" shall mean the borrowings by the Company under the
Monterey Credit Agreement. At such time as such Loans are repaid in full and the
Company may no longer borrow under the Monterey Credit Agreement, all references
in this Agreement to "SFER MRI Loans" and the "Monterey Credit Agreement" shall
be deemed deleted and of no further force or effect.
"S&P" shall mean Standard & Poor's Ratings Group.
"SPECIAL DEBT" shall mean, at any time, the sum of (a) Attributable Debt
of the Company and the Restricted Subsidiaries outstanding at such time, (b) all
Total Debt of the Company and the Restricted Subsidiaries outstanding at such
time that is secured by a Lien permitted by SECTION 9.7(A)(11) on any property
or assets of the Company or any Restricted Subsidiary, and (c) all Total Debt of
the Restricted Subsidiaries (whether or not secured by any Lien) outstanding at
such time.
"SPIN-OFF" shall mean (a) the distribution by dividend to the
stockholders of Santa Fe Pacific Corporation of the shares of capital stock of
the Company owned by Santa Fe Pacific Corporation, which distribution was
commenced on December 4, 1990, and (b) the distribution by SFP Properties, Inc.
to Santa Fe Pacific Corporation of the capital stock of the Company that was
made December 27, 1989.
"STATUTORY RESERVES" shall mean a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the weighted average of the reserve percentages (including any
marginal, special, emergency, or supplemental reserves), expressed as a decimal,
actually required to be maintained by any Bank by the Board or any other
Governmental Authority to which any of the Banks is subject as required by
Regulation D during the applicable Interest Period for "eurocurrency
liabilities" (as such term is used in Regulation D) and any other reserves
actually required to be maintained by any Bank by reason of any Regulatory
Change against (a) any category of liabilities which includes deposits by
reference to which the Eurodollar Rate is to be determined as provided in the
definition of "Eurodollar Rate" or (b) any category of extensions of credit or
other assets which include Eurodollar Loans. Such reserve percentages shall
include, without limitation, those imposed under Regulation D. Statutory
Reserves shall be adjusted automatically on and as of the effective date of any
change in any reserve percentage. Each determination of the Statutory Reserves
by the Agent shall be conclusive and binding, absent manifest error, and may be
made using any reasonable averaging and attribution method.
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<PAGE>
"SUBSIDIARY" shall mean, with respect to any Person, any Business Entity
of which 50% or more of the capital stock or other indicia of equity rights is
at the time directly or indirectly legally or beneficially owned or controlled
by such Person or by one or more of its Affiliates.
"TAX ALLOCATION AGREEMENT" shall mean those nine certain agreements
among the SFP Group, dated as of January 1, 1990 unless otherwise specified in
this definition and styled as follows: (a) Agreement for the Allocation of the
Combined Utah Franchise Tax Liability; (b) Agreement for the Allocation of the
Combined Oregon Excise Tax Liability; (c) Agreement for the Allocation of the
Consolidated New Mexico Income Tax Liability; (d) Agreement for the Allocation
of the Combined Kansas Income Tax Liability; (e) Agreement for the Allocation of
the Combined Illinois Income Tax Liability; (f) Agreement for the Allocation of
the Combined California Franchise Tax Liability; (g) Agreement for the
Allocation of the Combined Arizona Income Tax Liability; (h) Agreement
Concerning Taxes, and (i) Agreement for the Allocation of the Consolidated
Federal Income Tax Liability Among the Members of the Santa Fe Southern Pacific
Corporation Affiliated Group, dated as of January 1, 1987.
"TAX INDEMNIFICATION AGREEMENT" shall mean any agreement pursuant to
which the Company agrees to indemnify Santa Fe Pacific Corporation or its
successor or any member of the SFP Group from and against any and all federal,
state or local taxes, interest, penalties or additions to tax imposed upon or
incurred by the SFP Group or any member thereof as a result of the Spin-Off to
the extent specified in any such agreement.
"TERMINATION DATE" shall mean the earlier of (a) the Maturity Date and
(b) the date the Commitments are terminated pursuant to SECTION 2.3.
"TOTAL DEBT" shall mean, as of any date and for any Person, without
duplication, (a) all obligations for borrowed money; (b) all obligations
evidenced by bonds, debentures, notes or other similar instruments; (c) all
obligations to pay the deferred purchase price of property or services, except
trade accounts payable arising in the ordinary course of business; (d) all
Capitalized Lease Obligations; (e) all obligations in respect of production
payments, proceeds production payments and similar financing arrangements; (f)
all reimbursement obligations with respect to letters of credit issued for the
account of such Person, including the Letter of Credit Liabilities; (g) all
obligations of the types described in CLAUSES (A) THROUGH (F) of this definition
(collectively, "ORDINARY DEBT") of another Person secured by a Lien on any
property of the Person as to which Total Debt is being determined, regardless of
whether such Ordinary Debt is assumed by such Person, and (h) all Ordinary Debt
of another Person guaranteed by such Person; PROVIDED, HOWEVER, that Total Debt
of the Combined Group shall not include (x) any obligation of the Company owing
to a wholly-owned Restricted Subsidiary which is subordinated to the Obligations
upon the terms set forth on SCHEDULE V, or (y) any obligation of a Restricted
Subsidiary owing to the Company or one or more other Restricted Subsidiaries.
"TYPE" shall have the meaning assigned to such term in SECTION 1.3.
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"UNFUNDED LIABILITIES" shall mean, with respect to any Plan, at any
time, the amount (if any) by which (a) the present value of all benefits under
such Plan exceeds (b) the fair market value of all Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such Plan
(in accordance with GAAP), but only to the extent that such excess represents a
potential liability of the Company or any ERISA Affiliate to the PBGC or a Plan
under Title IV of ERISA.
"UNRESTRICTED SUBSIDIARY" shall mean Monterey and each other Subsidiary
of the Company designated as an Unrestricted Subsidiary on SCHEDULE I, as
supplemented from time to time by notice from the Company to the Agent, together
with any Subsidiary of the Company which is hereafter designated by the Board of
Directors of the Company as an Unrestricted Subsidiary.
"UNUSED COMMITMENT" shall mean, on any date, the difference of (a) the
lesser of (i) the Aggregate Commitment and (ii) the Borrowing Base MINUS (b) the
sum of (1) the aggregate outstanding principal balance of the Notes and the SFER
MRI Loans PLUS (2) the aggregate Letter of Credit Liabilities, all determined on
such date.
1.2. ACCOUNTING TERMS AND DETERMINATIONS. Except where specifically
otherwise provided:
(a) The symbol "$" and the word "dollars" shall mean lawful money of the
United States of America.
(b) Any accounting term not otherwise defined shall have the meaning
ascribed to it under GAAP.
(c) Unless otherwise expressly provided, any accounting concept and all
financial covenants shall be determined on a consolidated basis, and financial
measurements shall be computed without duplication.
(d) Wherever the term "including" or any of its correlatives appears in
the Credit Documents, it shall be read as if it were written "including (by way
of example and without limiting the generality of the subject or concept
referred to)".
(e) Wherever the word "herein" or "hereof" is used in any Credit
Document, it is a reference to that entire Credit Document and not just to the
subdivision of it in which the word is used.
(f) References in any Credit Document to Section numbers are references
to the Sections of such Credit Document.
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(g) References in any Credit Document to Exhibits, Schedules, Annexes
and Appendices are to the Exhibits, Schedules, Annexes and Appendices to such
Credit Document, and they shall be deemed incorporated into such Credit Document
by reference.
(h) Except as otherwise provided herein, any term defined in the Credit
Documents which refers to a particular agreement, instrument or document shall
also mean, refer to and include all modifications, amendments, supplements,
restatements, renewals, extensions and substitutions of the same; PROVIDED that
nothing in this subsection shall be construed to authorize any such
modification, amendment, supplement, restatement, renewal, extension or
substitution except as may be permitted by other provisions of the Credit
Documents.
(i) All times of day used in the Credit Documents mean local time in New
York, New York.
(j) Defined terms may be used in the singular or plural, as the context
requires.
1.3. TYPES OF LOANS. Loans hereunder are distinguished by "Type". The
"Type" of a Loan refers to the determination whether such Loan is a Eurodollar
Loan or an Alternate Base Rate Loan.
Section 2. COMMITMENTS.
2.1. LOANS.
(a) Each Bank severally agrees, subject to the terms and conditions of
this Agreement, from time to time on or after the date hereof and prior to the
Termination Date, to make Loans to the Company in an aggregate principal amount
at any one time outstanding up to but not exceeding the lesser of (1) such
Bank's Commitment at such time and (2) such Bank's Commitment Percentage of the
Available Borrowing Base at such time, MINUS, in either case, such Bank's
Commitment Percentage of all Letter of Credit Liabilities and (if the Available
Borrowing Base at such time shall be determined by reference to the Aggregate
Commitment as provided in CLAUSE (A) of the definition of "Available Borrowing
Base") all SFER MRI Loans outstanding at such time (whether or not such Bank
shall in fact have advanced any SFER MRI Loan). Subject to the conditions
precedent in this Agreement, any Loan repaid prior to the Termination Date may
be reborrowed prior to the Termination Date pursuant to the terms of this
Agreement; PROVIDED, that any and all Loans shall be due and payable in full on
the Maturity Date.
(b) Notwithstanding anything in this Agreement to the contrary, (i) no
Bank shall be required to make Loans at any one time outstanding in an amount
which, together with such Bank's Commitment Percentage of outstanding Letter of
Credit Liabilities, shall exceed such Bank's Commitment MINUS such Bank's
Commitment Percentage of all SFER MRI Loans outstanding at such time (whether or
not such Bank shall in fact have advanced any SFER MRI
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Loan), and (ii) if a Bank fails to make a Loan as and when required hereunder
and the Companysubsequently makes a repayment on the Notes, such repayment shall
be split among the non-defaulting Banks ratably in accordance with their
respective Commitment Percentages (computed without regard to the Commitment
Percentage of the defaulting Bank) until each Bank has its Commitment Percentage
of all outstanding Loans. Any balance of such repayment shall be divided among
all Banks in accordance with their respective Commitment Percentages.
2.2. LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement, the Company
shall have the right to utilize the Available Borrowing Base from time to time
prior to the Termination Date by obtaining the issuance by the Issuer of letters
of credit for the account of the Company in such amounts and in favor of such
beneficiaries as the Company from time to time shall request; PROVIDED, that in
no event shall the Issuer have any obligation to issue any Letter of Credit if
(1) the face amount of such Letter of Credit PLUS any additional Letter of
Credit Liabilities at such time would exceed $30,000,000 (as adjusted downward
from time to time to the extent the Available Borrowing Base is reduced below
$30,000,000), (2) the aggregate amount of Loans (and SFER MRI Loans) and Letter
of Credit Liabilities outstanding at such time would exceed the Available
Borrowing Base, (3) such Letter of Credit would have an expiry date later than
the earlier of (x) one year from the date thereof or (y) the Termination Date,
(4) such Letter of Credit is not in Proper Form, (5) the Company has not
executed and delivered to the Issuer an Application and such other customary
instruments and agreements relating to such Letter of Credit as the Issuer shall
have reasonably requested, or (6) a Default has occurred and is continuing. The
Company promises to pay to the Agent for the account of each Bank, on demand,
each Letter of Credit Advance, together with interest thereon at (i) prior to
the third Business Day following each such Letter of Credit Advance, the
Alternate Base Rate, and (ii) on and after such third Business Day, the
Post-Default Rate. All rights, powers, benefits and privileges of this Agreement
with respect to the Notes, all security therefor and guaranties thereof and all
restrictions, provisions for repayment or acceleration and all other covenants,
warranties, representations and agreements contained in the Credit Documents
with respect to the Notes shall apply to each Letter of Credit Advance.
Upon the date of the issuance of a Letter of Credit, the Issuer shall be
deemed, without further action by any party to this Agreement, to have sold to
each Bank, and each Bank shall be deemed, without further action by any party to
this Agreement, to have purchased from the Issuer, a participation, to the
extent of such Bank's Commitment Percentage, in such Letter of Credit and the
related Letter of Credit Liabilities. Any Letter of Credit with an expiry date
after the Termination Date shall be fully Covered or shall be backed by a letter
of credit in Proper Form issued by an issuer acceptable to the Issuer in its
sole discretion.
(b) The following additional provisions shall apply to each Letter of
Credit:
(1) The Company shall give the Agent at least three Business
Days' irrevocable
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prior notice (effective upon receipt) specifying the date such Letter of Credit
is to be issued, describing the proposed terms of such Letter of Credit and the
nature of thetransaction proposed to be supported thereby, and shall furnish
such additional information regarding such transaction as the Agent may request.
Upon receipt of such notice the Agent shall promptly notify each Bank of the
contents thereof and of such Bank's Commitment Percentage of the amount of such
proposed Letter of Credit.
(2) On each day during the period commencing with the issuance of
any Letter of Credit and until such Letter of Credit shall have expired or been
terminated, the Commitment of each Bank shall be deemed to be utilized for all
purposes of this Agreement in an amount equal to such Bank's Commitment
Percentage of the sum of (i) the undrawn amount of such Letter of Credit PLUS
(ii) the unpaid amount of all Letter of Credit Advances with respect to such
Letter of Credit.
(3) Upon receipt from the beneficiary of any Letter of Credit of
any demand for payment thereunder, the Issuer shall promptly notify the Company
and each Bank as to the amount to be paid as a result of such demand and the
payment date. If at any time the Issuer shall have made a payment to a
beneficiary of a Letter of Credit in respect of a drawing or in respect of an
acceptance created in connection with a drawing under such Letter of Credit,
each Bank will pay to the Agent immediately upon demand by the Agent at any time
during the period commencing after such payment until reimbursement thereof in
full by the Company, an amount equal to such Bank's Commitment Percentage of
such payment, together with interest on such amount for each day from the date
of demand for such payment (or, if such demand is made after 12:00 noon on such
date, from the next succeeding Business Day) to the date of payment by such Bank
of such amount at a rate of interest per annum equal to the Fed Funds Rate for
such day.
(4) The Company shall be irrevocably and unconditionally
obligated forthwith to reimburse the Issuer for the account of each Bank for any
amount paid by it upon any drawing under any Letter of Credit, without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly WAIVED by the Company to the extent not prohibited by law. Such
reimbursement may, subject to satisfaction of the conditions in SECTION 7 and to
the existence of sufficient Available Borrowing Base (after adjustment in the
same to reflect the elimination of the corresponding Letter of Credit Liability)
be made by borrowing of Loans. The Issuer will pay to each Bank such Bank's
Commitment Percentage of all amounts received from the Company for application
in payment, in whole or in part, of the Reimbursement Obligation in respect of
any Letter of Credit, but only to the extent such Bank has made payment to the
Issuer in respect of such Letter of Credit pursuant to CLAUSE (3) above.
(5) The Company will pay to the Agent at the Principal Office for
the account of each Bank the Letter of Credit Fee on such Bank's Commitment
Percentage of the amount available for drawings under each Letter of Credit, in
each case for the period from and including the date of issuance of each such
Letter of Credit to and including the date of expiration or
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termination thereof, such Letter of Credit Fees to be paid in arrears on the
Quarterly Dates and on the Termination Date. The Agent will pay to each Bank,
promptly after receiving any payment in respect of Letter of Credit Fees
referred to in this CLAUSE (5), anamount equal to such Bank's Commitment
Percentage of such Letter of Credit Fee. The aggregate Letter of Credit Fee for
any Letter of Credit is subject to a minimum of $600 per annum.
(6) The Company shall pay to the Agent for the account of the
Issuer, in arrears on each Quarterly Date and on the Termination Date, a
fronting fee for each Letter of Credit equal to 1/8 of 1% per annum times the
face amount of such Letter of Credit, in each case for the period from and
including the date of issuance of such Letter of Credit to and including the
date of expiration or termination thereof.
(c) Each Letter of Credit shall be subject to the Uniform Customs and
Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500 (and any subsequent revision thereof approved by a
Congress of the International Chamber of Commerce) and, to the extent not
inconsistent therewith, the laws of the State of New York.
(d) To the extent that any provision of any Application is contrary to
or inconsistent with the provisions of this Agreement, the provisions of this
Agreement shall control.
2.3 BORROWING BASE AND AVAILABLE BORROWING BASE.
(a) The initial Borrowing Base shall be $225,000,000. Within 30 days
after receipt of each Independent Engineering Report, the Agent shall, subject
to the approval of the Required Banks, determine the Borrowing Base and shall
notify the Company in writing of the amount of the Borrowing Base. Such
Borrowing Base shall be the Borrowing Base from the date of such notification
until the date of the next determination of the Borrowing Base in accordance
with this Agreement. Each determination of the Borrowing Base shall be made by
the Agent (subject to the approval of the Required Banks) in its sole discretion
using its normal and customary oil and gas lending practices, based on the Most
Recent Engineering Report furnished by the Company.
(b) Upon any Asset Sale of Petroleum Properties which causes the
aggregate net proceeds from the sale of all Petroleum Properties subject to
Asset Sales of Petroleum Properties since the effective date of the Most Recent
Engineering Report to exceed $20,000,000, the Agent may, and shall at the
request of the Required Banks, redetermine the Borrowing Base in accordance with
the procedures described in this Agreement on the basis of the information with
respect to the remaining Petroleum Properties set forth in the Most Recent
Engineering Report. The Company shall provide the Agent with all such
information as the Agent may reasonably request and shall otherwise cooperate in
good faith with and assist the Agent and the Required Banks in any such
determination.
(c) The initial Available Borrowing Base shall be $150,000,000. Upon
each receipt by the Agent of an Other Liabilities Report, and upon each
determination of the Borrowing Base,
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the Agent shall redetermine the Available Borrowing Base.
(d) In addition to the determinations of the Borrowing Base provided for
elsewhere in this SECTION 2.3, each of the Company or the Required Banks may, in
their sole discretion, require the Agent to determine the Borrowing Base one
additional time in each 12-month period. Such additional determination shall be
in accordance with the procedures described in this Agreement on the basis of
the information with respect to the Petroleum Properties at the time of such
determination set forth in (at the option of the Person requiring the
determination) a new Independent Engineering Report or the Most Recent
Engineering Report. The Company shall provide the Agent with all such
information as the Agent may reasonably request and shall otherwise cooperate in
good faith with and assist the Agent and the Required Banks in any such
redetermination.
2.4 BORROWING BASE DEFICIENCIES. Should there exist at any time a
Borrowing Base Deficiency (other than a Borrowing Base Deficiency resulting in
whole or in part from an Asset Sale of Petroleum Properties, the effects of
which are addressed in SECTION 3.2(B)(2), the Agent may, but shall not be
obligated to (unless requested to do so by the Required Banks), notify the
Company in writing of such deficiency. Within 90 days after the giving of such
notice, the Company shall make a prepayment on the Loans or take such other
steps as may be approved by the Agent, or a combination thereof, so that the
Available Borrowing Base is increased by an amount equal to at least 50% of such
Borrowing Base Deficiency. Within 180 days after the giving of such notice, the
Company shall make a prepayment on the Loans or take such other steps as may be
approved by the Agent, or a combination thereof, so that the Borrowing Base
Deficiency is eliminated.
2.5. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS.
(a) On the Termination Date, all Commitments shall be terminated in
their entirety.
(b) The Company shall have the right to terminate or reduce the unused
portion of the Aggregate Commitment at any time or from time to time; PROVIDED
that (i) the Company shall give notice of each such termination or reduction to
the Agent as provided in SECTION 5.5; (ii) each such partial reduction shall be
in an integral multiple of $5,000,000, and (iii) the Company may not cause the
Aggregate Commitment to be less than the aggregate principal amount of the Loans
(including SFER MRI Loans, if any) and Letter of Credit Liabilities then
outstanding (after giving effect to any concurrent repayment of the Loans and
reduction of Letter of Credit Liabilities).
(c) No reduction in or termination of the Aggregate Commitment pursuant
to this SECTION 2.3 may be reinstated without the written approval of the Agent
and all Banks.
2.6. FEES. In consideration of the Commitments, the Company shall pay to
the Agent for the account of each Bank in accordance with its Commitment
Percentage commitment fees (the "COMMITMENT FEES") (a) for each Margin Period
from the date of this Agreement to and including
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the date such Bank's Commitment is terminated at a rate per annum for such
Margin Period determined in accordance with the Pricing Schedule and (b) if no
Margin Period is in effect, the rate set forth for commitment fees in Level IV
of the Pricing Schedule. The Commitment Fees shall be computed for each day and
shall be based on such Bank's Commitment Percentage of the Unused Commitment for
such day. Accrued Commitment Fees shall be due in arrears on the date of the
initial Loans, within three days after demand therefor on or about the Quarterly
Dates, and within three days after demand therefor on or about the Termination
Date. Upon receipt, the Agent shall disburse such fees to the Banks in
accordance with their respective Commitment Percentages. All past due Commitment
Fees shall bear interest at the Post-Default Rate.
2.7. AFFILIATES; LENDING OFFICES.
(a) Any Bank may, if it so elects, fulfill its Commitment as to any
Eurodollar Loan by causing a branch, foreign or otherwise, or Affiliate of such
Bank to make such Loan and may transfer and carry such Loan at, to or for the
account of any branch office or Affiliate of such Bank; PROVIDED that in such
event, for the purposes of this Agreement, such Loan shall be deemed to have
been made by such Bank and the obligation of the Company to repay such Loan
shall nevertheless be to such Bank and shall be deemed to be held by such Bank,
to the extent of such Loan, for the account of such branch or Affiliate.
(b) Notwithstanding any provision of this Agreement to the contrary,
each Bank shall be entitled to fund and maintain its funding of all or any part
of its Loans in any manner it sees fit, it being understood, however, that for
the purposes of this Agreement all determinations shall be made as if such Bank
had actually funded and maintained each Eurodollar Loan during each Interest
Period through the purchase of deposits having a maturity corresponding to such
Interest Period and bearing an interest rate equal to the applicable Eurodollar
Rate for such Interest Period.
2.8. SEVERAL OBLIGATIONS. The failure of any Bank to make any Loan to be
made by it on the date specified therefor shall not relieve any other Bank of
its obligation to make its Loan on such date, but neither the Agent nor any Bank
shall be responsible for the failure of any other Bank to make a Loan to be made
by such other Bank.
2.9. NOTES. The Loans made by each Bank shall be evidenced by a single
Note of the Company in substantially the form of EXHIBIT A (each, together with
all renewals, extensions, modifications and replacements thereof and
substitutions therefor, a "NOTE") payable to the order of such Bank in a
principal amount equal to the Commitment of such Bank as originally in effect
and otherwise duly completed. Each Bank is hereby authorized by the Company to
endorse on the schedule (or a continuation thereof) attached to the Note of such
Bank, to the extent applicable, the date, amount and Type of each Loan made by
such Bank to the Company hereunder, and each Continuation thereof, each
Conversion of all or a portion thereof to another Type, the date and amount of
each payment or prepayment of principal thereof received by such Bank and, in
the case of Eurodollar Loans, the length of each Interest Period; PROVIDED that
any
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failure by such Bank to make any such endorsement shall not affect the
obligations of the Company under such Note or this Agreement in respect of such
Loan.
2.10. USE OF PROCEEDS. The proceeds of the Loans shall be used and the
Letters of Credit shall be issued for working capital and for general corporate
purposes of the Company and may not be utilized (a) to pay dividends other than
usual dividends in the ordinary course of business or (b) for the buyout or
acquisition of any Person unless the board of directors of such Person has first
approved such buyout or acquisition.
Section 3. BORROWINGS AND PREPAYMENTS.
3.1. BORROWINGS. The Company shall give the Agent notice of each
borrowing to be made under this Agreement as provided in SECTION 5.5. Each
borrowing shall be in an amount of $1,000,000 or any integral multiple thereof.
Not later than 2:00 p.m. on the date specified for each such borrowing, each
Bank shall make available the amount of the Loan, if any, to be made by it on
such date to the Agent, at its Principal Office, in immediately available funds,
for the account of the Company. The amounts so received by the Agent shall,
subject to the terms and conditions of this Agreement, be made available to the
Company by depositing the same, in immediately available funds, in an account
designated by the Company and maintained with the Agent at its Principal Office.
3.2. PREPAYMENTS.
(a) OPTIONAL PREPAYMENTS. Except as provided in this SECTION 3.2 or in
SECTION 5 or 6, the Company shall have the right to prepay, on any Business Day,
in whole or in part, without the payment of any penalty or fee, Loans at any
time or from time to time; PROVIDED that the Company shall give the Agent notice
of each such prepayment as provided in SECTION 5.5. Eurodollar Loans may be
prepaid on the last day of an Interest Period applicable thereto and may not be
otherwise prepaid unless prepayment is accompanied by payment of all
compensation required by SECTION 6.5.
(b) MANDATORY PREPAYMENTS.
(1) The Company shall from time to time on demand by the Agent
prepay the Loans (or SFER MRI Loans, if any) or reduce Letter of Credit
Liabilities in such amounts as shall be necessary so that at all times the
aggregate outstanding principal amount of the Loans (and SFER Loans, if any) and
the aggregate Letter of Credit Liabilities shall not exceed the Available
Borrowing Base. Any such payment shall be allocated between Loans and Letter of
Credit Liabilities and, if to Letter of Credit Liabilities, first to
Reimbursement Obligations and then to other obligations as the Company may
elect.
(2) Concurrently with any Asset Sale of Petroleum Properties
which would cause the aggregate amount of such Asset Sales of Petroleum
Properties since the effective date
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of the last calculation of the Borrowing Base to exceed $20,000,000, the Agent
may, and shall at the request of the Required Banks, redetermine the Borrowing
Base and the Available Borrowing Base in each case to the effective date of such
Asset Sale of Petroleum Properties on the basis of the Most Recent Engineering
Report and the Most Recent Other Liabilities Report. If a Borrowing Base
Deficiency exists as a result of any such redetermination, the Company shall
prepay on the Business Day following the date of such Asset Sale of Petroleum
Properties an amount equal to the lesser of (x) the net proceeds of all such
Asset Sales of Petroleum Properties not previously prepaid and (y) the amount of
the Borrowing Base Deficiency, for application to the unpaid principal balance
of the Notes. Should the payment of the net proceeds of all such Asset Sales of
Petroleum Properties not previously prepaid not eliminate the Borrowing Base
Deficiency, SECTION 2.4 shall apply.
(3) The Company shall maintain records of all Asset Sales of
Petroleum Properties and shall otherwise maintain books and records which enable
it to comply, and to demonstrate to the Agent on request compliance, with the
obligations of the Company in this SECTION 3.2(B).
Section 4. PAYMENTS OF PRINCIPAL AND INTEREST.
4.1. REPAYMENT OF LOANS AND REIMBURSEMENT OBLIGATIONS. The Company will
pay to the Agent for the account of each Bank the principal of each Loan made by
such Bank on the Maturity Date and the amount of each Reimbursement Obligation
forthwith upon its incurrence. The amount of any Reimbursement Obligation may,
if the applicable conditions precedent specified in SECTION 7 (other than any
Default resulting solely from the nonpayment of such Reimbursement Obligation)
have been satisfied, be paid with the proceeds of Loans.
4.2. INTEREST. Subject to SECTIONS 12.8 AND 4.3(B), the Company will pay
to the Agent for the account of each Bank interest on the unpaid principal
amount of each Loan made by such Bank for the period commencing on the date of
such Loan to but excluding the date such Loan shall be paid in full, at the
lesser of (1) the following rates per annum:
(A) if such Loan is an Alternate Base Rate Loan, the Alternate Base
Rate; or
(B) if such Loan is a Eurodollar Loan, the applicable Eurodollar
Rate PLUS the Applicable Margin for Eurodollar Loans;
or (2) the Highest Lawful Rate.
4.3. SELECTION OF INTEREST RATES.
(a) Subject to SECTION 6 and SECTION 12.8, the Company shall have the
right, by giving a Rate Designation Notice to the Agent as provided in SECTION
5.5, to designate any Loan as a Loan of a particular Type, to convert (a
"CONVERSION") any Loan (in whole or in part) into a Loan
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of another Type or to continue (a "CONTINUATION") any Loan (in whole or in part)
as a Loan of the same Type. The records of the Agent with respect to interest
rate designations, Interest Periods and the amount of Loans to which they are
applicable shall be binding and conclusive, absent manifest error. Loans shall
be Alternate Base Rate Loans except where the Company has complied with all
requirements of this Agreement for the designation, Conversion or Continuation
of such Loan as a Eurodollar Loan. Interest on the amount of each Loan shall
accrue on the amount of that Loan and from the date it is made. Any such notice
of designation, Conversion or Continuation shall specify the new Interest
Period. In the event the Company fails to so give such notice prior to the end
of any Interest Period for any Eurodollar Loan, such Loan shall become an
Alternate Base Rate Loan on the last day of such Interest Period. No more than
10 Eurodollar Interest Periods shall be in effect at any time. Except as
otherwise provided in this Agreement, each such designation, Conversion or
Continuation shall apply to all Notes ratably in accordance with their
respective principal balances. If any Bank assigns an interest in its Note when
any Eurodollar Loan is outstanding with respect thereto, the assignee shall have
its ratable interest in such Eurodollar Loan.
(b) Notwithstanding the foregoing but subject to SECTION 12.8, the
Company will pay to the Agent for the account of each Bank interest (i) except
as otherwise provided in CLAUSE (II) or CLAUSE (III) of this SECTION 4.3(B), at
a rate per annum 2% above the otherwise applicable rate on any principal of any
Loan made by such Bank, for the period commencing on the first day on which any
Event of Default exists and continuing through and including the date no Event
of Default exists and is continuing; (ii) at the rate provided in SECTION 2.2
for unpaid Letter of Credit Advances, and (iii) at the Post-Default Rate for any
other amount due under the Credit Documents which is not paid in full when due
(whether at stated maturity, by acceleration, or otherwise) (but, if such amount
is interest, only to the extent legally enforceable).
(c) Accrued interest shall be due and payable on the applicable Interest
Payment Dates, except that (1) accrued interest pursuant to SECTION 4.3(B) shall
be due and payable from time to time on demand of the Agent or the Required
Banks (through the Agent), (2) accrued interest on any amount converted from one
Type of Loan to another Type of Loan shall be paid on the amount so converted at
the time of such Conversion, and (3) accrued interest on any Eurodollar Loan
paid or prepaid shall be due at the time of such payment or prepayment.
Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC.
5.1. PAYMENTS.
(a) Except to the extent otherwise provided in this Agreement, all
payments of principal of or interest on the Loans, of Reimbursement Obligations
and of other amounts to be made by the Company under the Credit Documents shall
be made in dollars, in immediately available funds, to the Agent at its
Principal Office (or in the case of a successor Agent, at the principal office
of such successor Agent in the United States), not later than 12:00 noon on the
date on which such payment shall become due, and each such payment made after
such time on
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such due date shall be deemed to have been made on the next succeeding Business
Day. The Agent or any Bank for whose account any such payment is made may (but
shall not be obligated to) debit the amount of any such payment which is not
made by such time to any ordinary deposit account of the Company with the Agent
or such Bank, as the case may be.
(b) The Company shall, at the time it makes each payment under this
Agreement or any other Credit Document, specify to the Agent the Loans or other
amounts payable by the Company to which such payment is to be applied (and in
the event that it fails so to specify, such payment shall be applied as the
Agent may designate to the Loans or other amounts then due and payable);
PROVIDED that if no Loans or other amounts are then due and payable or an Event
of Default has occurred and is continuing, the Agent may apply any payment to
the Obligations in such order as it may elect in its sole discretion, but
subject to the other terms and conditions of this Agreement, including SECTION
5.2. Each payment received by the Agent under this Agreement or any other Credit
Document for the account of a Bank shall be paid promptly to such Bank in
immediately available funds for the account of such Bank's Applicable Lending
Office.
(c) If the due date of any payment under this Agreement or any other
Credit Document falls on a day which is not a Business Day, the due date for
such payment (except as otherwise provided in the definition of "Interest
Period") shall be extended to the next succeeding Business Day and interest
shall be payable for any principal so extended for the period of such extension
at the rate in effect on such due date.
5.2. PRO RATA TREATMENT. Except to the extent otherwise provided herein,
(a) each borrowing from the Banks hereunder, each payment of Commitment Fees and
other fees and each termination or reduction of the Aggregate Commitment under
SECTION 2.3 shall be made PRO RATA according to the Banks' respective Commitment
Percentages; (b) except as otherwise provided in this Agreement, each payment by
the Company of principal of or interest on Loans of a particular Type shall be
made to the Agent for the account of the Banks PRO RATA according to the Banks'
respective Commitment Percentages; and (c) the Banks (other than the Issuer)
shall purchase from the Issuer participations in each Letter of Credit and its
related Letter of Credit Liabilities PRO RATA according to the Banks' respective
Commitment Percentages.
5.3. COMPUTATIONS. Interest based on the Alternate Base Rate (to the
extent determined by reference to the Prime Rate), and fees hereunder, will be
computed on the basis of 365 (or 366) days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which
payable. All other interest and fees shall be computed on the basis of a year of
360 days and actual days elapsed (including the first day but excluding the last
day) occurring in the period for which payable, unless the effect of so
computing shall be to cause the rate of interest to exceed the Highest Lawful
Rate (in which event interest and fees shall be calculated on the basis of the
actual number of days elapsed in a year composed of 365 or 366 days, as the case
may be).
5.4. MINIMUM AND MAXIMUM AMOUNTS. Except for prepayments made pursuant
to
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SECTION 3.2(B), each borrowing and repayment of principal of Loans, each
optional partial prepayment and each designation, Continuation or Conversion of
Type shall be in an aggregate principal amount equal to $1,000,000 or an
integral multiple thereof (borrowings or prepayments of Loans of different Types
or, in the case of Eurodollar Loans, having different Interest Periods at the
same time hereunder, to be deemed separate borrowings and prepayments for
purposes of the foregoing, one for each Type or Interest Period), and each
termination or reduction of the Aggregate Commitment shall be in an aggregate
principal amount equal to $5,000,000 or an integral multiple thereof. Upon any
mandatory prepayment that would reduce Eurodollar Loans having the same Interest
Period to less than $1,000,000, such Eurodollar Loans shall automati cally be
converted into Alternate Base Rate Loans. Each issuance of a Letter of Credit
shall be in a face amount of at least $25,000.
5.5. CERTAIN ACTIONS, NOTICES, ETC. Notices to the Agent of any
termination or reduction of the Aggregate Commitment, of prepayments of Loans
and of the duration of Interest Periods, each Request for Extension of Credit
and each Rate Designation Notice shall be irrevocable and shall be effective
only if received by the Agent not later than 12:00 noon (1:00 p.m. in the case
of a Request for Extension of Credit or Rate Designation Notice related to a
Eurodollar Loan) on the day that is the applicable number of Business Days prior
to the date of the relevant termination, reduction, issuance, borrowing and/or
prepayment specified below:
NUMBER OF BUSINESS
DAYS PRIOR
NOTICE
------------------
Termination or reduction
of Aggregate Commitment ........................... 5
Borrowing or prepayment
of or Conversion into
Alternate Base Rate Loans ......................... same day
Borrowing or prepayment
of or Conversion into or
Continuation of Eurodollar ........................
Loans 3
Issuance of Letter of Credit ...................... 3
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Prepayments required
pursuant to SECTION 3.2(b) ........................ 1
Each such notice of reduction shall specify the amount to which the Aggregate
Commitment is to be reduced. Each such notice of prepayment or Request for
Extension of Credit shall specify the amount and Type of such Loans to be
borrowed or prepaid (subject to SECTIONS 3.2 and 5.4), the date of borrowing or
prepayment (which shall be a Business Day) and, in the case of Eurodollar Loans,
the duration of the Interest Period therefor (subject to the definition of
"Interest Period"). Each Rate Designation Notice with respect to a Conversion of
a Loan (or portion thereof) shall specify the amount and Type of the Loan (or
portion thereof) being converted, the amount and Type of Loan into which such
Loan is being converted (subject to SECTION 5.4), the date for Conversion (which
shall be a Business Day) and, unless such Loan is being converted into an
Alternate Base Rate Loan, the duration (subject to the definition of "Interest
Period") of the Interest Period therefor which is to commence as of the last day
of the then current Interest Period therefor (or the date of Conversion, if such
Loan is being converted from an Alternate Base Rate Loan). Each Rate Designation
Notice with respect to a Continuation of a Loan (or portion thereof) as the same
Type of Loan shall specify the amount and Type of such Loan (or portion thereof)
being continued (subject to SECTION 5.4) and the duration (subject to the
definition of "Interest Period") of the Interest Period therefor which is to
commence as of the last day of the then current Interest Period therefor. The
Agent shall promptly notify the Banks of the contents of each such notice,
Request for Extension of Credit, or Rate Designation Notice. Notice of any
prepayment having been given, the principal amount specified in such notice,
together with interest thereon to the date of prepayment, shall be due and
payable on such prepayment date.
5.6. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been
notified by a Bank prior to 2 p.m. on the date on which such Bank is to make
payment to the Agent of the proceeds of a Loan (or the payment of any amount by
such Bank to reimburse the Issuer for a drawing under any Letter of Credit) to
be made by it hereunder or by the Company prior to the date on which the Company
is to make a payment to the Agent for the account of the Agent, the Issuer or
one or more of the Banks, as the case may be (such Bank or the Company being
herein called the "PAYOR" and such payment being herein called the "REQUIRED
PAYMENT"), which notice shall be effective upon receipt, that the Payor does not
intend to make the Required Payment to the Agent, the Agent may assume that the
Required Payment has been made and may, in reliance upon such assumption (but
shall not be required to), make the amount thereof available to the intended
recipient on the date that such Required Payment is to be made. If the Payor is
the Company and the Company has not in fact made the Required Payment to the
Agent on or before such date, the Banks, ratably in proportion to their
respective Commitment Percentages, shall, on demand, repay to the Agent the
amount made available by the Agent, together with interest thereon from the date
such amount was so made available by the Agent until the date the Agent recovers
such amount at a rate per annum equal to the Fed Funds Rate for the first three
days after demand and thereafter at the Fed Funds Rate plus 2%. (If the Payor is
the Company, the provisions of SECTION 2.2(A) AND SECTION 4.3(B) shall also
apply.) If the Payor is a Bank and such Bank has not in fact made the Required
Payment to the Agent on or before such date, such Bank
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shall, on demand, pay to the Agent the amount made available by the Agent on
behalf of such Bank, together with interest thereon from the date such amount
was so made available by the Agent until the date the Agent recovers such amount
at a rate per annum equal to the Fed Funds Rate for each of the first three days
after demand and for each day thereafter at the Fed Funds Rate plus 2%.
5.7. SHARING OF PAYMENTS, ETC. If a Bank or any participant of a Bank
shall obtain payment of any principal of or interest on any Loan made by it
under this Agreement or of any Reimbursement Obligation or other obligation to
it under this Agreement, through the exercise of any right of set-off, banker's
lien, counterclaim or similar right, or otherwise, such Bank or participant
shall promptly purchase from the other Banks participations in the Loans made or
Reimbursement Obligations or other obligations held by the other Banks in such
amounts, and make such other adjustments from time to time as shall be equitable
to the end that all the Banks and participants shall share the benefit of such
payment (net of any expenses which may be incurred by such Bank or its
participant in obtaining or preserving such benefit) PRO RATA in accordance with
the respective amounts then due to each of them. To such end all the Banks and
their participants shall make appropriate adjustments among themselves (by the
resale of participations sold or otherwise) if such payment is rescinded or must
otherwise be restored. The Company agrees, to the fullest extent it may
effectively do so under applicable law, that any Person so purchasing a
participation in the Obligations may exercise all rights of set-off, bankers'
lien, counterclaim or similar rights with respect to such participation as fully
as if such Bank were a direct holder of Loans, Reimbursement Obligations or
other obligations in the amount of such participation. Nothing in this Agreement
shall require any Bank to exercise any such right or shall affect the right of
any Bank to exercise, and retain the benefits of exercising, any such right with
respect to any other indebtedness or obligation of the Company.
Section 6. YIELD PROTECTION AND ILLEGALITY.
6.1. ADDITIONAL COSTS.
(a) Subject to SECTION 12.8, the Company shall pay to the Agent, on
demand, for the account of such Bank, from time to time such amounts as any Bank
may reasonably determine to be necessary to compensate it for any costs incurred
by such Bank which such Bank reasonably determines are attributable to its
making or maintaining any Eurodollar Loan hereunder or its obligation to make or
maintain any such Loan hereunder, or any reduction in any amount receivable by
such Bank hereunder in respect of any of such Loans or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"ADDITIONAL COSTS"), in each case resulting from any Regulatory Change which:
(1) subjects such Bank (or makes it apparent that such Bank is
subject) to any tax (including any United States interest equalization tax),
levy, impost, duty, charge or fee (collectively, "TAXES"), or any deduction or
withholding for any Taxes on or from the payment due under any Eurodollar Loan
or other amounts due hereunder, other than income and franchise
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taxes of the jurisdiction (or any subdivision thereof) in which such Bank has an
office or its Applicable Lending Office; or
(2) changes the basis of taxation of any amounts payable to such
Bank under this Agreement or its Note in respect of any of such Loans, other
than changes which affect taxes measured by or imposed on the overall net income
or franchise taxes of such Bank or of its Applicable Lending Office for any of
such Loans by the jurisdiction (or any subdivision thereof) in which such Bank
has an office or such Applicable Lending Office; or
(3) imposes or modifies or increases or deems applicable any
Statutory Reserves or any other reserve, special deposit or similar requirement
(including any such requirement imposed by the Board) relating to any extensions
of credit or other assets of, or any deposits with or other liabilities of, such
Bank or loans made by such Bank, or against any other funds, obligations or
other property owned or held by such Bank; or
(4) imposes any other condition affecting this Agreement (or any
of such extensions of credit or liabilities).
Each Bank will notify the Company through the Agent of any event occurring after
the date of this Agreement which will entitle such Bank to compensation pursuant
to this SECTION 6.1 as promptly as practicable after it obtains knowledge
thereof and determines to request such compensation, and (if so requested by the
Company through the Agent) will designate a different available Applicable
Lending Office for the Eurodollar Loans of such Bank or take such other action
as the Company may reasonably request if such designation or action is
consistent with the internal policy of such Bank and legal and regulatory
restrictions, can be undertaken at no additional cost, will avoid the need for,
or reduce the amount of, such compensation and will not, in the sole opinion of
such Bank, be disadvantageous to such Bank (PROVIDED that such Bank shall have
no obligation so to designate an Applicable Lending Office located in the United
States of America). Each Bank will furnish the Company with a statement setting
forth the basis and amount of each request by such Bank for compensation under
this SECTION 6.1, with each such statement to cover amounts accruing under this
SECTION 6.1 with respect to a period beginning not earlier than 120 days from
the date thereof and using any reasonable averaging and attribution methods.
(b) Without limiting the effect of the foregoing provisions of this
SECTION 6.1, in the event that, by reason of any Regulatory Change, any Bank
either (1) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
such Bank which includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Bank which includes Eurodollar
Loans or (2) becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if such Bank so elects by notice
to the Company (with a copy to the Agent), the obligation of such Bank to make
Eurodollar Loans hereunder shall be suspended until the date such Regulatory
Change ceases to be in effect (in which case the provisions of SECTION 6.4 shall
be applicable).
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(c) Determinations and allocations by any Bank for purposes of this
SECTION 6.1 of the effect of any Regulatory Change on its costs of maintaining
its obligations to make Loans or of making or maintaining Eurodollar Loans or on
amounts receivable by it in respect of Eurodollar Loans, and of the additional
amounts required to compensate such Bank in respect of any Additional Costs,
shall be conclusive, absent manifest error, and may be made using any reasonable
averaging and attribution methods.
(d) In the event any Bank shall seek compensation pursuant to this
SECTION 6.1, the Company may give notice to such Bank (with copies to the Agent)
that it wishes to seek one or more Eligible Assignees (which may be one or more
of the Banks) to purchase and assume the Commitment, Loans, Note, Letter of
Credit Liabilities and interests in this Agreement of such Bank. Each Bank
requesting compensation pursuant to this SECTION 6.1 agrees to sell its
Commitment, Loans, Note, Letter of Credit Liabilities and interests in this
Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty
except as provided in SECTION 12.6) to any such Eligible Assignee for an amount
equal to (x) the sum of the outstanding unpaid principal of and accrued interest
on such Loans, Note and Letter of Credit Advances, plus (y) in the case of the
Issuer, Cover for the face amount of all undrawn Letter of Credit Liabilities
plus (z) all other fees and amounts (including any compensation claimed by such
Bank under this SECTION 6.1) owing to such Bank under the Credit Documents,
calculated, in each case, to the date on which such Commitment, Loans, Note,
Letter of Credit Liabilities and interests are purchased, whereupon such Bank
shall have no further Commitment or other obligation to the Company under this
Agreement or any other Credit Document in respect of matters arising after the
consummation of such purchase, but shall continue to be entitled to the benefit
of, and subject to any obligations incurred by it under, this Agreement and the
other Credit Documents in respect of matters occurring during the time it was a
Bank under this Agreement.
6.2. LIMITATION ON TYPES OF LOANS. Anything in this Agreement to the
contrary notwithstanding, if, with respect to any Eurodollar Loans:
(a) the Agent determines (which determination shall be conclusive absent
manifest error) that quotations of interest rates for the relevant deposits
referred to in the definition of "Eurodollar Rate" in SECTION 1.1 are not being
provided in the relevant amounts or for the relevant maturities for purposes of
determining the rate of interest for such Loans for Interest Periods therefor as
provided in this Agreement; or
(b) the Required Banks determine (which determination shall be
conclusive absent manifest error) and notify the Agent that the relevant rates
of interest referred to in the definition of "Eurodollar Rate" in SECTION 1.1
upon the basis of which the rates of interest for such Loans are to be
determined do not accurately reflect the cost to such Banks of making or
maintaining such Loans for any proposed Interest Periods therefor; or
(c) the Agent determines (which determination shall be conclusive absent
manifest error) that by reason of circumstances affecting the Eurodollar
interbank market generally,
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deposits in dollars in the relevant Eurodollar interbank market are not being
offered for the applicable Interest Period and in an amount equal to the amount
of the Eurodollar Loan requested by the Company;
the Agent shall promptly notify the Company and each Bank thereof, and, so long
as such condition remains in effect, the Banks shall be under no obligation to
make Eurodollar Loans (but shall maintain until the end of the Interest Period
then in effect the Eurodollar Loans then outstanding).
6.3. ILLEGALITY. Notwithstanding any other provision of this Agreement
to the contrary, if by reason of (x) the adoption or effectiveness of any
applicable Legal Requirement, or any change in any applicable Legal Requirement
or in the interpretation or administration thereof by any Governmental
Authority, or compliance by any Bank with any request or directive (whether or
not having the force of law) of any central bank or other Governmental Authority
or (y) circumstances affecting the relevant Eurodollar interbank market or the
position of a Bank therein, it shall at any time be unlawful or impracticable in
the sole discretion of a Bank for such Bank or its Applicable Lending Office to
(a) honor its obligation to permit the establishment of Eurodollar Loans
hereunder or (b) maintain Eurodollar Loans hereunder, then such Bank through the
Agent shall promptly notify the Company thereof, and the obligation of such Bank
to establish or maintain Eurodollar Loans hereunder shall be suspended until
such time as such Bank may again establish and maintain Eurodollar Loans, in
which case the provisions of SECTION 6.4 shall be applicable. Before giving such
notice pursuant to this SECTION 6.3, such Bank will designate a different
available Applicable Lending Office for the Eurodollar Loans of such Bank or
take such other action as the Company may reasonably request if such designation
or action is consistent with the internal policy of such Bank and legal and
regulatory restrictions, can be undertaken at no additional cost, will avoid the
need to suspend such Bank's obligation to make Eurodollar Loans hereunder and
will not, in the sole opinion of such Bank, be disadvantageous to such Bank
(PROVIDED that such Bank shall have no obligation so to designate an Applicable
Lending Office located in the United States of America).
In the event any Bank shall seek to invoke the benefits of this SECTION
6.3, the Company may give notice to such Bank (with copies to the Agent) that it
wishes to seek one or more Eligible Assignees (which may be one or more of the
Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit
Liabilities and interests in this Agreement of such Bank. Each Bank requesting
to invoke the benefits of this SECTION 6.3 agrees to sell its Commitment, Loans,
Note, Letter of Credit Liabilities and interests in this Agreement pursuant to
SECTION 12.6 (without recourse, representation or warranty except as provided in
SECTION 12.6) to any such Eligible Assignee for an amount equal to (x) the sum
of the outstanding unpaid principal of and accrued interest on such Loans, Note
and Letter of Credit Advances, plus (y) in the case of the Issuer, Cover for the
face amount of all undrawn Letter of Credit Liabilities, plus (z) all other fees
and amounts owing to such Bank under the Credit Documents, calculated, in each
case, to the date on which such Commitment, Loans, Note, Letter of Credit
Liabilities and interests are purchased, whereupon such Bank shall have no
further Commitment or other
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obligation to the Company hereunder or any other Credit Document in respect of
matters arising after the consummation of the purchase, but shall continue to be
entitled to the benefit of, and subject to any obligation incurred by it under,
this Agreement and the other Credit Documents in respect of matters occurring
during the time it was a Bank under this Agreement.
6.4. SUBSTITUTE ALTERNATE BASE RATE LOANS. If the obligation of any Bank to make
or maintain Eurodollar Loans shall be suspended pursuant to SECTION 6.1, 6.2 or
6.3, all Loans which would otherwise be made by such Bank as Eurodollar Loans
shall be made instead as Alternate Base Rate Loans (and, if an event referred to
in SECTION 6.1(B) or 6.3 has occurred and such Bank so requests by notice to the
Company with a copy to the Agent, each Eurodollar Loan of such Bank then
outstanding shall be automatically converted into an Alternate Base Rate Loan on
the date specified by such Bank in such notice which shall be the last day of
the current Interest Period with respect to such Eurodollar Loan or on such
earlier date as required by law) and, to the extent that such Eurodollar Loans
are so made as (or converted into) Alternate Base Rate Loans, all payments of
principal which would otherwise be applied to such Eurodollar Loans shall be
applied instead to such Alternate Base Rate Loans.
6.5. COMPENSATION. Subject to SECTION 12.8, the Company shall pay to the
Agent for the account of each Bank, within two Business Days after demand
therefor by such Bank through the Agent, such amount or amounts as shall be
sufficient (in the reasonable opinion of such Bank) to compensate it for any
loss, cost or expense incurred by it as a result of:
(a) any payment, prepayment or Conversion of a Eurodollar Loan made by
such Bank on a date other than the last day of an Interest Period for such Loan;
or
(b) any failure by the Company to borrow a Eurodollar Loan to be made by
such Bank on the date for such borrowing specified in the relevant notice of
borrowing under SECTION 5.5 or to convert an Alternate Base Rate Loan into a
Eurodollar Loan on such date after giving notice of such Conversion or to
continue a Eurodollar Loan after giving notice of such Continuation; or
(c) any payment, prepayment or Conversion of a Eurodollar Loan required
by any provision of this Agreement or otherwise made or deemed made on a date
other than the last day of an Interest Period for such Eurodollar Loan; or
(d) any cessation of the Eurodollar Rate to apply to any Loan or any
part thereof;
including, in each case, any actual loss or expense sustained or incurred or to
be sustained or incurred in liquidating or employing deposits acquired to effect
or maintain such Eurodollar Loan or any part thereof. Such compensation shall
include an amount equal to the excess, if any, as reasonably determined by each
Bank, of (1) its cost of obtaining the funds for the Loan being paid, prepaid or
converted or not borrowed, converted or continued (assumed to be the applicable
Eurodollar Rate) for the period from the date of such payment, prepayment or
Conversion or failure to borrow, convert or continue to the last day of the
Interest Period for such Loan (or, in
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the case of a failure to borrow, convert or continue the Interest Period for
such Loan which would have commenced on the date of such failure to borrow,
convert or continue) over (2) the amount of interest (as reasonably determined
by such Bank) that would be realized by such Bank in reemploying the funds so
paid, prepaid or converted or not borrowed, converted or continued for such
period or Interest Period, as the case may be. Each determination of the amount
of such compensation by a Bank shall be conclusive and binding, absent manifest
error, and may be computed using any reasonable averaging and attribution
method.
6.6. ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result of
any Regulatory Change there shall be imposed, modified or deemed applicable any
tax, reserve, special deposit or similar requirement against or with respect to
or measured by reference to Letters of Credit issued or to be issued under this
Agreement or participations in such Letters of Credit, and the result shall be
to increase the cost to the Issuer or any Bank of issuing or maintaining any
Letter of Credit or any participation therein, or reduce any amount receivable
by the Issuer or any Bank in respect of any Letter of Credit or any
participation therein (which increase in cost, or reduction in amount
receivable, shall be the result of such Issuer's or such Bank's reasonable
allocation of the aggregate of such increases or reductions resulting from such
event), such Issuer or such Bank shall notify the Company through the Agent, and
upon demand therefor by such Issuer or such Bank through the Agent, the Company
(subject to SECTION 12.8) shall pay to the Issuer or such Bank, from time to
time as specified by the Issuer or such Bank, such additional amounts as shall
be sufficient to compensate the Issuer or such Bank for such increased costs or
reductions in amount. Before making such demand pursuant to this SECTION 6.6,
the Issuer or such Bank will designate a different available Applicable Lending
Office for the Letter of Credit or participation or take such other action as
the Company may request, if such designation or action will avoid the need for,
or reduce the amount of, such compensation and will not, in the sole opinion of
the Issuer or such Bank, be disadvantageous to the Issuer or such Bank. A
statement as to such increased costs or reductions in amount incurred by the
Issuer or such Bank, submitted by the Issuer or such Bank to the Company, shall
cover amounts accruing under this SECTION 6.6 with respect to a period beginning
not earlier than 120 days from the date thereof, shall be conclusive as to the
amount thereof, absent manifest error, and may be prepared using any reasonable
averaging and attribution method.
In the event any Bank shall seek compensation pursuant to this SECTION
6.6, the Company may give notice to such Bank (with copies to the Agent) that it
wishes to seek one or more Eligible Assignees (which may be one or more of the
Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit
Liabilities and interests in this Agreement of such Bank. Each Bank requesting
compensation pursuant to this SECTION 6.6 each agrees to sell its Commitment,
Loans, Note, Letter of Credit Liabilities and interests in this Agreement
pursuant to SECTION 12.6 (without recourse, representation or warranty except as
provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to
(x) the sum of the outstanding unpaid principal of and accrued interest on such
Loans, Note and Letter of Credit Advances, plus (y) all other fees and amounts
(including any compensation claimed by such Bank under this SECTION 6.6) owing
to such Bank under the Credit Documents, calculated, in each case, to the date
such
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Commitment, Loans, Note, Letter of Credit Liabilities and interests in this
Agreement are purchased, whereupon such Bank shall have no further Commitment or
other obligation to the Company under this Agreement or any other Credit
Document in respect of matters arising after the consummation of such purchase,
but shall continue to be entitled to the benefit of, and subject to any
obligation incurred by it under, this Agreement and the other Credit Documents
in respect of matters occurring during the time it was a Bank under this
Agreement.
In the event any Issuer shall seek compensation pursuant to this SECTION
6.6, the Company may give notice to such Issuer (with copies to the Agent) that
it wishes another of the Banks to become the Issuer for future Letters of Credit
(including any Letters of Credit which the Company may arrange to substitute for
any Letter of Credit issued by the retiring Issuer), whereupon such retiring
Issuer shall have no further obligation to issue Letters of Credit, but shall
continue to be entitled to the benefit of, and subject to any obligation
incurred by it under, this Agreement and the other Credit Documents in respect
of matters occurring and Letters of Credit issued during the time it was the
Issuer under this Agreement. Notwithstanding its retirement, the retiring Issuer
shall continue to be entitled to reimbursement of any and all Letter of Credit
Advances made by it under each Letter of Credit issued by it. All fees and other
amounts (including any compensation claimed by the retiring Issuer under this
SECTION 6.6) owing to the retiring Issuer under the Credit Documents shall be
paid to the retiring Issuer at the time of its retirement as Issuer, and the
retiring Issuer shall continue to be the Issuer for all purposes of this
Agreement with respect to any outstanding Letters of Credit theretofore issued
by it.
6.7. CAPITAL ADEQUACY. If any Bank shall have determined that
(a) the adoption after the date of this Agreement or the effectiveness
after the date of this Agreement (regardless of whether previously announced) of
any applicable Legal Requirement or treaty regarding capital adequacy, or
(b) any change after the date of this Agreement in any existing or
future Legal Requirement or treaty regarding capital adequacy, or
(c) any change after the date of this Agreement in the interpretation or
administration of any existing or future Legal Requirement or treaty regarding
capital adequacy by any Governmental Authority or comparable agency charged with
the interpretation or administration thereof, or
(d) compliance by any Bank (or its Applicable Lending Office) with any
request or directive after the date of this Agreement regarding capital adequacy
(whether or not having the force of law) of any such Governmental Authority or
comparable agency has or would have the effect of reducing the rate of return on
the capital of such Bank (or any holding company of which such Bank is a part)
as a consequence of its obligations under this Agreement and the other Credit
Documents to a level below that which such Bank or holding company could have
achieved but for such adoption, change or compliance by an amount deemed by such
Bank or holding company
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to be material, then, from time to time, on demand by such Bank (with a copy to
the Agent), the Company (subject to SECTION 12.8) shall pay to such Bank such
additional amount or amounts as will compensate such Bank or holding company for
such reduction. The certificate of any Bank setting forth such amount or amounts
as shall be necessary to compensate it and the basis therefor shall cover
amounts accruing under this SECTION 6.7 with respect to a period beginning not
earlier than 120 days from the date thereof and shall be conclusive and binding,
absent manifest error. The Company shall pay the amount shown as due on any such
certificate upon delivery of such certificate. In preparing such certificate, a
Bank may take into consideration such Bank's and such holding company's policies
with respect to capital adequacy, employ such assumptions and allocations of
costs and expenses as it shall in good faith deem reasonable, and use any
reasonable averaging and attribution method.
In the event any Bank shall seek compensation pursuant to this SECTION
6.7, the Company may give notice to such Bank (with copies to the Agent) that it
wishes to seek one or more Eligible Assignees (which may be one or more of the
Banks) to purchase and assume the Commitment, Loans, Note, Letter of Credit
Liabilities and interests in this Agreement of such Bank. Each Bank requesting
compensation pursuant to this SECTION 6.7 agrees to sell its Commitment, Loans,
Note, Letter of Credit Liabilities and interests in this Agreement pursuant to
SECTION 12.6 (without recourse, representation or warranty except as provided in
SECTION 12.6) to any such Eligible Assignee for an amount equal to (x) the sum
of the outstanding unpaid principal of and accrued interest on such Loans, Note
and Letter of Credit Advances, plus (y) in the case of the Issuer, Cover for the
face amount of all undrawn Letter of Credit Liabilities, plus (z) all other fees
and amounts (including any compensation claimed by such Bank under this SECTION
6.7) owing to such Bank under the Credit Documents, calculated, in each case, to
the date on which such Commitment, Loans, Note, Letter of Credit Liabilities and
interests are purchased, whereupon such Bank shall have no further Commitment or
other obligation to the Company under this Agreement or any other Credit
Document in respect of matters arising after the consummation of such purchase,
but shall continue to be entitled to the benefit of, and subject to any
obligation incurred by it under, this Agreement and the other Credit Documents
in respect of matters occurring during the time it was a Bank under this
Agreement.
Section 7. CONDITIONS PRECEDENT.
7.1. INITIAL CONDITIONS PRECEDENT. The obligation of each Bank to make
its initial Loan to the Company pursuant to this Agreement and the obligation of
the Issuer to issue the first Letter of Credit pursuant to this Agreement are
each subject to the following conditions precedent, each of which shall have
been fulfilled or waived in the discretion of the Agent:
(a) CORPORATE ACTION AND STATUS. The Agent shall have received copies of
the Organizational Documents of the Company certified by the Secretary of the
Company, and resolutions of the Board of Directors of the Company, certified by
the Secretary of the Company, for all corporate action taken by the Company
authorizing the execution, delivery and performance of the Credit Documents to
which the Company is a party, together with such certificates as may
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beappropriate to demonstrate the existence, qualification and good standing of
and payment of taxes by each member of the Combined Group in each jurisdiction
in which such qualification is required to make true the representations
contained in SECTION 8.1.
(b) INCUMBENCY. The Company shall have delivered to the Agent a
certificate in respect of the name and signature of each officer who (i) is
authorized to sign on its behalf the applicable Credit Documents to which the
Company is a party and (ii) will, until replaced by another officer or officers
duly authorized for that purpose, act as its representative for the purposes of
signing documents and giving notices and other communications in connection with
this Agreement and the other Credit Documents. The Agent and each Bank may
conclusively rely on such certificates until they receive notice in writing from
the Company to the contrary.
(c) NOTES. The Agent shall have received the appropriate Note of the
Company for each Bank, duly completed and executed.
(d) CREDIT DOCUMENTS. The Company shall have duly executed and delivered
the other Credit Documents to which it is a party, and each such Credit Document
shall be in Proper Form. Each such Credit Document shall be in substantially the
form furnished to the Banks prior to their execution of this Agreement, together
with such changes therein as the Agent may approve in its discretion. The
Company shall have paid to the Agent all fees and expenses in the amounts
previously agreed upon in writing among the Company and the Agent and all
amounts due under SECTION 12.3.
(e) OPINION OF COUNSEL TO THE COMPANY. The Agent shall have received the
opinions of Andrews & Kurth L.L.P. and of David L. Hicks, counsel to the
Company, substantially in the forms of SCHEDULES III and IV, respectively.
(f) COUNTERPARTS. The Agent shall have received counterparts of each of
the Credit Documents duly executed and delivered by or on behalf of each of the
parties thereto (or, in the case of any Bank as to which the Agent shall not
have received such a counterpart, the Agent shall have received evidence
satisfactory to it of the execution and delivery by such Bank of a counterpart
hereof).
(g) CONSENTS. The Agent shall have received evidence satisfactory to it
in its discretion that all consents of each Governmental Authority and of each
other Person, if any, required in connection with the Loans and Letters of
Credit or the execution, delivery and performance of the Credit Documents have
been received and remain in full force and effect.
(h) OTHER DOCUMENTS. The Agent shall have received such other documents
consistent with the terms of this Agreement and relating to the transactions
contemplated hereby as the Agent may reasonably request.
(i) TERMINATION OF EXISTING CREDIT FACILITY. The Agent shall have
received evidence
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satisfactory to it in its discretion that the Company has terminated the
Existing Credit Facility; the Company shall have repaid all borrowings
thereunder, and all commitments thereunder shall have terminated.
(j) SENIOR SUBORDINATED DEBT. The Agent shall have received evidence
satisfactory to it in its discretion that the aggregate principal amount of
Total Debt outstanding pursuant to the Indenture does not exceed $100,000,000.
All provisions and payments required by this SECTION 7.1 are subject to
the provisions of SECTION 12.8.
7.2. ALL LOANS AND LETTERS OF CREDIT. The obligation of each Bank to
make any Loan (including its initial Loan) to be made by it hereunder and the
obligation of the Issuer to issue any Letter of Credit (including the first
Letter of Credit) are each subject to the additional conditions precedent that,
as of the date of such Loan or such issuance, and after giving effect thereto:
(a) for each Loan which is not a Conversion or a Continuation, no
Default shall have occurred and be continuing and no Borrowing Base Deficiency
shall exist;
(b) for each Loan which is not a Conversion or a Continuation, and for
each Letter of Credit, there shall have been no Material Adverse Change since
the date of this Agreement;
(c) for each Loan which is not a Conversion or a Continuation, and for
each Letter of Credit, all representations and warranties made in each Credit
Document shall be true and correct in all material respects on and as of the
date of the making of such Loan or the issuance of such Letter of Credit, with
the same force and effect as if made on and as of such date (except as the same
are expressly stated in the Credit Documents to be made only as of a specific
earlier date, in which case the same shall have been true and correct in all
material respects as of such earlier date);
(d) except for Loans and Letters of Credit made or issued on the date of
this Agreement, the Company shall have delivered to the Agent a Request for
Extension of Credit (and, in the case of a Letter of Credit, a completed
Application) within the time specified in SECTION 5.5; and
(e) the making of such Loan or the issuance of such Letter of Credit
shall not be prohibited by, or subject the Agent or such Bank to any penalty
under, any Legal Requirement applicable to the Agent or such Bank.
The borrowing of the initial Loans and the issuance of the initial
Letter of Credit under this Agreement and each Request for Extension of Credit
in respect of each Loan and each Letter of Credit by the Company hereunder shall
constitute and include a representation and warranty by the Company to the
effect set forth in SUBSECTIONS (A) through (C) (if applicable) of this SECTION
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7.2 (both as of the date of such notice and, unless the Company otherwise
notifies the Agent prior to the date of such borrowing or issuance, as of the
date of such borrowing or issuance). Except in the case of Loans and Letters of
Credit made or issued on the date hereof, such representation and warranty shall
be accompanied by a certificate of the Chief Executive Officer, President, Chief
Financial Officer or Treasurer of the Company setting forth in reasonable detail
the calculations of the Company in making such representation and warranty.
7.3. CONVERSIONS AND CONTINUATIONS OF EURODOLLAR LOANS. The obligation
of each of the Banks to convert any Alternate Base Rate Loan into a Eurodollar
Loan or to continue any Eurodollar Loan for a new Interest Period is subject to
the conditions precedent that on the date of such Conversion or Continuation and
after giving effect thereto (a) no Default shall have occurred and be
continuing, (b) the Company shall have delivered to the Agent a Rate Designation
Notice within the time specified in SECTION 5.5, and (c) such Conversion or
Continuation shall not be prohibited by, or subject such Bank to any penalty
under, any Legal Requirement applicable to such Bank. The acceptance of the
benefits of such Conversion or Continuation shall constitute a representation
and warranty by the Company to each of the Banks to the effect set forth in
CLAUSE (A).
Section 8. REPRESENTATIONS AND WARRANTIES. To induce the Agent and the
Banks to enter into this Agreement and to extend credit under it, the Company
represents and warrants (such representations and warranties to survive any
investigation, the making of the Loans and the issuance of the Letters of
Credit) to the Banks and the Agent as follows:
8.1. CORPORATE EXISTENCE. Each member of the Combined Group (a) is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; (b) has all requisite power and authority, and
has all licenses, permits, authorizations, consents and approvals necessary, to
own its property and carry on its business as now being conducted, and (c) is
qualified to do business, and is in good standing, in all jurisdictions in which
any of the Petroleum Properties which it owns are located or the nature of the
business conducted by it makes such qualification necessary or advisable, unless
the failure to be so qualified or in good standing would not individually or in
the aggregate have a material adverse effect on the business, financial
condition or results of operations of the Combined Group taken as a whole.
8.2. INFORMATION.
(a) The most recent consolidated balance sheet of the Company and its
Subsidiaries and the related consolidated statements of operations, changes in
financial position and cash flows for the period then ended, together with the
respective notes thereto, delivered to each of the Banks in accordance with the
provisions of SECTION 9.1(A) or (B), as the case may be (the latest of such
financial statements and the notes thereto being referred to herein as the "MOST
RECENT FINANCIAL STATEMENTS"), fairly present in all material respects the
consolidated financial position of the Company and its Subsidiaries as of such
date and their consolidated results of operations for the period then ended in
conformity with GAAP.
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(b) Since the date of this Agreement, there has been no Material Adverse
Change.
8.3. LITIGATION; COMPLIANCE. Except as disclosed in writing to the Banks
prior to the date hereof, there are no legal or arbitral proceedings or any
proceedings by or before any Governmental Authority now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or any of
its Subsidiaries which, if adversely determined, would cause a Material Adverse
Change. The Company and its Subsidiaries comply in all material respects with
all applicable material (based on the Company and its Subsidiaries taken as a
whole) Legal Requirements (other than the Applicable Environmental Laws,
representations and warranties regarding which are found in SECTION 8.13).
Neither the Company nor any of its Subsidiaries is in default in any material
respect under, or in violation of, any material (based on the Company and its
Subsidiaries taken as a whole) judgment, order or decree of any Governmental
Authority.
8.4. NO BREACH. None of the execution and delivery of the Credit
Documents, the consummation of the transactions therein contemplated or
compliance with the terms and provisions thereof will conflict with or result in
a breach of, or require any consent that has not been obtained under, the
Organizational Documents of the Company or any of its Subsidiaries or any
material Legal Requirement (including any securities law, rule or regulation)
applicable to the Company or any of its Subsidiaries or (except for the Liens
permitted by this Agreement) result in the creation or imposition of any Lien
upon any of the revenues or property of the Company or any of its Subsidiaries.
Such execution, delivery, consummation and compliance do not and will not
conflict with or result in a breach of any material agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound or to which any of them is subject, or
constitute a default under any such agreement or instrument.
8.5. NECESSARY ACTION. The Company has all necessary power and authority
to execute, deliver and perform its obligations under the Credit Documents and
the documentation relating to the Monterey Transactions and to consummate the
transactions contemplated therein. The execution, delivery and performance of
the Credit Documents by the Company and the consummation by the Company of the
transactions contemplated therein have been duly authorized by all necessary
action on the part of the Company. The Credit Documents have been duly and
validly executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company, enforceable in accordance with their
respective terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws relating to the enforcement of creditors' rights generally
and by general equitable principles.
8.6. APPROVALS. All authorizations, approvals and consents of, and all
filings and registrations with, all Governmental Authorities, the holders of the
Senior Subordinated Notes and each other Person necessary for the execution,
delivery or performance of any Credit Document or the consummation by the
Company of the transactions contemplated therein or for the validity or
enforceability thereof have been obtained and are in full force and effect.
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8.7. REGULATIONS G, T, U AND X. Neither the Company nor any agent acting
on its behalf has taken or will take any action which might cause this
Agreement, the Loans or the Notes to violate Regulations G, T, U or X or any
other regulation of the Board or to violate the Securities Exchange Act of 1934,
as amended, in each case as in effect now or as the same may hereafter be in
effect. No portion of the Loans shall be drawn or used for any purpose which
would cause this Agreement, the Notes or the Loans to be "purpose credit" under
Regulation U of the Board. The parties acknowledge that neither the Agent nor
any Bank is relying upon as collateral any margin stock, whether issued by the
Company, currently owned by the Company or any Restricted Subsidiary or intended
to be acquired by the Company or any Restricted Subsidiary. The Company warrants
and covenants that it shall not take any action that would result, in the
absence of the application of the following sentence, in any credit that may be
(or that may have been) advanced under this Agreement being classified as
purpose credit directly or indirectly secured by margin stock within the meaning
of Regulation U. Notwithstanding any term contained in this Agreement to the
contrary, if any purpose credit extended or deemed to be extended under this
Agreement should nevertheless ever be deemed to be indirectly secured by margin
stock, then, during such time that such condition exists: (i) the Company
(without regard to any restriction contained in the Credit Documents) may sell,
pledge or otherwise dispose of the Excess Portion of margin stock (and the
exercise of such right shall not constitute cause for accelerating the maturity
of the Obligations); and (ii) the Company shall not utilize any of its assets
that are not margin stock to acquire any margin stock directly or indirectly. As
used in this SECTION 8.7: (A) "REGULATION U" means those regulations concerning
credit provided by banks for the purpose of purchasing or carrying margin stock
set forth at Part 211 of Volume 12 of the Code of Federal Regulations, as the
same may be amended from time to time; (B) "INDIRECTLY SECURED" and "PURPOSE
CREDIT" shall have the meanings ascribed to those phrases in Section 221.2 of
Regulation U; (iii) "EXCESS PORTION OF MARGIN STOCK" means that portion of the
margin stock directly or indirectly owned by the Company (and, where the value
of all margin stock so owned by the Company exceeds the Regulation U Limit, the
Company shall promptly identify to the Agent the particular shares from among
them which shall be included in such portion exceeding the Regulation U Limit)
that has a value, when added to the value all other margin stock indirectly
securing the credit extended under this Agreement, that would cause the total
value of the margin stock indirectly securing the credit to exceed the
Regulation U Limit; and (iv) "REGULATION U LIMIT" means that amount equal to
twenty-five (25%) of the value of the Company's properties or assets that are
then subject to any restriction in this Agreement on the disposition thereof or
the creation of Liens thereon.
8.8. ERISA. The Company and each ERISA Affiliate have fulfilled their
contribution obligations under each Plan subject to Title IV of ERISA and have
fulfilled their obligations under the minimum funding standards of ERISA and the
Code with respect to each Plan subject to Title IV of ERISA, and in all other
regards with respect to each Plan are in material compliance with the applicable
provisions of ERISA, the Code, and all other applicable laws, regulations and
rules, to the extent that noncompliance with such provisions would result in a
Material Adverse Change. The Company has no knowledge of any event with respect
to each Plan which could result in a Material Adverse Change.
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8.9. TAXES. Each of the Company and its Subsidiaries has filed all
United States federal income tax returns and all other material tax returns
which are required to be filed by it and has paid all taxes due pursuant to such
returns or pursuant to any assessment received by it, except to the extent the
same may be contested in good faith by appropriate proceedings diligently
conducted for which adequate reserves have been established in accordance with
GAAP. The charges, accruals and reserves on the books of the Company and its
Subsidiaries in respect of taxes and other governmental charges, as made on a
periodic basis, are adequate.
8.10. SUBSIDIARIES. SCHEDULE I as supplemented from time to time by
notice from the Company to the Agent is a complete and correct list of all
Subsidiaries of the Company. All shares or other indicia of equity interest of
the Restricted Subsidiaries directly or indirectly owned by the Company are free
and clear of Liens (except Permitted Encumbrances and Liens permitted by SECTION
9.7(A)(7)), and all such shares are validly issued, fully paid and
non-assessable.
8.11. INVESTMENT COMPANY ACT. No member of the Combined Group is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, or directly or indirectly controlled by or acting on behalf of any
Person which is an "investment company", within the meaning of said Act.
8.12. PUBLIC UTILITY HOLDING COMPANY ACT; FEDERAL POWER ACT. No member
of the Combined Group is a "public utility company", or an "affiliate" or a
"subsidiary company" of a "public utility company", or a "holding company", or
an "affiliate" or a "subsidiary company" of a "holding company" or of a
"subsidiary company" of a "holding company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, or a "public utility" as
such term is defined in the Federal Power Act, as amended.
8.13. ENVIRONMENTAL MATTERS. Except as disclosed in writing to the Agent
prior to the date hereof, the Company and its Subsidiaries, and the plants and
sites of each, have complied with all Applicable Environmental Laws, except, in
any such case, where such failure to so comply would not result in a Material
Adverse Change. Without limiting the generality of the preceding sentence,
neither the Company nor any of its Subsidiaries has received notice of or has
actual knowledge of any actual or claimed or asserted failure so to comply with
Applicable Environmental Laws or of any other Environmental Claim which alone or
together with all other such failures or Environmental Claims is material and
would result in a Material Adverse Change. Except as disclosed in writing to the
Agent prior to the date hereof, neither the Company nor any of its Subsidiaries
nor their plants or other sites manage, generate or dispose of, or during their
respective period of use, ownership, occupancy or operation by the Company or
its Subsidiaries have managed, generated, released or disposed of, any hazardous
wastes, solid wastes, petroleum substances, hazardous substances, hazardous
materials, toxic substances or toxic pollutants, as those terms are used or
defined in the Applicable Environmental Laws, in material violation of or in a
manner which would result in liability under the Applicable Environmental Laws
or any other applicable Legal Requirement, or in a manner which would result in
an Environmental Claim except where such noncompliance or liability or
Environmental Claim would not result in
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a Material Adverse Change. The representation and warranty contained in this
SECTION 8.13 is based in its entirety upon (a) current interpretations and
enforcement policies that have been publicly disseminated and are used by
Governmental Authorities charged with the enforcement of the Applicable
Environmental Laws or which apply to the Company or any of its Subsidiaries with
respect to any property or sites in a particular jurisdiction and (b) current
levels of publicly disseminated scientific knowledge concerning the detection
of, and the health and environmental risks associated with the discharge of,
substances and pollutants regulated pursuant to the Applicable Environmental
Laws.
8.14. TITLE.
(a) Each member of the Combined Group has good and defensible title to
the oil, gas and mineral properties shown as owned by it and included in the
Most Recent Engineering Report furnished to the Banks.
(b) Such properties and facilities are free and clear of all Liens,
except Permitted Encumbrances and other Liens permitted hereby.
(c) All oil, gas and mineral leases and leasehold estates, gas purchase
and sales contracts and other agreements comprising or relating to any of such
properties are valid and subsisting and in full force and effect, except for
those leases, estates, contracts, easements, rights-of-way and agreements which
are in the aggregate not material to oil, gas and mineral properties included in
the Most Recent Engineering Report furnished to the Banks, taken as a whole.
(d) All rights, permits, easements, servitudes and rights-of-way,
failure to have or maintain which would materially interfere with the
development, maintenance and operation of such properties so as to cause a
Material Adverse Change, have been obtained and are in full force and effect.
Section 9. COVENANTS. The Company covenants to and agrees with the Banks
and the Agent that until the termination of this Agreement pursuant to SECTION
12.7:
9.1. FINANCIAL STATEMENTS AND CERTIFICATES. The Company will deliver in
duplicate:
(a) to each Bank, as soon as practicable and in any event within 45 days
after the end of each quarterly period (other than the last quarterly period) in
each fiscal year, consolidated and consolidating statements of operations,
stockholders' equity and cash flows of the Company and its Subsidiaries for the
period from the beginning of the then-current fiscal year to the end of such
quarterly period, and a consolidated and consolidating balance sheet of the
Company and its Subsidiaries as of the end of such quarterly period, setting
forth (1) as to each account affected thereby, all eliminating entries for the
Unrestricted Subsidiaries as a group and (2) the resulting consolidated and
consolidating figures for the Company and the Restricted Subsidiaries, and
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setting forth in each case in comparative form figures as of the end of and for
the corresponding period in the preceding fiscal year, all in reasonable detail
and unaudited but certified by an authorized financial officer of the Company as
fairly presenting the financial position and results of operations of the
Company and its Subsidiaries as of the date thereof and the period then ended,
subject to changes resulting from year-end adjustments;
(b) to each Bank, as soon as practicable and in any event within 90 days
after the end of each fiscal year, consolidated and consolidating statements of
operations, stockholders' equity and cash flows of the Company and its
Subsidiaries for such year, and a consolidated and consolidating balance sheet
of the Company and its Subsidiaries as of the end of such fiscal year,
setting forth (1) as to each account affected thereby, all eliminating entries
for the Unrestricted Subsidiaries as a group and (2) the resulting consolidating
figures for the Company and the Restricted Subsidiaries, and setting forth in
each case in comparative form corresponding consolidating figures from the
preceding annual audit, all in reasonable detail and which shall be reported on
by Price Waterhouse LLP or other independent public accountants of recognized
national standing selected by the Company whose report shall (A) contain an
opinion that shall be unqualified as to the scope or limitations imposed by the
Company and shall not be subject to any other material qualification and (B)
state that such financial statements present fairly, in all material respects,
the financial position of the Company and its Subsidiaries at the dates
indicated and their cash flows and the results of their operations and the
changes in their financial position for the periods indicated in conformity with
GAAP, and shall be accompanied by a report of such independent public
accountants stating that (W) such audit was made for the purpose of forming an
opinion on the consolidated financial statements taken as a whole; (X) the
consolidating information set forth therein is presented for purposes of
additional analysis rather than to present the financial position, results of
operations and cash flows of the individual companies; (Y) such consolidating
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements, and (Z) in such independent public
accountants' opinion, such consolidating information is fairly stated in all
material respects in relation to the consolidated financial statements taken as
a whole, with such changes thereto as such accountants reasonably determine to
be appropriate under the circumstances;
(c) to each Bank, promptly upon transmission thereof, copies of all
financial statements, proxy statements, notices and reports as it shall send to
its public stockholders and copies of all registration statements (without
exhibits, and other than registration statements and reports relating to
employee benefit or compensation plans) and all reports which it files with the
Securities and Exchange Commission (or any governmental body or agency
succeeding to any or all of the functions of the Securities and Exchange
Commission);
(d) to each Bank, promptly upon receipt thereof, a copy of each other
report submitted to the Company or any of its Subsidiaries by independent
accountants in connection with any annual, interim or special audit made by them
of the books of the Company or any such Subsidiary;
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(e) to each Bank, as soon as practicable and in any event within 15 days
after any executive officer of the Company obtains knowledge (1) of any Default
or any condition or event which, in the opinion of management of the Company,
would cause a Material Adverse Change (to the extent affecting the Company and
its Subsidiaries in a materially different manner or extent than the oil and gas
industry generally); (2) that any Person has given any notice to the Company or
any of its Subsidiaries or taken any other action with respect to a claimed
default or event or condition of the type referred to in SECTION 10.1(B) or (M);
(3) of the institution of any litigation involving claims against the Company or
any of its Subsidiaries equal to or greater than $5,000,000 with respect to any
single cause of action or of any adverse determination in any court proceeding
in any litigation involving a potential liability to the Company or any of its
Subsidiaries equal to or greater than $5,000,000 with respect to any single
cause of action which makes the likelihood of an adverse determination in such
litigation against the Company or such Subsidiary substantially more probable;
and (4) of any regulatory proceeding which, if determined adversely to the
Company, would cause a Material Adverse Change (to the extent affecting the
Company and its Subsidiaries in a materially different manner or extent than the
oil and gas industry generally), an Officer's Certificate specifying the nature
and period of existence of any such Default, condition or event, or specifying
the notice given or action taken by such Person and the nature of any such
claimed Default, event or condition, or specifying the details of such
proceeding, litigation or dispute and, in each case, what action the Company and
any affected Subsidiary has taken, is taking or proposes to take with respect
thereto;
(f) to each Bank, (1) promptly after the filing or receiving thereof,
copies of all annual reports and such other material reports and notices which
the Company or any ERISA Affiliate files under ERISA with the Internal Revenue
Service, the PBGC, the U.S. Department of Labor or any entity succeeding to any
or all of their respective functions with respect to a Plan that is subject to
Title IV of ERISA; (2) promptly upon acquiring knowledge of any "reportable
event" (as defined in Section 4043 of ERISA) or of any "prohibited transaction,"
as such term is defined in the Code or ERISA, in connection with any Plan which
may result in a Material Adverse Change, a statement executed by the President
or Chief Financial Officer of the Company or the applicable ERISA Affiliate,
setting forth the details thereof and the action which the Company or the ERISA
Affiliate proposes to take with respect thereto and, when known, any action
taken by the PBGC, the Internal Revenue Service, the U.S. Department of Labor
(or any entity succeeding to any or all of the functions of any such entity)
with respect thereto; (3) promptly after the filing or receiving thereof by the
Company or any ERISA Affiliate, any notice of the institution of any proceedings
or other actions which may result in the termination of any Plan or notice of
complete or partial withdrawal liability under Title IV of ERISA, and (4) each
request for waiver of the funding standards or extension of the amortization
periods required by Sections 303 and 304 of ERISA or Section 412 of the Code
promptly after the request is submitted by the Company or any ERISA Affiliate,
to the Secretary of the Treasury, the U.S. Department of Labor or the Internal
Revenue Service (or any entity succeeding to any or all of the functions of any
such entity), as the case may be;
(g) to each Bank, as soon as available but in no event later than
February 28 of each
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year, an Independent Engineering Report reflecting data as
of December 31 of the prior year and, upon the request of the Agent promptly
after June 30 of each year, but in no event later than September 1 of each year,
a Company Report;
(h) to the Agent, no later than the first Quarterly Date after the
formation or acquisition of any Subsidiary of the Company, notice of such
formation or acquisition stating the name, jurisdiction of organization,
percentage owned by the Company, whether such Subsidiary is a Restricted
Subsidiary or an Unrestricted Subsidiary, and other relevant information;
(i) to the Agent, (i) on or before each Quarterly Date, (ii) at any time
the aggregate amount of Other Liabilities reported in the Most Recent Other
Liabilities Report shall exceed the aggregate amount of Other Liabilities
reported in the immediately preceding Other Liabilities Report by $10,000,000 or
more, (iii) concurrently with each Request for Extension of Credit, and (iv)
whenever the Company shall desire, an Other Liabilities Report; and
(j) with reasonable promptness, such other information respecting the
business, financial condition or results of operations of the Company or any of
its Subsidiaries as the Agent or any Bank may reasonably request.
Additionally, the Company will deliver to each Bank:
(x) Together with each delivery of financial statements required by
SUBSECTION (A) above, an Officer's Certificate demonstrating (with applicable
computations in reasonable detail) compliance by the Company and the Restricted
Subsidiaries with the provisions of SECTIONS 9.6, 9.7(B), 9.7(C)(2) and (3),
9.7(D), 9.7(E), 9.7(F), 9.9, 9.10 and 9.11 as at the date of the balance sheet
included in such financial statements and stating that at the date of such
Officer's Certificate there exists no Default, or, if any Default exists,
specifying the nature and period of existence thereof and what action the
Company proposes to take with respect thereto; and
(y) Together with each delivery of financial statements required by
SUBSECTION (B) above, a certificate of such accountants stating that, in
conducting the audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards they have obtained no
knowledge of any Default arising under SECTION 10.1(A), (B) or (I) or any
Default arising under SECTION 10.1(D) that occurs as result of the breach or
violation by the Company or the Restricted Subsidiaries of SECTIONS 9.6, 9.7(A)
9.7(B), (C), (D), (E), (F), or (G), 9.8, 9.9, 9.10 or 9.11 or, if they have
obtained knowledge of any such Default, specifying the nature and period of
existence thereof. Such accountants, however, shall not be liable to the Agent
or any Bank by reason of their failure to obtain knowledge of any such Default
which would not be disclosed in the course of an audit conducted in accordance
with generally accepted auditing standards.
9.2. INSPECTION OF PROPERTY. The Company will permit, and cause each of
its Subsidiaries to permit, any Person designated in writing by any Bank, at
such Bank's expense and risk, to visit and inspect any of the properties of the
Company and its Subsidiaries; and also to
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examine the corporate books and financial records of the Company and its
Subsidiaries and to make copies thereof or extracts therefrom and to discuss the
affairs, finances and accounts of such Persons with the executive officers of
the Company and its Subsidiaries, the petroleum reserve engineers employed by
the Company and its Subsidiaries and the Company's independent public
accountants, all at such reasonable times, with a representative of the Company
present and as often as such Bank may reasonably request, and will assist such
Person or Persons in all such activities.
9.3. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will, and will
cause each of its Subsidiaries and each of its Affiliates that are controlled by
the Company or its Subsidiaries to, comply in a timely fashion with, or operate
pursuant to valid waivers of the provisions of, all Applicable Environmental
Laws, except where non-compliance would neither (a) result in a Material Adverse
Change nor (b) subject the Agent or any Bank to any liability for such
non-compliance (PROVIDED that the Company shall not be in default of this CLAUSE
(B) if the Company indemnifies each of the Agent, Banks or any of them subjected
to such liability and provides collateral to secure such indemnification, all to
the extent required by the Person subjected to such liability in its sole and
unfettered discretion). THE COMPANY AGREES TO INDEMNIFY AND HOLD THE AGENT AND
EACH BANK, AND THEIR RESPECTIVE OFFICERS, AGENTS AND EMPLOYEES HARMLESS FROM ANY
LOSS, LIABILITY, CLAIM OR EXPENSE WHICH ANY SUCH PERSON MAY INCUR OR SUFFER AS A
RESULT OF A BREACH BY THE COMPANY OR ITS SUBSIDIARIES OR AFFILIATES, AS THE CASE
MAY BE, OF THIS COVENANT. The Company shall not be deemed to have breached or
violated this SECTION 9.3 if the Company or the applicable Subsidiary or
Affiliate, as the case may be, is challenging in good faith by appropriate
proceedings diligently pursued, and subject to the indemnification obligations
of this SECTION 9.3, the application or enforcement of any such Applicable
Environmental Laws for which adequate reserves have been established in
accordance with GAAP.
9.4. PAYMENT OF TAXES. The Company will, and will cause each of its
Subsidiaries to, pay, or have paid on its behalf, before the same become
delinquent all taxes, assessments and governmental charges imposed upon it or
upon its property, except to the extent contested in good faith by appropriate
proceedings diligently conducted for which adequate reserves have been
established in accordance with GAAP.
9.5. MAINTENANCE OF INSURANCE. The Company and each of its Subsidiaries
will carry and maintain insurance (subject to self-insurance in the maximum
amount of $10,000,000, customary deductibles and retentions) in at least such
amounts and against such liabilities and hazards and by such methods as
customarily maintained by other companies operating similar businesses and,
together with each delivery of financial statements required by SECTION 9.1(B)
will deliver to the Agent for each Bank an Officer's Certificate specifying the
details of such insurance in effect. Upon the request of the Agent or any Bank,
the Company shall promptly deliver to the Agent one or more current certificates
of the insurer or insurers providing the insurance required by this SECTION 9.5
to the effect that such insurance may not be canceled, reduced or affected in
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any manner without 30 days' prior written notice to the Agent.
9.6. RESTRICTED PAYMENTS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, (i) declare or pay any
dividend on, or make any distribution on or in respect of, its Capital Stock or
Redeemable Stock (including any such payment (other than payments solely in its
Capital Stock or in options, warrants or other rights to purchase its Capital
Stock) in connection with any merger or consolidation involving the Company),
except dividends or distributions payable solely in its Capital Stock or in
options, warrants or other rights to purchase such Capital Stock and except
dividends or distributions payable solely to the Company or any Restricted
Subsidiary, (ii) purchase, redeem or otherwise acquire for value any Capital
Stock or Redeemable Stock of the Company or any Restricted Subsidiary held by
Persons other than the Company or any Restricted Subsidiary; (iii) make any
principal payment on, or redeem, purchase, repurchase, defease or otherwise
acquire or retire for value prior to any scheduled repayment, scheduled sinking
fund payment or other scheduled maturity, any Indebtedness that is subordinated
in right of payment to the Obligations or (iv) make any Investment in any Person
(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or investment being referred to in this SECTION
9.6 as a "RESTRICTED PAYMENT"), unless at the time of and after giving effect to
the proposed Restricted Payment (a) no Default or Event of Default or Borrowing
Base Deficiency shall have occurred and be continuing under this Agreement, (b)
the Company could Incur at least $1.00 of additional Indebtedness under SECTION
9.7(B) and (c) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the board of directors of the Company, whose
determination shall be evidenced by a resolution of such board) declared or made
since the Recalculation Date would not exceed, without duplication, the sum of
(1) 50% of the Consolidated Adjusted Net Income accrued during the period
(treated as one accounting period) from the quarter end on or before the
Recalculation Date to the end of the Company's most recent fiscal quarter
immediately preceding such proposed Restricted Payment (or, if such Consolidated
Adjusted Net Income shall be a deficit, minus 50% of such deficit), (2) the
aggregate net proceeds, including cash and the Fair Market Value of Property
other than cash, received by the Company from the issue or sale of its Capital
Stock (including pursuant to the exercise of options or warrants or the making
of any equity contribution by stockholders of the Company subsequent to the
Recalculation Date (other than an issuance or sale to a Subsidiary of the
Company or any employee stock ownership plan or other trust established by the
Company or any of its Subsidiaries)), (3) the amount by which the Indebtedness
of the Company or any Restricted Subsidiary is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Subsidiary of the
Company), subsequent to the Recalculation Date of any Indebtedness or Redeemable
Stock of the Company or any Restricted Subsidiary into or for Capital Stock of
the Company (less the amount of any cash (other than cash distributed in payment
of interest on such Indebtedness accrued and unpaid to the date of such
conversion or exchange) or other property distributed by the Company or any
Restricted Subsidiary upon such conversion or exchange) and (4) $50 million.
Any payments made pursuant to CLAUSES (A) through (F) of the definition
of "Permitted
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Investment" shall be excluded for purposes of any calculation of
the aggregate amount of Restricted Payments. Any payments made pursuant to
CLAUSES (G), (H) AND (I) of the definition of "Permitted Investment" shall be
included for purposes of any calculation of the aggregate amount of Restricted
Payments.
The foregoing limitations will not prevent the Company or any Restricted
Subsidiary from (a) paying a dividend on its Capital Stock within 60 days after
declaration thereof if, on the declaration date, such dividend could have been
paid in compliance with this SECTION 9.6 and declared without creating any Total
Debt which would cause a breach of SECTION 9.11 or (b) making Permitted
Investments so long as no Default or Event of Default shall have occurred and be
continuing. Furthermore, notwithstanding anything to the contrary in this
Agreement, no payment under any of the Monterey Transactions shall constitute a
Restricted Payment except any payment of greater than $100 million with respect
to the Preferred Stock Purchases.
As used in this SECTION 9.6 only, the following terms shall have the
meanings ascribed to them in the Indenture in effect on the date of this
Agreement, without giving effect to any subsequent amendment, waiver or
termination thereof: "Capital Stock", "Consolidated Adjusted Net Income", "Fair
Market Value", "Incur", "Indebtedness", "Investment", "Permitted Investment",
"Preferred Stock Purchases", ""Recalculation Date" and "Redeemable Stock" (and
all other defined terms used in any thereof). The text of these terms is set
forth on APPENDIX I.
9.7. INDEBTEDNESS, LIEN AND OTHER RESTRICTIONS. The Company will not and
will not permit any Restricted Subsidiary to:
(a) LIENS. Create, assume or suffer to exist any Lien upon any of its
properties or assets, whether now owned or hereafter acquired, except Permitted
Encumbrances and
(1) Liens for taxes or assessments or other governmental charges
or levies not yet due or which are being actively contested in good faith by
appropriate proceedings;
(2) Liens (including mechanics' and materialmen's liens, landlord
liens, easements, rights-of-way or the like) incidental to the conduct of its
business or the ownership of its property and assets which are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than advances or credit on open account, includable in current
liabilities, for goods and services in the ordinary course of business and on
terms and conditions which are customary in the oil, gas and mineral exploration
and development business) or the guaranteeing of the obligations of another
Person, and which do not in the aggregate materially detract from the value of
its property or assets or materially impair the use thereof in the operation of
its business;
(3) Liens for lessor's royalties, overriding royalties, net
profits interests, carried interests, reversionary interests and other similar
burdens, production sales contracts, division orders, contracts for the sale,
purchase, exchange, or processing of hydrocarbons, unitization and
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pooling designations, declarations, orders and agreements, operating agreements,
agreements of development, area of mutual interest agreements, gas balancing or
deferred production agreements, processing agreements, plant agreements,
pipeline gathering and transportation agreements, injection, repressuring and
recycling agreements, salt water or other disposal agreements, seismic or
geophysical permits or agreements, and other agreements which are customary in
the oil, gas and mineral exploration and development business or in the business
of processing gas and gas condensate production for the extraction of products
therefrom, if the net cumulative effect of such burdens does not operate to
reduce the net revenue interest of any oil and gas properties to less than (A)
the "Net Revenue Interest" set forth in the Most Recent Engineering Report for
those oil and gas properties included in the Most Recent Engineering Report or
(B) the net revenue interest so acquired for those oil and gas properties
acquired after the date of the Most Recent Engineering Report; PROVIDED that
such Liens are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than advances or credit on open account,
includable in current liabilities, for goods and services in the ordinary course
of business and on terms and conditions which are customary in the oil, gas and
mineral exploration and development business) or the guaranteeing of the
obligations of another Person;
(4) Liens described in SCHEDULE II securing Total Debt of the Company or
a Restricted Subsidiary set forth in SCHEDULE II;
(5) Liens existing on any real property of any Person at the time
such Person becomes a Restricted Subsidiary, or any Liens existing prior to the
time of acquisition upon any real property acquired by the Company or any
Restricted Subsidiary through purchase, merger or consolidation or otherwise,
whether or not the obligation secured by such Lien is assumed by the Company or
such Restricted Subsidiary; PROVIDED that except as otherwise permitted by
SECTION 9.7(A), any such Lien (A) shall not encumber any other property of the
Company or any Restricted Subsidiary and (B) shall not have been created or
modified in any respect in anticipation of such Person's becoming a Restricted
Subsidiary or in anticipation of the acquisition by the Company or any
Restricted Subsidiary of the real property subject thereto (other than to
reflect the assumption of such Lien or other ministerial acts relating thereto);
(6) Liens placed on property at the time of acquisition,
construction, development or improvement thereof, or created in respect of such
property within six months after the time of acquisition thereof or the
commencement of construction, development or improvement thereof, as the case
may be, to secure all or a portion of (or to secure Total Debt incurred to pay
all or a portion of) the purchase price of such acquisition, or the cost of such
construction, development or improvement, as the case may be; PROVIDED that (A)
such property is not and shall not thereby become encumbered in an amount in
excess of the lesser of the cost or fair market value thereof; (B) except as
otherwise permitted in SECTION 9.7(A), any such Lien shall not encumber any
other property of the Company or a Restricted Subsidiary, and (C) any such Lien
shall not encumber property of the Company or a Restricted Subsidiary for the
purpose of securing an obligation of the Company or a Restricted Subsidiary or
securing a Guaranty by the Company or any Restricted Subsidiary in connection
with the sale, exchange, transfer or other
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disposition by the Company or a Restricted Subsidiary of net profits interests;
PROVIDED that the Company or a Restricted Subsidiary may assign all or part of
the proceeds of production of property in which a net profits interest has been
granted to secure its obligation to make net profits interests payments
therefrom; and PROVIDED FURTHER that any such Lien shall not encumber any other
property of the Company or any Restricted Subsidiary;
(7) Liens on the capital stock of a Restricted Subsidiary
acquired after the Commencement Date by the Company or a Restricted Subsidiary
and created or assumed contemporaneously with such acquisition, to secure Total
Debt assumed or incurred to finance all or a part of the purchase price of such
acquisition;
(8) Liens on the capital stock of an Unrestricted Subsidiary;
(9) Liens on property of the Company or a Restricted Subsidiary
to secure Total Debt assumed or incurred in the form of Capitalized Lease
Obligations or industrial revenue bonds, pollution control bonds or similar
tax-exempt financings; PROVIDED that any such Lien shall not encumber any
property of the Company or a Restricted Subsidiary other than the property the
acquisition or construction of which is financed or refinanced, in whole or in
part, with proceeds from such Total Debt;
(10) any Lien renewing or extending any Lien permitted by CLAUSES
(4), (5), (6), (7), (8), or (9) above; PROVIDED that the principal amount of the
Total Debt secured thereby is not increased and such Lien is not extended to
other property; and
(11) other Liens on any property of the Company or a Restricted
Subsidiary securing any Debt of the Company or a Restricted Subsidiary permitted
by the last sentence of SECTION 9.11.
(b) INDEBTEDNESS. Create, incur, suffer or permit to exist, or assume or
enter into any Total Debt or any Guaranty, whether direct, indirect, absolute,
contingent or otherwise, EXCEPT: (a) Total Debt under the Credit Documents and
the SFER MRI Loans; (b) Total Debt secured by Liens permitted by SECTION 9.7(A);
(c) the Senior Subordinated Notes; (d) Total Debt in respect of Other Letters of
Credit; (e) bonds or surety obligations required by any Governmental Authority
in connection with the operation of the property of the Company and its
Subsidiaries; (f) Total Debt or Guaranties to and among the Company and the
Restricted Subsidiaries or Guaranties of Total Debt of the Company and the
Restricted Subsidiaries; (g) other Total Debt having a weighted average life to
maturity of not less than seven years from the date of issuance thereof and
subject to terms (including representations, warranties, covenants and defaults
and events of default) no more restrictive (as determined by the Agent in its
sole discretion) with respect to the issuer thereof than the terms of the Credit
Documents; and (h) unsecured Total Debt or Guaranties in an aggregate amount at
any time outstanding not to exceed $25,000,000.
Notwithstanding anything to the contrary in this SECTION 9.7(B), no
member of the
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Combined Group shall create, incur or assume any Total Debt or
Guaranty if to do so would cause or enlarge a Borrowing Base Deficiency or
violate any other provision of this Agreement.
(c) SALE OF LESS THAN SUBSTANTIALLY ALL ASSETS. Sell, exchange, transfer
or otherwise dispose of part, but less than all or substantially all, of their
respective assets unless
(1) such sale, exchange, transfer or other disposition is made in
the ordinary course of business (including abandonments, farm-ins, farm-outs,
leases and subleases of developed or undeveloped properties owned or held by the
Company or any Restricted Subsidiary that are made or entered into in the
ordinary course of business, but EXCLUDING, however, any sale of net profits
interests in developed oil and gas properties); or
(2) after giving effect to such sale, exchange, transfer or other
disposition, (A) the aggregate net book value of (i) all assets of the Company
and the Restricted Subsidiaries (including the sale of net profits interests in
developed oil and gas properties) sold, exchanged, transferred or otherwise
disposed of (on a consolidated basis) (but excluding assets sold, exchanged,
transferred or otherwise disposed of in the ordinary course of business pursuant
to SECTION 9.7(C)(1)) during the period of 12 consecutive months immediately
preceding such sale, exchange, transfer or other disposition and (ii) the assets
of all Restricted Subsidiaries, the stock of which have been sold or otherwise
disposed of pursuant to SECTION 9.7(D)(2)(A) during such 12-month period shall
not exceed 10% of the consolidated total assets of the Company and the
Restricted Subsidiaries as of the end of the fiscal quarter immediately
preceding or coinciding with such sale, exchange, transfer or other disposition,
and (B) the assets described in the foregoing CLAUSE (A) shall not have
contributed more than 10% of EBITDA of the Company and the Restricted
Subsidiaries for the four most recently completed fiscal quarters taken as a
single accounting period; or
(3) after giving effect to such sale, exchange, transfer or other
disposition, (A) the aggregate net book value of (i) all assets of the Company
and the Restricted Subsidiaries (including the sale of net profits interests in
developed oil and gas properties) sold, exchanged, transferred or otherwise
disposed of (on a consolidated basis) (but excluding assets sold, exchanged,
transferred or otherwise disposed of pursuant to SECTION 9.7(C)(1) and (2))
during the period of 12 consecutive months immediately preceding such sale,
exchange, transfer or other disposition and (ii) the assets of all Restricted
Subsidiaries, the stock of which has been sold or otherwise disposed of pursuant
to SECTION 9.7(D)(2)(B) during such 12-month period, shall not exceed 10% of the
consolidated total assets of the Company and the Restricted Subsidiaries as of
the end of the fiscal quarter immediately preceding or coinciding with such
sale, exchange, transfer or other disposition; (B) the assets described in the
foregoing CLAUSE (A) shall not have contributed more than 10% of EBITDA for the
four most recently completed fiscal quarters taken as a single accounting
period, and (C) within six months after such sale, exchange, transfer or other
disposition, the net proceeds thereof are applied toward, or the exchange
results in, (1) the acquisition by the Company or a Restricted Subsidiary of (i)
assets which have an aggregate fair market value at least equal to the net
proceeds received by the Company and the Restricted
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Subsidiaries from such sale, exchange, transfer or other disposition; (ii) if
the assets so sold, exchanged, transferred or otherwise disposed of were located
in the United States of America or Canada, the assets acquired are located in
the United States of America or Canada, and (iii) the assets so acquired are of
a type usual and customary in the oil and gas business; PROVIDED that no Liens
shall at any time exist on the assets so acquired which secure any Total Debt
except as permitted by SECTION 9.7(A)(1), (2), (3) OR (11) or (2) the prepayment
of an aggregate principal amount of all Obligations plus accrued interest
thereon in accordance with this Agreement or the payment of an aggregate
principal amount of other Total Debt (other than Total Debt subordinate in right
of payment to the Obligations) plus accrued interest and premium, if any, in
either case in an amount at least equal to the aggregate net proceeds that the
Company or a Restricted Subsidiary receives from the sale, exchange, transfer or
other disposition of such assets.
(d) SALE OF STOCK OF RESTRICTED SUBSIDIARIES. Sell or otherwise dispose
of, or part with control of, any shares of stock of any Restricted Subsidiary,
except (1) to the Company or another wholly-owned Restricted Subsidiary and (2)
that all shares of stock of any Restricted Subsidiary at the time owned by the
Company and all Restricted Subsidiaries may be sold as an entirety for a cash
consideration which represents the fair market value (as determined in good
faith by the Board of Directors of the Company) at the time of sale of the
shares of stock so sold; PROVIDED that for purposes of this exception:
(A) (i) the net book value of the assets of such Restricted
Subsidiary together with (x) the net book value of the assets of any other
Restricted Subsidiary the stock of which was sold during the preceding 12-month
period and (y) the net book value of the assets of the Company and all
Restricted Subsidiaries sold, exchanged, transferred or otherwise disposed of
pursuant to SECTION 9.7(C)(2) during the preceding 12-month period, does not
represent more than 10% of the consolidated total assets of the Company and the
Restricted Subsidiaries as of the end of the fiscal quarter immediately
preceding or coinciding with such sale, exchange, transfer or other disposition
and (ii) the earnings of such Restricted Subsidiary together with (x) the
earnings of any other Restricted Subsidiary the stock of which was sold or
otherwise disposed of pursuant to the exception described in this CLAUSE (A)
during the preceding 12-month period and (y) the earnings attributable to the
assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION
9.7(C)(2) during such 12-month period, do not represent more than 10% of EBITDA
for the four most recently completed fiscal quarters taken as a single
accounting period; and PROVIDED FURTHER that, at the time of such sale, such
Restricted Subsidiary shall not own, directly or indirectly, any shares of stock
of the Company or any other Restricted Subsidiary unless all of the shares of
stock of such other Restricted Subsidiary owned, directly or indirectly, by the
Company and all Restricted Subsidiaries are simultaneously being sold as
permitted by the exception described in this CLAUSE (A); or
(B) (i) the net book value of the assets of such Restricted
Subsidiary together with (x) the net book value of the assets of any other
Restricted Subsidiary the stock of which was sold during the preceding 12-month
period (but excluding stock sold pursuant to SECTION 9.7(D)(A)) and (y) the net
book value of the assets of the Company and any Restricted Subsidiary sold,
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exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(C)(3)
during the preceding 12-month period, does not represent more than 10% of the
consolidated total assets of the Company and the Restricted Subsidiaries as of
the end of the fiscal quarter immediately preceding or coinciding with such
sale, exchange, transfer or other disposition; (ii) the earnings of such
Restricted Subsidiary together with (x) the earnings of any other Restricted
Subsidiary the stock of which was sold or otherwise disposed of pursuant to the
exception described in this CLAUSE (B) during the preceding 12-month period and
(y) the earnings attributable to the assets sold, exchanged, transferred or
otherwise disposed of pursuant to SECTION 9.7(C)(3) during such 12-month period,
do not represent more than 10% of EBITDA for the four most recently completed
fiscal quarters taken as a single accounting period, and (iii) within six months
after such sale or other disposition, the proceeds thereof are applied toward
(i) the acquisition by the Company or a Restricted Subsidiary of (1) assets
which have an aggregate fair market value at least equal to the net proceeds
received by the Company and the Restricted Subsidiaries from
such sale or other disposition and (2) the assets so acquired are of a type
usual and customary in the oil and gas business; PROVIDED that no Liens shall at
any time exist on the assets so acquired which secure any Total Debt except as
permitted by SECTION 9.7(A)(1), (2), (3) OR (11), or (ii) the prepayment of an
aggregate principal amount of all Obligations in accordance with this Agreement
or the payment of an aggregate principal amount of other Total Debt (other than
Total Debt subordinate in right of payment to the Obligations) plus accrued
interest and premium, if any, in either case in an amount at least equal to the
aggregate net proceeds that the Company or a Restricted Subsidiary receives from
the sale or other disposition; and PROVIDED FURTHER that, at the time of such
sale or other disposition, such Restricted Subsidiary shall not own, directly or
indirectly, (y) any shares of stock of the Company or any other Restricted
Subsidiary unless all of the shares of stock of such other Restricted Subsidiary
owned, directly or indirectly, by the Company and all Restricted Subsidiaries
are simultaneously being sold as permitted by the exception described in this
CLAUSE (B).
(e) MERGER AND SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. Convey,
exchange, transfer or otherwise dispose of all or a substantial part of its
assets (I.E., assets which could not otherwise be disposed of pursuant to
SECTION 9.7(C)(2) or (3)) to any Person; or merge or consolidate with or into
any other Person or, except that
(1) any wholly-owned Restricted Subsidiary may merge with the
Company (PROVIDED that the Company shall be the continuing or surviving
corporation) or with any one or more other wholly-owned Restricted Subsidiaries;
(2) any Restricted Subsidiary may sell, exchange, transfer or otherwise
dispose of any of its assets to the Company or to a wholly-owned Restricted
Subsidiary;
(3) any Restricted Subsidiary may sell, exchange, transfer or
otherwise dispose of all or substantially all of its assets subject to the
conditions and provisions specified in SECTIONS 9.7(C)(2) and (3);
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(4) any Restricted Subsidiary may merge into or consolidate with
any Person which does not thereupon become a Restricted Subsidiary, subject to
the conditions and provi sions specified in SECTION 9.7(D) with respect to a
sale or other disposition of the stock of such Restricted Subsidiary;
(5) any Restricted Subsidiary may permit any Person to be merged
into such Restricted Subsidiary or may consolidate with or merge into a Person
which thereupon becomes a Restricted Subsidiary; PROVIDED that immediately after
any such merger or consolidation, no Default shall have occurred and be
continuing;
(6) the Company may permit any Person to be merged into the
Company (such that the Company shall be the continuing or surviving
corporation); and
(7) the Company may permit any corporation to consolidate with
the Company and the Company may merge into any solvent corporation organized
under the laws of the United States of America or any state thereof and having
at least 80% of its consolidated assets located in the United States of America
and Canada which expressly assumes in writing the due and punctual performance
of the obligations of the Company under the Credit Documents, to the same extent
as if such successor or transferee corporation had originally executed the
Credit Documents in the place of the Company (it being agreed that such
assumption shall, upon the request of any Bank and at the expense of such
successor corporation, be evidenced by the exchange of such Bank's Note for
another Note executed by such successor corporation, with such changes in
phraseology and form as may be appropriate but in substance of like terms as the
Note surrendered for such exchange and of like unpaid principal amount, and that
each Note executed pursuant to this Agreement after such assumption shall be
executed by and in the name of such successor corporation);
PROVIDED that for purposes of SECTIONS 9.7(E)(6) and (7) immediately after such
merger or consolidation, and after giving effect thereto, (x) such successor
Person could incur at least $1.00 of additional Total Debt without violation of
SECTION 9.11, and (y) no Default shall have occurred and be continuing. As soon
as practicable, and in any event at least 75 days prior to the proposed
consummation date of any merger or consolidation described in SECTION 9.7(E)(7),
the Company shall give written notice thereof to each Bank describing in
reasonable detail the proposed transaction, the date on which it is proposed to
be consummated and the identity, jurisdiction of organization, and geographic
composition of assets of the proposed successor corporation.
(f) SALE AND LEASEBACK. Enter into any Sale and Leaseback Transaction
unless:
(1) the net sales proceeds received by the Company or a
Restricted Subsidiary in respect of the assets sold pursuant to such Sale and
Leaseback Transaction are greater than or equal to the fair market value of the
assets sold (which determination shall be based upon a written opinion (the cost
of which shall be borne exclusively by the Company) as to valuation from an
independent valuation expert selected by the Company) and such proceeds are
concurrently
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applied to (A) the purchase, acquisition, development or construction of assets
having a value at least equal to such net proceeds, and to be used in the
Company's or such Restricted Subsidiary's business; PROVIDED that no Liens shall
at any time exist on such assets which secure any Total Debt except as permitted
by SECTION 9.7(a)(1), (2), (3) OR (11); (B) the prepayment in accordance with
this Agreement of any aggregate principal amount of all the Obligations (plus
accrued interest and premium, if any) at least equal to the amount of such net
proceeds; or (C) the payment of other Total Debt (other than Total Debt
subordinate in right of payment to the Obligations) in an aggregate principal
amount at least equal to the amount of such net sales proceeds; or
(2) the Sale and Leaseback Transaction involves the sale of assets by
the Company to a wholly-owned Restricted Subsidiary or by a Restricted
Subsidiary to the Company or to another wholly-owned Restricted Subsidiary;
PROVIDED that if the Company is the seller under any such Sale and Leaseback
Transaction, its lease obligations thereunder shall be subord inated to the
Obligations upon terms set forth on SCHEDULE V.
(g) TRANSACTIONS WITH AFFILIATES. Except for the Monterey Transactions,
directly or indirectly purchase, acquire or lease any property from, or sell,
transfer or lease any property to, or otherwise deal with, in the ordinary
course of business or otherwise, (1) any Affiliate (except any employee
compensation benefit plan or any Restricted Subsidiary) or (2) any Person (other
than a Restricted Subsidiary) in which an Affiliate or the Company (directly or
indirectly) owns, beneficially or of record, 5% or more of the outstanding
voting stock or similar equity interest, except that (A) any Affiliate may be a
director, officer or employee of the Company or any Restricted Subsidiary and
may be paid reasonable compensation in connection therewith and (B) acts and
transactions that would otherwise be prohibited by this subsection may be
performed or engaged in if upon terms not less favorable to the Company or any
Restricted Subsidiary than if no relationship described in CLAUSES (1) and (2)
above existed. With respect to any capital contribution to, or transaction with,
a Subsidiary, the requirement that the transaction be on "terms not less
favorable to the Company or any Restricted Subsidiary than if no relationship
described in CLAUSES (1) and (2) above existed" shall be satisfied if such
transaction is fair, from a financial point of view, to the Company or such
Restricted Subsidiary.
(h) TAX CONSOLIDATION. Except as provided for in the Tax Allocation
Agreement or the Spin Off Tax Indemnification Agreement, the Company will not,
and will not permit any of its Subsidiaries to, file or consent to the filing of
any consolidated income tax return with any Person unless such other Person
shall have agreed in writing with the Company that the Company's or such
Subsidiary's liability with respect to taxes as a result of the filing of any
such consolidated income tax return with such Person shall not be materially
greater, nor the receipt of any tax benefits materially less, than they would
have been had the Company and its Subsidiaries continued to file a consolidated
income tax return with the Company as the parent corporation.
9.8. ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES. The Company will not
permit any Restricted Subsidiary (either directly or indirectly, by the issuance
of rights or options for, or securities convertible into, such shares) to issue,
sell or otherwise dispose of any shares of any
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authorized but unissued or treasury class of such Restricted Subsidiary's stock
(other than directors' qualifying shares) except to the Company or another
Restricted Subsidiary.
9.9. CAPITALIZATION. The Company will not permit the ratio of Total Debt
of the Combined Group to Capitalization to exceed 0.60.
9.10. INTEREST COVERAGE. The Company will not permit the ratio of (a)
EBITDA for the four fiscal quarters then most recently ended to (b) Fixed
Charges on Total Debt of the Combined Group for that period to be less than 3.00
to 1.00.
9.11. SENIOR TOTAL DEBT; SPECIAL DEBT. The Company will not at any time
create, incur, assume or suffer to exist any Total Debt of the Combined Group
PARI PASSU with the Obligations other than such Total Debt of the Combined Group
which does not at any time exceed the product of (a) 3.00 times (b) Adjusted
EBITDA for the four consecutive fiscal quarters then most recently ended. The
Company will not at any time create, incur, assume or suffer to exist any
Special Debt that would cause the aggregate principal amount of Special Debt to
exceed 15% of Consolidated Net Worth.
9.12. RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Board of Directors
of the Company may designate any Subsidiary of the Company or any Restricted
Subsidiary to be an Unrestricted Subsidiary if (a) the Subsidiary to be so
designated does not own any capital stock, redeemable stock or Total Debt of, or
own or hold any Lien on any property of, the Company or any other Restricted
Subsidiary of the Company, (b) the Subsidiary to be so designated is not
obligated by any Total Debt or Lien that, if in default, would result (with the
passage of time or notice or otherwise) in a default on any Total Debt of the
Company or any Restricted Subsidiary, and (c) either (A) the Subsidiary to be so
designated has total assets of $1,000 or less, or (B) such designation is
effective immediately upon such Person's becoming a Subsidiary of the Company or
of a Restricted Subsidiary. Unless so designated as an Unrestricted Subsidiary,
any Person that becomes a Subsidiary of the Company or any Restricted Subsidiary
will be classified as a Restricted Subsidiary. Except as provided in the first
sentence of this SECTION 9.12, no Restricted Subsidiary may be redesignated as
an Unrestricted Subsidiary. An Unrestricted Subsidiary may not be redesignated
as a Restricted Subsidiary. Any designation by the Board of Directors of the
Company will be evidenced to the Agent by promptly filing with the Agent a copy
of the resolution of such Board giving effect to such designation and an
Officer's Certificate certifying that such designation complies with this
SECTION 9.12.
Section 10. DEFAULTS.
10.1. EVENTS OF DEFAULT. If one or more of the following events (herein
called "EVENTS OF DEFAULT") shall occur and be continuing:
(a) the Company shall fail to pay any principal of any Loan,
Reimbursement Obligation, fee or other principal amount payable hereunder or
under any other Credit Document,
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or any SFER MRI Loan, as and when due, or shall fail to pay any interest on any
amount hereunder or under any other Credit Document or any SFER MRI Loan for
more than three days after the date due; or
(b) any member of the Combined Group shall default in any payment of
principal of or interest on any other obligation for money borrowed (or any
Capitalized Lease Obligation, any obligation under a conditional sale or other
title retention agreement, any obligation issued or assumed as full or partial
payment for property whether or not secured by a purchase money mortgage or any
obligation under notes payable or drafts accepted representing extensions of
credit) beyond any period of grace provided with respect thereto; or any member
of the Combined Group shall fail to perform or observe any other agreement, term
or condition contained in any agreement under which any such obligation is
created (or if any other event thereunder or under any such agreement shall
occur and be continuing) and the effect of such failure or other event is to
cause, or to permit the holder or holders of such obligation (or a trustee on
behalf of such holder or holders) to cause, such obligation to become due prior
to any stated maturity; or any member of the Combined Group shall fail to pay
any Guaranty relating to Total Debt for borrowed money in accordance with its
terms; PROVIDED, in each case, that the aggregate amount of all obligations as
to which such a payment default shall occur and be continuing or such a failure
or other event causing or permitting acceleration shall occur and be continuing
shall exceed $10,000,000; and PROVIDED, FURTHER that a default for purposes of
this SECTION 10.1(B) shall not be deemed to exist by reason of the acceleration
of the maturity of any such obligation solely by reason of a default in the
performance of a term or condition in any agreement or instrument under or by
which such obligation is created, evidenced or secured, which term or condition
restricts the right of the Company or any other Person to sell, pledge or
otherwise dispose of any margin stock (as such term is defined in Regulation U
of the Board) held by the Company or such other Person; or
(c) any representation or warranty made by the Company or any of its
officers in any Credit Document or in any other writing furnished to the Agent
or any Bank in connection with any Credit Document shall prove to have been
false or misleading in any material respect on the date as of which it was made;
or
(d) the Company shall default in the performance of any of its
obligations under SECTIONS 9.6 through 9.11; or
(e) the Company shall default in the performance of any of its
obligations in any Credit Document other than those specified elsewhere in this
SECTION 10.1 and such default shall not be remedied within 30 days after any
executive officer of the Company obtains actual knowledge thereof; or
(f) any member of the Combined Group shall make an assignment for the
benefit of creditors; generally fail to pay its debts as such debts become due;
or admit in writing its inability to generally pay its debts as such debts
become due; or
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(g) a Governmental Authority shall enter any decree or order for relief
in respect of any member of the Combined Group under any bankruptcy,
reorganization, compromise, arrangement, insolvency, readjustment of debt,
dissolution or liquidation or similar law of any jurisdiction, whether now or
hereafter in effect (herein called the "BANKRUPTCY LAW"); or
(h) any member of the Combined Group shall petition or apply for or
consent to the appointment of, or taking possession by, a trustee, receiver,
custodian, sequestrator, liquidator or other similar official of or for itself
or any substantial part of its assets, or shall commence a voluntary case under
any Bankruptcy Law or any proceedings (other than proceedings for the voluntary
liquidation and dissolution of a Restricted Subsidiary) relating to any member
of the Combined Group under any Bankruptcy Law; or
(i) any such petition or application referred to in SECTION 10.1(H)
shall be filed, or any such proceeding referred to in SECTION 10.1(H) shall be
commenced, against any member of the Combined Group and such member of the
Combined Group by any act shall indicate its approval thereof, consent thereto
or acquiescence therein; or an order, judgment or decree shall be entered
appointing any such trustee, receiver, custodian, liquidator or similar
official, or approving the petition in any such proceedings, and such order,
judgment or decree shall remain unstayed and in effect for more than 60
consecutive days; or
(j) any order, judgment or decree shall be entered in any proceedings
against any member of the Combined Group decreeing the dissolution or
liquidation of any member of the Combined Group and such order, judgment or
decree shall remain unstayed and in effect for more than the appeal time
provided by law; or
(k) any order, judgment or decree shall be entered in any proceedings
against any member of the Combined Group decreeing a split-up of such member of
the Combined Group which requires (1) the divestiture of assets which exceed, or
the divestiture of the stock of a Restricted Subsidiary whose assets exceed, 10%
of the consolidated total assets of the Company and the Restricted Subsidiaries
as of the end of the fiscal quarter immediately preceding or coinciding with
such divestiture or (2) the divestiture of assets or stock of a Restricted
Subsidiary which shall have contributed more than 10% of EBITDA for the four
most recently completed fiscal quarters, and such order, judgment or decree
shall remain unstayed and in effect for more than 60 consecutive days; or
(l) any judgment or order, or series of judgments or orders, for the
payment of money in an amount in excess of $10,000,000 shall be rendered against
any member of the Combined Group and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay of execution thereof
shall not be procured, within the appeal time provided by law from the date of
entry thereof, or such member of the Combined Group shall not, within said
appeal time, or such longer period during which execution of the same shall have
been stayed, appeal therefrom and cause the execution thereof to be stayed
during such appeal; or
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(m) the Company or any ERISA Affiliate shall fail to pay when due any
amount or amounts aggregating in excess of $10,000,000 which it shall have
become liable to pay with respect to any Plan; or notice of intent to terminate
a Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of
ERISA) having aggregate Unfunded Liabilities in excess of $10,000,000 shall be
filed under Title IV of ERISA by the Company or any ERISA Affiliate, any plan
administrator or any combination of the foregoing; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate or to cause a trustee to be
appointed to administer any Plan or Plans (other than a multiemployer plan under
Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of
$10,000,000 or a proceeding shall be instituted by a fiduciary of any such Plan
or Plans against the Company or any ERISA Affiliate to enforce Section 515 or
4219(c)(5) of ERISA; or the Company or any ERISA Affiliate shall incur a
complete or partial withdrawal liability under Title IV of ERISA in an annual
amount in excess of $2,000,000 (and in the aggregate $10,000,000 in connection
with any Plan; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any Plan or Plans having aggregate
Unfunded Liabilities in excess of $10,000,000 must be terminated; or there shall
occur any event or condition that might reasonably constitute grounds for the
termination of any Plan or Plans having aggregate Unfunded Liabilities in excess
of $10,000,000 or with respect to such Plan or Plans either the imposition of
any liability in excess of $10,000,000 (other than contributions in the ordinary
course) or any Lien provided under Section 4068 of ERISA securing an amount in
excess of $10,000,000 on any property of the Company or any ERISA Affiliate;
PROVIDED, HOWEVER, that any amounts owing by the Company pursuant to the ERISA
Indemnification Agreement between Santa Fe Pacific Corporation or its successor
and the Company shall be deducted from the dollar threshold amounts set forth
above in determining whether any such condition or event constitutes an Event of
Default under this paragraph; or
(n) one or more demands for payment is made upon the Company by Santa Fe
Pacific Corporation or its successor or any other Person pursuant to the Tax
Indemnification Agreement and such demands exceed $5,000,000 in the aggregate;
or
(o) any Default or Event of Default, as defined in Appendix A to the
Monterey Credit Agreement, shall occur; or
(p) any Change of Control shall occur;
THEREUPON: (I) the Agent may (and, if directed by the Required Banks, shall) do
any or all of the following: (a) declare the Commitments terminated (whereupon
the Commitments shall be terminated); (b) terminate any Letter of Credit
pursuant to which such termination is permitted; (c) declare the unpaid amount
of the Loans (principal and accrued and unpaid interest) and all Reimbursement
Obligations, fees and other amounts payable under the Credit Documents to be
forthwith due and payable, whereupon such amounts shall be and become
immediately due and payable, without notice (including notice of acceleration
and notice of intent to accelerate), presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly WAIVED by the Company
to the extent permitted by law; PROVIDED that in the case of the
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occurrence of an Event of Default with respect to the Company referred to in
SECTION 10.1(G) through (I), the Commitments shall be automatically terminated
and the unpaid amount of the Loans (principal and accrued and unpaid interest)
and all Reimbursement Obligations, fees and all other amounts payable under the
Credit Documents shall be and become automatically and immediately due and
payable, without notice (including notice of intent to accelerate and to the
extent permitted by the law, notice of acceleration) and without presentment,
demand, protest or other formalities of any kind, all of which are hereby
expressly WAIVED by the Company; and (d) require Cover for all Letter of Credit
Liabilities; (II) each Bank may exercise its rights of offset against each
account and all other property of the Company in the possession of such Bank,
which right is hereby granted by the Company to the Banks; and (III) the Agent
and each Bank may exercise any and all other rights available to them pursuant
to the Credit Documents, at law and in equity.
Section 11. THE AGENT.
11.1. APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably
appoints and authorizes the Agent to act as its agent under the Credit Documents
with such powers as are specifically delegated to the Agent by the terms
thereof, together with such other powers as are reasonably incidental thereto.
The Agent (which term as used in this SECTION 11 shall include reference to its
Affiliates and its own and its Affiliates' officers, directors, employees and
agents) (a) shall have no duties or responsibilities except those expressly set
forth in the Credit Documents and shall not by reason of any Credit Document be
a trustee or fiduciary for any Bank; (b) shall not be responsible to any Bank
for any recitals, statements, representations or warranties contained in any
Credit Document, or in any certificate or other document referred to or provided
for in, or received by any of them under, any Credit Document, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of any
Credit Document or any other document referred to or provided for therein or any
property covered thereby or for any failure by the Company or any other Person
to perform any of its obligations thereunder; (c) shall not be required to
initiate or conduct any enforcement, litigation or collection proceedings
hereunder or under any Credit Document except to the extent requested by the
Required Banks (and SECTION 11.7 shall apply), and (d) shall not be responsible
to any Bank for any action taken or omitted to be taken by it under any Credit
Document or any other document or instrument referred to or provided for therein
or in connection therewith, including any such action pursuant to its own
negligence, except for its own gross negligence or willful misconduct. The Agent
may employ agents and attorneys-in-fact and shall not be responsible for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care. Without in any way limiting any of the foregoing, each
Bank acknowledges that the Agent shall have no greater responsibility in the
operation of the Letters of Credit than is specified in the Uniform Customs and
Practice of Documentary Credits (1993 Revision, International Chamber of
Commerce Publication No. 500).
11.2. RELIANCE BY AGENT. The Agent shall be entitled to rely upon any
certification, notice or other communication (including any thereof by
telephone, facsimile, telegram or cable)
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believed by it to be genuine and correct and to have been signed or sent by or
on behalf of the proper Person or Persons, and upon advice and statements of
legal counsel (which may be counsel for the Company), independent accountants
and other experts selected by the Agent. As to any matters not expressly
provided for by any Credit Document, the Agent shall in all cases be fully
protected in acting, or in refraining from acting, in accordance with
instructions of the Required Banks, and any action taken or failure to act
pursuant thereto shall be binding on all of the Banks.
11.3. DEFAULTS. The Agent shall not be deemed to have knowledge of the
occurrence of a Default (other than the nonpayment of Loans, Reimbursement
Obligations, Commitment Fee or Letter of Credit Fee) unless it has received
notice from a Bank or the Company specifying such Default and stating that such
notice is a "Notice of Default". In the event that the Agent receives such a
notice of the occurrence of a Default, the Agent shall give prompt notice
thereof to the Banks (and shall give each Bank prompt notice of each such
nonpayment). The Agent shall (subject to SECTIONS 11.7 and 12.5) take such
action with respect to such Default as shall be directed by all Banks or the
Required Banks, as appropriate, and within its rights under the Credit Documents
and at law or in equity; PROVIDED that, unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, permitted hereby with respect
to such Default as it shall deem advisable in the best interests of the Banks
and within its rights under the Credit Documents, at law or in equity, and shall
be fully protected in doing so.
11.4. RIGHTS AS A BANK. With respect to its Commitment, Loans and Letter
of Credit Liabilities, Chase in its capacity as a Bank hereunder shall have the
same rights and powers under the Credit Documents as any other Bank and may
exercise the same as though it were not acting as the Agent, and the term "Bank"
or "Banks" shall, unless the context otherwise indicates, include the Agent in
its individual capacity. The Agent may (without having to account therefor to
any Bank) accept deposits from, lend money to and generally engage in any kind
of banking, trust, letter of credit, agency or other business with the Company
(and any of its Affiliates) as if it were not acting as the Agent, and the Agent
may accept fees and other consideration from the Company and its Affiliates (in
addition to the fees heretofore agreed to between the Company and the Agent) for
services in connection with this Agreement or otherwise without having to
account for the same to the Banks. Without limiting the rights and remedies of
the Banks specifically set forth herein, no other Bank by virtue of being a Bank
hereunder shall have any interest in any such activities, any present or future
guaranty by or for the account of the Company, any present or future offset
exercised by the Agent in respect of any such other activities, or any present
or future property at any time taken as security for any such other activities;
PROVIDED, HOWEVER, that if any payment in respect of such guaranties or such
property or the proceeds thereof shall be applied to the Obligations, each Bank
shall be entitled to share in such application PRO RATA according to its portion
of the Obligations.
11.5. INDEMNIFICATION. THE BANKS SHALL INDEMNIFY THE AGENT AND EACH
OTHER INDEMNIFIED PERSON (TO THE EXTENT NOT REIMBURSED
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UNDER SECTION 12.3 OR 12.4, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE COMPANY
UNDER SAID SECTIONS 12.3 AND 12.4), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE
COMMITMENT PERCENTAGES, FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS
OF ANY KIND AND NATURE WHATSOEVER (INCLUDING THE CONSEQUENCES OF THE NEGLIGENCE
OF THE AGENT OR ANY OTHER INDEMNIFIED PERSON) WHICH MAY BE IMPOSED ON, INCURRED
BY OR ASSERTED AGAINST THE AGENT OR ANY INDEMNIFIED PERSON IN ANY WAY RELATING
TO OR ARISING OUT OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN) OR ANY OTHER
DOCUMENTS CONTEMPLATED BY OR REFERRED TO THEREIN OR THE TRANSACTIONS
CONTEMPLATED BY ANY CREDIT DOCUMENT (INCLUDING THE COSTS AND EXPENSES WHICH THE
COMPANY IS OBLIGATED TO PAY UNDER SECTIONS 12.3 AND 12.4 BUT EXCLUDING, UNLESS A
DEFAULT HAS OCCURRED AND IS CON TINUING, NORMAL ADMINISTRATIVE COSTS AND
EXPENSES INCIDENT TO THE PERFORMANCE OF ITS DUTIES UNDER THE CREDIT DOCUMENT) OR
THE ENFORCEMENT OF ANY OF THE TERMS OF ANY CREDIT DOCUMENT OR OF ANY SUCH OTHER
DOCUMENTS; PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE
EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY
TO BE INDEMNIFIED. The obligations of the Banks under this SECTION 11.5 shall
survive the termination of this Agreement.
11.6. NON-RELIANCE ON THE AGENT AND OTHER BANKS. Each Bank agrees that
it has received current financial information with respect to the Company and
its Subsidiaries and that it has, independently and without reliance on the
Agent or any other Bank and based on such documents and information as it has
deemed appropriate, made its own credit analysis of the Company and decision to
enter into this Agreement and that it will, independently and without reliance
upon the Agent or any other Bank, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under the Credit Documents. The Agent
shall not be required to keep itself informed as to the performance or
observance by the Company of any Credit Document or any other document referred
to or provided for therein or to inspect the property or books of the Company or
any other Person. Except for notices, reports and other documents and
information expressly required to be furnished to the Banks by the Agent under
the Credit Documents, the Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning the affairs,
financial condition or business of the Company (or any of its Affiliates) which
may come into the possession of the Agent.
11.7. FAILURE TO ACT. Except for action expressly required of the Agent
under the Credit Documents, the Agent shall in all cases be fully justified in
failing or refusing to act under the Credit Documents unless it shall have
received further assurances to its satisfaction by the Banks of their
indemnification obligations under SECTION 11.5 against any and all liability and
expense
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which may be incurred by it by reason of taking or continuing to take
any such action.
11.8. RESIGNATION OR REMOVAL OF THE AGENT. Subject to the appointment
and acceptance of a successor Agent as provided below, the Agent may resign at
any time by giving notice thereof to the Banks and the Company, and the Agent
may be removed at any time with or without cause by the Required Banks. Upon any
such resignation or removal, the Required Banks shall have the right to appoint
a successor Agent. If no successor Agent shall have been so appointed by the
Required Banks and shall have accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or the Required Banks' removal
of the retiring Agent, the retiring Agent may, on behalf of the Banks, appoint a
successor Agent. Any successor Agent shall be a bank which has an office in the
United States and a combined capital and surplus of at least $250,000,000 and
with its deposits insured by the FDIC. Upon the acceptance of any such
appointment, the successor Agent shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under the Credit
Documents. Such successor Agent shall promptly specify its Principal Office
referred to in SECTIONS 3.1 and 5.1 by notice
to the Company and the Banks. After any retiring Agent's resignation or removal
hereunder as the Agent, the provisions of this SECTION 11 shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent.
Section 12. MISCELLANEOUS.
12.1. WAIVER. No waiver of any Default shall be a waiver of any other
Default. No failure on the part of the Agent or any Bank to exercise and no
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under any Credit Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege thereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The remedies provided in the Credit Documents are
cumulative and not exclusive of any remedies provided by law or in equity.
12.2. NOTICES. All notices and other communications provided for in the
Credit Documents (including any modifications of, or waivers or consents under,
this Agreement) shall be in writing and (a) delivered against receipt therefor,
(b) sent by overnight courier (such as Federal Express), charges prepaid, (c)
mailed by registered or certified mail, return receipt requested, postage
prepaid, or (d) given or made by telegraph, telecopy (confirmed by mail), cable
or other writing, in each case addressed to the intended recipient at the
"Address for Notices" specified below its name on the signature pages hereof;
or, as to any party, at such other address as shall be designated by such party
in a notice to the Company and the Agent given in accordance with this SECTION
12.2. Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given when delivered; on the Business Day
following delivery to an overnight courier; when transmitted before 5 p.m. on a
Business Day by telecopier or delivered to the telegraph or cable office (when
transmitted after 5 p.m. on a Business Day, at 9 a.m. on the next Business Day);
or on the second Business Day after its deposit in the mails;
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PROVIDED, HOWEVER, that notices required or permitted by SECTION 5.5 shall be
effective only when actually received by the Agent. Actual notice shall always
be effective.
12.3. EXPENSES. Whether or not any Loan is ever made or any Letter of
Credit ever issued, the Company shall pay or reimburse on demand each of the
Banks and the Agent for paying: (a) the reasonable fees and expenses of Liddell,
Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Agent, in connection
with (1) the preparation, execution and delivery of the Credit Documents
(including exhibits and schedules) and the making of the Loans and the issuance
of Letters of Credit hereunder and (2) any modification, supplement or waiver of
any of the terms of any Credit Document; (b) all reasonable out-of-pocket costs
and expenses of the Banks or the Agent (including costs of preparing an
Independent Engineering Report and reasonable counsels' fees) in connection with
any Event of Default or the enforcement of any Credit Document; (c) all
transfer, stamp, documentary or other similar taxes, assessments or charges
levied by any governmental or revenue authority in respect of any Credit
Document or any other document referred to therein; (d) all costs, expenses,
taxes, assessments and other charges incurred in connection with any filing or
registration contemplated by any Credit
Document or any document referred to therein; and (e) reasonable expenses of due
diligence and syndication, and mutually agreed advertising and marketing costs.
12.4. INDEMNIFICATION.
(I) TO THE FULLEST EXTENT PERMITTED BY LAW, THE COMPANY SHALL INDEMNIFY
THE AGENT (INCLUDING THE AGENT WHEN ACTING AS ISSUER OF LETTERS OF CREDIT), EACH
BANK AND EACH OTHER INDEMNIFIED PERSON FROM, AND HOLD EACH OF THEM HARMLESS
AGAINST, ANY AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO
WHICH ANY OF THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES,
LIABILITIES, COSTS, EXPENSES, CLAIMS AND DAMAGES ARISING FROM THE NEGLIGENCE OF
THE AGENT OR THE BANKS OR ANY OTHER INDEMNIFIED PERSON, INSOFAR AS SUCH LOSSES,
LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES ARISE OUT OF OR IN CONNECTION
WITH (A) ANY ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY
EXTENSION OF CREDIT UNDER THIS AGREEMENT; (B) ANY BREACH BY THE COMPANY OF ANY
CREDIT DOCUMENT (AS DEFINED HEREIN); (C) ANY VIOLATION BY THE COMPANY OR ANY OF
ITS SUBSIDIARIES OF ANY LEGAL REQUIREMENT, INCLUDING, WITHOUT LIMITATION,
APPLICABLE ENVIRONMENTAL LAWS; (D) ANY ENVIRONMENTAL CLAIMS OR (E) ANY
INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED
INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING, AND THE COMPANY
SHALL REIMBURSE EACH INDEMNIFIED PERSON, UPON DEMAND, FOR ANY EXPENSES
(INCLUDING REASONABLE LEGAL FEES) INCURRED IN CONNECTION WITH ANY SUCH
INVESTIGATION OR PROCEEDING; BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS,
DAMAGES, COSTS OR EXPENSES INCURRED BY
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SUCH INDEMNIFIED PERSON BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
OF ANY INDEMNIFIED PERSON.
(II) TO THE FULLEST EXTENT PERMITTED BY LAW, THE COMPANY SHALL INDEMNIFY
THE AGENT (INCLUDING THE AGENT WHEN ACTING AS ISSUER OF LETTERS OF CREDIT), AND
EACH OTHER INDEMNIFIED PERSON FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY
AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO WHICH ANY OF
THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES, LIABILITIES, COSTS,
EXPENSES, CLAIMS AND DAMAGES ARISING FROM THE NEGLIGENCE OF THE AGENT OR THE
BANKS OR ANY OTHER INDEMNIFIED PERSON, IN CONNECTION WITH THE EXECUTION AND
DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT,
INCLUDING, WITHOUT LIMITATION, ANY CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS
OR EXPENSES WHICH THE AGENT, OR SUCH OTHER INDEMNIFIED PERSON, AS THE CASE MAY
BE, MAY INCUR (WHETHER INCURRED AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE)
BY REASON OF OR IN CONNECTION WITH THE FAILURE OF ANY OTHER BANK (WHETHER AS A
RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) TO FULFILL OR COMPLY WITH ITS
OBLIGATIONS TO THE AGENT OR ANY BANK, AS THE CASE MAY BE, WITH RESPECT TO SUCH
LETTER OF CREDIT HEREUNDER (BUT NOTHING HEREIN CONTAINED SHALL AFFECT THE RIGHTS
THE COMPANY MAY HAVE AGAINST SUCH DEFAULTING BANK); BUT EXCLUDING ANY SUCH
LOSSES, LIABILITIES, CLAIMS, DAMAGES, COSTS OR EXPENSES INCURRED BY SUCH
INDEMNIFIED PERSON BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
ANY INDEMNIFIED PERSON.
(III) The obligation of the Company to provide indemnification under
this SECTION 12.4 for fees and expenses of counsel shall be limited to the
reasonable fees and expenses of one counsel in each jurisdiction representing
all of the Persons entitled to such indemnification, except to the extent that,
in the reasonable judgment of any such Indemnified Person, the existence of
actual or potential conflicts of interest make representation of all of such
indemnified Persons by the same counsel inappropriate; in such a case, the
Person exercising such judgment shall be indemnified for the reasonable fees and
expenses of its separate counsel to the extent provided in this SECTION 12.4
without giving effect to the first clause of this sentence. Nothing in this
SECTION 12.4 is intended to limit the obligations of the Company under any other
provision of this Agreement.
12.5. AMENDMENTS, ETC. No amendment or waiver of any provision of any
Credit Document, nor any consent to any departure by the Company therefrom,
shall in any event be effective unless the same shall be agreed or consented to
by the Required Banks and the Company, as appropriate, and each such waiver or
consent shall be effective only in the specific instance
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and for the specific purpose for which given; PROVIDED that no amendment, waiver
or consent shall, unless in writing and signed by each Bank affected thereby, do
any of the following: (a) increase the Commitment of any of the Banks or subject
any Bank to any additional obligation; (b) reduce the principal of, or interest
on, any Loan, Reimbursement Obligation, fee or other sum to be paid under any
Credit Document; (c) postpone any scheduled date fixed for any payment of
principal of, or interest on, any Loan, Reimbursement Obligation, fee or other
sum to be paid under any Credit Document; (d) change the percentage of the
Aggregate Commitment, or of the aggregate unpaid principal amount of any of the
Loans, or the number of Banks, which shall be required for the Banks or any of
them to take any action under this Agreement or any other Credit Document; or
(e) change any provision contained in SECTIONS 2.3, 5.2, 5.7, 6, 12.3 or 12.4 or
this SECTION 12.5. Anything in this SECTION 12.5 to the contrary, no amendment,
waiver or consent shall be made with respect to SECTION 11 without the consent
of the Agent.
12.6. SUCCESSORS AND ASSIGNS.
(a) This Agreement and the other Credit Documents shall be
binding upon and inure to the benefit of the Company, the Agent and the Banks
and their respective successors and assigns. The Company may not assign or
transfer any of its rights or obligations under any of the Credit Documents
without the prior written consent of all of the Banks.
(b) Each Bank may sell participations to any Person in all or
part of its Loans, Reimbursement Obligations, Note and Commitment, in which
event, without limiting the foregoing, the provisions of SECTION 6 shall inure
to the benefit of each purchaser of a participation and the PRO RATA treatment
of payments, as described in SECTION 5.2, shall be determined as if such Bank
had not sold such participation. In the event any Bank shall sell any
participation, (1) the Company, the Agent and the other Banks shall continue to
deal solely and directly with such selling Bank in connection with such selling
Bank's rights and obligations under the Credit Documents (including the Note
held by such selling Bank); (2) such Bank shall retain the sole right and
responsibility to enforce the obligations of the Company under the Credit
Documents, including the right to approve any amendment, modification or waiver
of any provision of this Agreement or any other Credit Document other than
amendments, modifications or waivers with respect to (A) any fees payable
hereunder to the Banks and (B) the amount of principal or the rate of interest
payable on, or the dates fixed for the scheduled repayment of principal of, the
Loans, Reimbursement Obligations and other sums to be paid to the Banks under
the Credit Documents, and (3) the Company agrees, to the fullest extent it may
effectively do so under applicable law, that any participant of a Bank may
exercise all rights of set-off, bankers' lien, counterclaim or similar rights
with respect to such participation as fully as if such participant were a direct
holder of Loans and Reimbursement Obligations if such Bank has previously given
notice of the sale of such participation to the Company.
(c) Each Bank may assign to one or more Banks or Eligible
Assignees all or a portion of its interests, rights and obligations under this
Agreement and the other Credit Documents (including all or a portion of its
Commitment and the same portion of the Loans and
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Letter of Credit Advances at the time owing to it and of its outstanding Letter
of Credit Liabilities at the time and the Note held by it); PROVIDED THAT (1)
other than in the case of an assignment to a Person at least 50% owned by the
assignor Bank, or by a common parent of both, or to another Bank, the Agent and
the Company must give their respective prior written consent, which consent will
not be unreasonably withheld; (2) the aggregate amount of the Commitment, Loans
and outstanding Letter of Credit Liabilities of the assigning Bank subject to
each such assignment (determined as of the date the Assignment Agreement with
respect to such assignment is delivered to the Agent) shall in no event be less
than $10,000,000 (or $1,000,000 in the case of an assignment between Banks)
(except for certain exceptions approved by the Company and the Agent or where
all of a Bank's Commitment, Loans and outstanding Letter of Credit Liabilities
are being assigned) and shall be in an amount that is an integral multiple of
$1,000,000 (except for certain exceptions approved by the Company and the Agent
or where all of a Bank's Commitment, Loans and outstanding Letter of Credit
Liabilities are being assigned); and (3) the parties to each such assignment
shall execute and deliver to the Agent, for its acceptance and recording in its
records, an Assignment Agreement with blanks appropriately completed, together
with the Note subject to such assignment and a processing and recordation fee of
$2,500 (for which the Company shall have no liability except in the case of
assignments required by the Company pursuant to SECTION 6.1, 6.3, 6.6 or 6.7, in
which case such fee shall be paid by the Company). Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment Agreement, which shall be at least five Business Days after
the date of execution thereof (unless otherwise agreed by the parties thereto
and the Agent), (A) the assignee thereunder shall be a party to this Agreement
and, to the extent provided in such Assignment Agreement, have the rights and
obligations of a Bank under the Credit Documents, and (B) the Bank making such
assignment shall, to the extent provided in such Assignment Agreement, be
released from its obligations under this Agreement and the other Credit
Documents (and, in the case of an Assignment Agreement covering all or the
remaining portion of an assigning Bank's rights and obligations under this
Agreement, such Bank shall cease to be a party hereto) but shall be entitled to
the benefit of this Agreement and the other Credit Documents for matters
occurring during the time it was a Bank under this Agreement.
(d) By executing and delivering an Assignment Agreement, the
assigning Bank and the assignee thereunder confirm to and agree with each other
and the other parties to this Agreement as follows: (1) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim, such
assigning Bank makes no representation or warranty and assumes no responsibility
with respect to any statements, warranties or representations made in or in
connection with any Credit Document or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of any Credit Document; (2)
such assigning Bank makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Company or the
performance or observance by the Company of any of its obligations under any
Credit Document; (3) such assignee confirms that it has received a copy of this
Agreement, together with copies of the financial statements of the Company
previously delivered by the Company in accordance herewith and such other
documents and information as it has deemed appropriate to make its own
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credit analysis and decision to enter into such Assignment Agreement; (4) such
assignee will, independently and without reliance upon the Agent, such assigning
Bank or any other Bank and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under the Credit Documents; (5) such assignee
appoints and authorizes the Agent to take such action as agent on its behalf and
to exercise such powers under the Credit Documents as are delegated to the Agent
by the terms hereof, together with such powers as are reasonably incidental
thereto, and (6) such assignee agrees that it will perform in accordance with
their terms all obligations that by the terms of the Credit Documents are
required to be performed by it as a Bank.
(e) The Agent shall maintain at its office a copy of each Assignment
Agreement delivered to it and a record of the names and addresses of the Banks
and the Commitment of, and the principal amount of the Loans and Letter of
Credit Advances owing to, and the outstanding Letter of Credit Liabilities of,
each Bank from time to time. The entries in such record shall be conclusive, in
the absence of manifest error, and the Company, the Agent and the Banks may
treat each Person the name of which is recorded therein as a Bank hereunder for
all purposes of the Credit Documents. Such records shall be available for
inspection by the Company or any Bank at any reasonable time and from time to
time upon reasonable prior notice.
(f) Upon its receipt of an Assignment Agreement executed by an
assigning Bank and the assignee thereunder together with the Note subject to
such assignment, any required consent to such assignment and the fee payable in
respect thereto, the Agent shall, if such Assignment Agreement has been
completed with blanks appropriately filled, (1) accept such Assignment
Agreement; (2) record the information contained therein in its records, and (3)
give prompt notice thereof to the Company. Contemporaneously with the receipt by
the Agent of an Assignment Agreement, the Company, at its own expense, shall
execute and deliver to the Agent in exchange for each surrendered Note a new
Note payable to the order of such assignee in an amount equal to the Commitment
and/or Loans assumed by it pursuant to such Assignment Agreement and, if the
assigning Bank has retained any Commitment and/or Loans hereunder, a new Note
payable to the order of the assignor Bank in an amount equal to the Commitment
and/or Loans retained by it. Such new Notes shall be in an aggregate face amount
equal to the face amount of each surrendered Note, shall be dated the effective
date of such Assignment Agreement and shall otherwise be in substantially the
form of the surrendered Note. Thereafter, the surrendered Note shall be marked
canceled and returned to the Company.
(g) Any Bank may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this SECTION
12.6, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Company furnished to such Bank by or
on behalf of the Company.
(h) Notwithstanding anything herein to the contrary, each Bank
may pledge and assign all or any portion of its rights and interests under the
Credit Documents to any Federal Reserve Bank. No such assignment shall release
the assigning Bank from its obligations
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hereunder.
(i) All transfers of any interest in any Note hereunder shall be
in compliance with all federal and state securities laws, if applicable.
Notwithstanding the foregoing sentence, however, the parties to this Agreement
do not intend that any transfer under this SECTION 12.6 be construed as a
"purchase" or "sale" of a "security" within the meaning of any applicable
federal or state securities laws.
(j) Notwithstanding any other provision of this SECTION 12.6
(except SUBSECTION (H)), Chase and its Affiliates may not make any assignment of
their rights hereunder which would reduce their aggregate Commitment Percentages
below 10%.
12.7. SURVIVAL; TERMINATION; REINSTATEMENT.
(a) In addition to the other provisions of the Credit Documents
expressly stated to survive the termination of this Agreement, the obligations
of the Company under SECTIONS 6, 12.3 and 12.4 and the last sentence of this
SECTION 12.7 and the obligations of the Banks under SECTIONS 11.5, 12.8 and
12.12 shall survive the termination of this Agreement.
(b) This Agreement shall terminate upon (i) the full and final
payment of all Notes and Reimbursement Obligations, (ii) the expiry of all
Letters of Credit, (iii) the termination of all Commitments and (iv) the payment
of all non-contingent amounts due under the Credit Documents. Notwithstanding
the foregoing, if all conditions to the termination of this Agreement set forth
in this SECTION 12.7(B) shall have been satisfied other than the expiry of all
Letters of Credit, and all outstanding Letters of Credit shall have been fully
Covered or shall be backed by a letter of credit in Proper Form issued by an
issuer acceptable to the Issuer in its sole discretion, the Company shall in
such event no longer be required to comply with SECTION 9.
(c) If at any time all or any part of any payment previously
applied by the Agent or any Bank to any Loan, Reimbursement Obligation or other
sum hereunder is or must be returned by or recovered from the Agent or such Bank
for any reason (including the order of any bankruptcy court), to the extent
permitted by law, the Credit Documents shall automatically be reinstated to the
same effect as if such prior application had not been made, and the Company
shall indemnify the Agent or such Bank against, and save and hold the Agent and
such Bank harmless from, any required return by or recovery from the Agent or
such Bank of any such payment because of its being deemed preferential under any
applicable Legal Requirement or for any other reason.
12.8. LIMITATION OF INTEREST. The parties to the Credit Documents intend
to strictly comply with all applicable laws, including applicable usury laws.
Accordingly, the provisions of this SECTION 12.8 shall govern and control over
every other provision of any Credit Document which conflicts or is inconsistent
with this SECTION 12.8, even if such provision declares that it controls. To the
maximum extent permitted by applicable law, (a) any non-principal payment shall
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be characterized as an expense or as compensation for something other than the
use, forbearance or detention of money and not as interest and (b) all interest
at any time contracted for, taken, reserved, retained, charged or received shall
be amortized, prorated, allocated and spread, in equal parts, during the full
term of the Loans and the Commitments. In no event shall the Company or any
other Person be obligated to pay, or the Agent or any Bank have any right or
privilege to reserve, take, receive or retain, any interest in excess of the
maximum amount of nonusurious interest permitted under applicable law. If the
term of any of the Notes is shortened by reason of acceleration of maturity as a
result of any Default or by any other cause, or by reason of any required or
permitted prepayment, and if for that (or any other) reason the Agent or any
Bank at any time, including the stated maturity, is owed or receives (and/or has
reserved, taken or received) interest in excess of interest calculated at the
Highest Lawful Rate, then and in any such event all of any such excess interest
shall be canceled automatically as of the date of such acceleration, prepayment
or other event which produces the excess, and, if such excess interest has been
paid to the Agent or such Bank, it shall be credited PRO TANTO against the
then-outstanding principal balance of the Company's obligations to the Agent or
such Bank, effective as of the date or dates when the event occurs which causes
it to be excess interest, until such excess is exhausted or all of such
principal has been fully paid and satisfied, whichever occurs first, and any
remaining balance of such excess shall be promptly refunded to its payor.
12.9. CAPTIONS. Captions and section headings appearing in the Credit
Documents are included solely for convenience and shall not be considered in
construing the Credit Documents.
12.10. COUNTERPARTS. Each Credit Document may be executed in any number
of identical counterparts, and by the parties on separate counterparts, and each
counterpart, when so executed and delivered, shall constitute an original
instrument, and all such separate counterparts together shall constitute but one
and the same agreement.
12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.
(A) EXCEPT TO THE EXTENT OTHERWISE SPECIFIED IN THE CREDIT DOCUMENTS,
EACH CREDIT DOCUMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK (TO THE EXTENT PERMITTED BY LAW, OTHER THAN ITS
CONFLICT OF LAW RULES) AND THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA. ANY
LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED
STATES FOR THE SOUTHERN DISTRICT OF NEW YORK AND THE COMPANY HEREBY IRREVOCABLY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. THE
COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION
SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 1633 BROADWAY, NEW YORK, NEW YORK
10019 AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT
76
<PAGE>
AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE
OF ANY AND ALL LEGAL PROCESS, SUMMONSES, NOTICES AND DOCUMENTS WHICH MAY BE
SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE,
APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH OR THE COMPANY
DESIRES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT, THE COMPANY AGREES TO
DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK, NEW YORK ON THE TERMS
AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE AGENT UNDER THIS
AGREEMENT. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS
OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
THE COMPANY AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE
TO BECOME EFFECTIVE TEN DAYS AFTER SUCH MAILING. NOTHING IN THIS AGREEMENT SHALL
AFFECT THE RIGHT OF THE AGENT, ANY BANK OR THE HOLDER OF ANY NOTE TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO THE EXTENT PERMITTED BY LAW
TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE TO PROCEED AGAINST THE COMPANY IN ANY
OTHER JURISDICTION.
(B) TO THE EXTENT PERMITTED BY LAW, EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE IN ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT
BROUGHT IN THE NEW YORK COURTS REFERRED TO IN CLAUSE (A) ABOVE AND HEREBY
FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM.
(C) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED BY ANY CREDIT DOCUMENT.
12.12. CONFIDENTIALITY. Each Bank agrees to exercise its best efforts to
keep any information delivered or made available by the Company to it (including
any information obtained pursuant to SECTION 9.1) which is clearly indicated to
be confidential information, confidential from anyone other than Persons
employed or retained by such Bank who are or are expected to become engaged in
evaluating, approving, structuring or administering the Loans or the Letters of
Credit; PROVIDED that nothing herein shall prevent any Bank from disclosing such
information (a) to any other Bank, (b) pursuant to subpoena or upon the order of
any court or administrative
77
<PAGE>
agency, (c) upon the request or demand of any regulatory agency or authority
having jurisdiction over such Bank, (d) which has been publicly disclosed, (e)
to the extent reasonably required in connection with any litigation to which the
Agent, any Bank, or their respective Affiliates may be a party, (f) to the
extent reasonably required in connection with the exercise of any remedy
hereunder or under any other Credit Document, (g) to such Bank's legal counsel
and independent auditors and (h) to any actual or proposed participant or
assignee of all or part of its rights hereunder which has agreed in writing to
be bound by the provisions of this SECTION 12.12. Each Bank will promptly notify
the Company of any information that it is required or requested to deliver
pursuant to CLAUSE (B) OR (C) of this SECTION 12.12 and, if the Company is not a
party to any such litigation, CLAUSE (E) of this SECTION 12.12.
12.13. ENTIRE AGREEMENT. This Agreement and the other Credit Documents
embody the entire agreement among the parties with respect to their subject
matter and supersede all prior proposals, agreements and understandings related
to the subject matter of this Agreement and the other Credit Documents.
12.14. CONSTRUCTION. The parties agree that this Agreement and the other
Credit Documents were negotiated agreements and accordingly no presumption shall
attach based on the identity of the drafting party.
12.15. SEVERABILITY. Whenever possible, each provision of the Credit
Documents shall be interpreted in such manner as to be effective and valid under
applicable law. If any provision of any Credit Document shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions of such Credit Document
shall not be affected or impaired thereby.
12.16. SFER MRI LOANS. The Banks acknowledge and agree that the Company
may have up to $20,000,000 in SFER MRI Loans outstanding at any time and that
such SFER MRI Loans shall be due and payable no later than December 31, 1996.
Such SFER MRI Loans shall be PARI PASSU with the Obligations. The Banks consent
to Chase's serving as Agent under the Monterey Credit Agreement, WAIVE any
conflict of interest in connection therewith, and agree that Chase may exercise
its rights and remedies as the Agent under this Agreement and under the Monterey
Credit Agreement and at law, all as Chase may in its sole discretion deem
appropriate.
12.17. EXISTING CREDIT FACILITY TERMINATED. By their execution and
delivery hereof, the Company and the other parties to the Existing Credit
Facility terminate the Existing Credit Facility (except for the portions thereof
which are stated therein to survive the termination thereof).
78
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be duly executed and delivered.
SANTA FE ENERGY RESOURCES, INC.,
a Delaware corporation
By: /s/ JAMES L. PAYNE
James L. Payne
Chairman of the Board, President
and Chief Executive Officer
Address for Notices:
Santa Fe Energy Resources, Inc.
1616 South Voss Road, Suite 1000
Houston, Texas 77057
Telecopy: (713) 507-5341
Attention: Treasurer
79
<PAGE>
THE CHASE MANHATTAN BANK,
individually and as Administrative Agent
By: /s/ MARTHA FETNER
Martha Fetner, Vice President
Address for Notices:
Domestic and Eurodollar
Lending Offices: The Chase Manhattan Bank
c/o Texas Commerce Bank National
Association
707 Travis, 5 TCBN-86
COMMITMENT: $100,000,000 Houston, Texas 77002
Telephone: (713) 216-4316
Telecopy: (713) 216-4117
Attention: James C. Nicholas
The Chase Manhattan Bank
1 Chase Manhattan Plaza, 3rd Floor
New York, New York 10081
Telephone: (212) 552-3165
Telecopy: (212) 552-1687
Attention: David R. D'Amico,
Operations Officer
80
<PAGE>
COMMITMENT: ABN AMRO BANK N.V., Individually and
as Co-Agent
$50,000,000
By: ABN AMRO NORTH AMERICA, INC.
By: /s/ MICHAEL N. OAKES
Name: Michael N. Oakes
Title: Vice President and Director
By: /s/ H. GENE SHIELS
Name: H. Gene Shiels
Title: Vice President and Director
Address for Notices:
Domestic and Eurodollar
Lending Offices:
81
<PAGE>
PRICING SCHEDULE
APPENDIX I
EXHIBITS:
A - Form of Note
B - Form of Request for Extension of Credit
C - Form of Assignment Agreement
D - Form of Application
E - Form of Rate Designation Notice
SCHEDULES:
I - Restricted and Unrestricted Subsidiaries
II - Liens and Total Debt and Guaranties
III - Opinion of Andrews & Kurth L.L.P.
IV - Opinion of David L. Hicks
V - Subordination Provisions
VI - Jurisdictions for which Certificates are to be Provided
82
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Santa Fe Energy Resources, Inc. ("SFER") has 33 wholly-owned
subsidiaries, all of which are engaged in the exploration for and development
and production of oil and natural gas. Four subsidiaries conduct operations in
the United States and 29 subsidiaries conduct operations in foreign areas. In
addition, SFER owns approximately 83% of Monterey Resources, Inc. which conducts
oil and gas exploration, development and production operations in the United
States.
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542, 33-58613, 33-59253,
33-59255 and 333-07949) of Santa Fe Energy Resources, Inc. of our report dated
February 21, 1997 appearing on page 63 of this Form 10-K.
PRICE WATERHOUSE LLP
Houston, Texas
March 11, 1997
EXHIBIT 23(B)
CONSENT OF EXPERTS
As petroleum engineers, we hereby consent to the incorporation by reference
in the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541, 33-44542,
33-58613, 33-59253, 33-59255 and 333-07949) of our oil and gas reserve reports
as of December 31, 1993, December 31, 1994, December 31, 1995 and December 31,
1996 included in the Santa Fe Energy Resources, Inc. Form 10-K for the year
ended December 31, 1996.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 11, 1997
EXHIBIT 24
POWER OF ATTORNEY
Know all men by these presents that W. E. GREEHEY constitutes and
appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE
ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file
the same, and with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or their substitutes may lawfully do or cause to be done
by virtue hereof.
Dated February 19, 1997 __________________________________
W. E. Greehey
<PAGE>
POWER OF ATTORNEY
Know all men by these presents that M. N. KLEIN constitutes and appoints
J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them, as his
true and lawful attorneys-in-fact and agents, with full power of substitution,
for him and in his name, place and stead, in any and all capacities to sign in
his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC.
for the fiscal year ended December 31, 1996 and to file the same, and with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them or their
substitutes may lawfully do or cause to be done by virtue hereof.
Dated February 19, 1997 __________________________________
M. N. Klein
<PAGE>
POWER OF ATTORNEY
Know all men by these presents that A. V. MARTINI constitutes and
appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE
ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file
the same, and with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or their substitutes may lawfully do or cause to be done
by virtue hereof.
Dated February 19, 1997 __________________________________
A. V. Martini
<PAGE>
POWER OF ATTORNEY
Know all men by these presents that M. J. SHAPIRO constitutes and
appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE
ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file
the same, and with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or their substitutes may lawfully do or cause to be done
by virtue hereof.
Dated February 19, 1997 __________________________________
M. J. Shapiro
<PAGE>
POWER OF ATTORNEY
Know all men by these presents that K. D. WRISTON constitutes and
appoints J. L. PAYNE, JANET F. CLARK and DAVID L. HICKS and each or any of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE
ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1996 and to file
the same, and with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or their substitutes may lawfully do or cause to be done
by virtue hereof.
Dated February 19, 1997 __________________________________
K. D. Wriston
<PAGE>
POWER OF ATTORNEY
Know all men by these presents that J. L. PAYNE constitutes and appoints
JANET F. CLARK and DAVID L. HICKS and each or any of them, as his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities to sign in his name
to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the
fiscal year ended December 31, 1996 and to file the same, and with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them or their substitutes may
lawfully do or cause to be done by virtue hereof.
Dated February 19, 1997 __________________________________
J. L. Payne
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1996 AND THE INCOME STATEMENT FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,600
<SECURITIES> 0
<RECEIVABLES> 111,600
<ALLOWANCES> 2,500
<INVENTORY> 13,600
<CURRENT-ASSETS> 172,500
<PP&E> 2,574,200
<DEPRECIATION> 1,664,400
<TOTAL-ASSETS> 1,120,000
<CURRENT-LIABILITIES> 179,400
<BONDS> 0
111,100
0
<COMMON> 900
<OTHER-SE> 434,500
<TOTAL-LIABILITY-AND-EQUITY> 1,120,000
<SALES> 582,300
<TOTAL-REVENUES> 583,300
<CGS> 493,800
<TOTAL-COSTS> 493,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,400
<INCOME-PRETAX> 58,000
<INCOME-TAX> 14,300
<INCOME-CONTINUING> 42,400
<DISCONTINUED> 0
<EXTRAORDINARY> (6,000)
<CHANGES> 0
<NET-INCOME> 36,400
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
