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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Coho Energy, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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[COHO LOGO]
14785 Preston Road, Suite 860
Dallas, Texas 75240
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
November 10, 1998
To the Shareholders of Coho Energy, Inc.:
A Special Meeting of Shareholders of Coho Energy, Inc. (the "Company") will
be held on December 4, 1998 at 2:00 p.m., Dallas, Texas time, at the Westin
Hotel Galleria, Collin Room, 13340 Dallas Parkway, Dallas, Texas, for the
following purposes:
1. To amend the Articles of Incorporation, as amended, of the Company
to increase the number of authorized shares of Common Stock from 50,000,000
to 100,000,000.
2. To approve the sale by the Company of 41,666,666 shares of its
Common Stock to HM 4 Coho, L.P. pursuant to an Amended and Restated Stock
Purchase Agreement dated effective August 21, 1998.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Holders of record of the Common Stock, $0.01 par value, of the Company as
reflected on the books of the Company at the close of business on November 6,
1998 will be entitled to vote at the meeting and any adjournments thereof.
Whether or not you expect to attend the meeting, please fill in, date, sign, and
return the proxy in the enclosed envelope which requires no postage if mailed in
the United States.
/s/ JEFFREY CLARKE
Jeffrey Clarke
Chairman, President and
Chief Executive Officer
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COHO ENERGY, INC.
14785 PRESTON ROAD, SUITE 860
DALLAS, TEXAS 75240
PROXY STATEMENT
---------------------
SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 4, 1998
---------------------
This Proxy Statement is being furnished to shareholders of Coho Energy,
Inc., a Texas corporation (the "Company"), in connection with the solicitation
of proxies by its Board of Directors for use at a Special Meeting of
Shareholders (the "Meeting") to be held on December 4, 1998 at 2:00 p.m.,
Dallas, Texas time, at the Westin Hotel Galleria, Collin Room, 13340 Dallas
Parkway, Dallas, Texas, and any adjournment or postponement thereof.
At the Meeting, shareholders of the Company will be asked to consider the
approval of (i) a proposed amendment to the Articles of Incorporation, as
amended, of the Company to increase the number of authorized shares of Common
Stock from 50,000,000 to 100,000,000 (the "Amendment") and (ii) a proposed sale
by the Company of 41,666,666 shares of its common stock, $0.01 par value
("Common Stock"), to HM 4 Coho, L.P., a Texas limited partnership ("HM4") (the
"Transaction"). The purchase price for the shares to be sold to HM4 is
$249,999,996.00. The terms of the Transaction are contained in the Amended and
Restated Stock Purchase Agreement dated effective August 21, 1998 (the
"Agreement"), between the Company and HM4. A copy of the Agreement is set forth
as Annex A hereto and is made a part of this Proxy Statement. See "The
Transaction -- Terms of the Transaction".
The Company currently intends to use the net proceeds of the Transaction
initially to repay existing debt and subsequently for other purposes as more
fully described in "Use of Proceeds". The Transaction will result in a change of
control of the Company under the Marketplace Rules (the "Marketplace Rules") of
The Nasdaq Stock Market ("Nasdaq"), on which the Common Stock is quoted. The
Transaction will cause substantial dilution of the voting power of the current
shareholders of the Company, since, following the Transaction, HM4 will own
approximately 62.0% of the Common Stock. See "The Transaction -- Effects of the
Transaction on Shareholders". The Amendment will allow the Company to issue
shares to HM4 in the Transaction and provide the Company with greater
flexibility in effecting future acquisitions and financings. See "The
Amendment".
After the Transaction, HM4 and its affiliates will be able to nominate four
members of the Board of Directors of the Company. John R. Muse and Lawrence D.
Stuart, Jr. are currently members of the Board of Directors of the Company
nominated by an affiliate of HM4 pursuant to an agreement between the Company
and that affiliate and are expected to continue as members of the Board of
Directors after the Transaction. Also, after the Transaction, two additional
individuals will be nominated by HM4 to serve on the Board of Directors. In
order to accommodate HM4's right to name two additional directors after the
Transaction, the Board of Directors will increase the size of the Board of
Directors by one member to nine members and one current member of the Board of
Directors will resign.
Only holders of record of Common Stock as reflected on the books of the
Company at the close of business on November 6, 1998 (the "Record Date") will be
entitled to notice of and to vote at the Meeting. As of the close of business on
the Record Date, the Company had 25,603,512 shares of Common Stock outstanding.
With respect to each matter to come before the Meeting, the holders of the
Common Stock will have one vote per share. There are no other classes of voting
securities of the Company outstanding. To approve the Amendment, it is necessary
to obtain the affirmative vote of the greater of (i) the holders of shares
having two-thirds of the votes entitled to vote that are represented at the
Meeting in person or by proxy and (ii) a majority of the shares issued and
outstanding and entitled to vote as of the Record Date. To approve
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the Transaction, it is necessary to obtain the affirmative vote of a majority of
the shares entitled to vote that are represented at the Meeting in person or by
proxy. See "Voting -- General".
If the shareholders of the Company vote for approval of the Amendment but
against approval of the Transaction, the Amendment will be made effective by the
Company. However, if the shareholders of the Company vote for approval of the
Transaction but against approval of the Amendment, the Transaction will not be
consummated since the Company will not have sufficient authorized shares to
consummate the Transaction.
This Proxy Statement and the accompanying proxy card are being sent on or
about November 10, 1998 to shareholders of record as of the close of business on
the Record Date.
The holders of a majority of the total shares of Common Stock issued and
outstanding on the Record Date, whether present in person or represented by
proxy, will constitute a quorum for the transaction of business at the Meeting.
Under Texas law, any unvoted position in a brokerage account with respect to any
matter will be considered as not voted and will not be counted toward
fulfillment of quorum requirements. The shares held by each shareholder who
signs and returns the enclosed form of proxy will be counted for purposes of
determining the presence of a quorum at the Meeting.
If the enclosed form of proxy is properly executed and returned, it will be
voted at the Meeting, or at any adjournment or postponement thereof, in
accordance with the specifications thereof. If no instructions are specified in
the proxy, the shares represented thereby will be voted in favor of the
Transaction and the Amendment. A proxy may be revoked, at any time before it has
been voted, upon written notice to the Secretary of the Company, by submitting a
subsequently dated proxy or by attending the Meeting and withdrawing the proxy.
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PROPOSAL ONE -- THE AMENDMENT
PURPOSE AND BACKGROUND OF THE AMENDMENT
The Board of Directors has recommended the adoption of an amendment to the
Company's Articles of Incorporation, as amended, that will increase the number
of authorized shares of Common Stock from 50,000,000 to 100,000,000 shares. The
increase in the number of authorized shares will allow the Company to issue
shares to HM4 in the Transaction. In addition, the Board of Directors believes
that this increase in the number of authorized shares of Common Stock is
advisable and in the best interest of the Company because it will provide the
Company with greater flexibility in effecting future acquisitions and
financings. The Company expects that its future growth may require the use of
its Common Stock from time to time either as consideration for acquisitions or
as part of a financing for the Company either through the use of Common Stock or
securities convertible into Common Stock. The Amendment would allow the Company
to complete the Transaction and provide the Company with additional flexibility
to effect any such acquisitions and financings without the delay and expense
associated with obtaining the approval or consent of shareholders at the same
time the shares are needed. Such shares may be issued in conjunction with both
public offerings and private placements of shares of Common Stock.
As amended, the first paragraph of Article IV of the Articles of
Incorporation of the Company would read as follows:
"The total number of shares of all classes of stock which the Corporation
shall be authorized to issue is 110,000,000 shares, divided into the
following: (i) 10,000,000 shares of Preferred Stock, of the par value of
$.01 per share (hereinafter called "Preferred Stock"), and (ii) 100,000,000
shares of common stock, of the par value of $.01 per share (hereinafter
called "Common Stock")."
Other than the Transaction, the Company does not have any current plans,
proposals or understandings that would require the use of the additional
authorized shares of Common Stock to be issued. The Company, however,
anticipates that some portion of the additional shares could be used by the
Company in the future for acquisitions as well as for public offerings or
private placements of Common Stock or securities convertible or exchangeable
into shares of Common Stock. Such shares could also be used for the Company's
stock-based compensation plans. Other than the Transaction, unless required by
law, regulatory authorities or applicable rules of Nasdaq, it is not anticipated
that any future authorization by a vote of shareholders will be sought for the
issuance of any shares of Common Stock. Shareholders of the Company do not have
any preemptive rights to purchase additional shares of Common Stock, whether now
or hereafter authorized.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY (WITH MESSRS. STUART AND MUSE NOT
PARTICIPATING) HAS UNANIMOUSLY APPROVED THE AMENDMENT AND RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE AMENDMENT.
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PROPOSAL TWO -- THE TRANSACTION
THE PRINCIPAL TERMS OF THE TRANSACTION ARE SET FORTH IN THE AGREEMENT, A
COPY OF WHICH IS SET FORTH AS ANNEX A HERETO AND IS MADE A PART OF THIS PROXY
STATEMENT. THE FOLLOWING DISCUSSION SETS FORTH A DESCRIPTION OF CERTAIN MATERIAL
TERMS OF THE AGREEMENT AND IS QUALIFIED BY THE MORE COMPLETE INFORMATION SET
FORTH IN THE AGREEMENT.
PURPOSE AND BACKGROUND OF THE TRANSACTION
The Company is an independent energy company engaged, through its wholly
owned subsidiaries, in the development and production of, and exploration for,
crude oil and natural gas. The Company's crude oil activities are concentrated
principally in Mississippi and Oklahoma and the Company's natural gas activities
are concentrated principally in Louisiana. In December 1997, the Company
acquired interests in 14 principal producing fields located primarily in
southern Oklahoma (the "Oklahoma Properties"). The aggregate purchase price for
the Oklahoma Properties was $267.8 million, including cash consideration of
approximately $257.5 million. Of the total cash consideration, $221 million was
financed under the Company's bank revolving credit facility.
A combination of factors occurring over the course of the last year has
caused management of the Company to explore ways of raising additional capital
for capital expenditure and working capital needs. The Company is the operator
of, and owns a sizable majority working interest in, all of its significant
fields and can therefore control the level of capital expenditures it incurs.
However, the Company's assets are comprised of reserves which deplete with
production. For the Company to experience growth and create increasing value, it
must find significant new quantities of oil and gas reserves. Therefore, for the
Company to replace production and grow reserves, it must raise additional
capital for future significant amounts of capital expenditures. In addition,
crude oil prices have been falling steadily throughout 1998 from an average
price of $18.32 per barrel in December 1997 to an average price of $13.38 per
barrel in August 1998.
The Company's borrowing base under its bank revolving credit facility is
based upon the agent banks' consensus pricing strip, which uses escalating
future prices. This consensus pricing strip is not directly related to current
New York Mercantile Exchange pricing. Each individual bank has its own internal
forecast of product prices, based upon their own beliefs. These forecasts or
"price strips" are used for determining borrowing bases for their customers'
loans. The three agent banks for the Company's credit facility meet and develop
a compromise "consensus pricing strip". Sustained periods of low product prices
usually affect forward outlooks. The lower the "pricing strip", the lower the
present worth of future production and thus a lower borrowing base for
commercial bank loans. So long as such consensus pricing strip combined with the
Company's proved reserves calculate a borrowing base in excess of the current
borrowings and anticipated future capital expenditures of the Company, then the
Company would not have any limitations on available capital resources. However,
the sustained low crude oil price environment may have an adverse effect on the
consensus pricing strip. In such a case, the Company could face limitations on
its ability to provide debt financings adequate to fund future capital
expenditures, and if the effect is adverse enough, could require some repayment
of excess borrowings over borrowing base to occur.
Management and the Board of Directors of the Company pursued financing
alternatives which would reduce interest expense and improve the Company's
balance sheet. Debt instruments and any form of equity which would require a
dividend were eliminated from review. The potential to merge with another oil
and gas company or issue common equity were investigated as alternatives, though
no specific transaction was considered. Due to the high level of debt already
existing in the Company, there was some concern that the share price of a merged
entity would suffer if commodity prices did not recover from 1998 levels. A
public offering of Common Stock was not practical due to the Company's declining
stock price and the general state of the United States financial markets.
Several potential buyers of common equity of the Company other than Hicks Muse
(defined below) were approached to discuss a private sale of shares, but
preliminary discussions revealed that it was likely that any such transaction
would be at a discount to the market price of the Common
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Stock. In addition, the amount of time it would take to consummate any of these
transactions was taken into account.
In June 1998, the Company retained Alan Edgar, who became a director of the
Company in August 1998, to assist the Company in raising equity and identifying
potential investors. Mr. Edgar was involved in the negotiation of the
Transaction on behalf of the Company.
While the Company was exploring these alternatives, on May 12, 1998, Energy
Investment Partnership No. 1, a Texas general partnership ("EIP"), purchased
1,485,184 shares of Common Stock from The Morgan Stanley Leveraged Equity Fund
II, L.P., and Quinn Oil Company, Ltd. EIP is an affiliate of Hicks, Muse, Tate &
Furst Incorporated ("Hicks Muse"). Hicks Muse is a private investment firm
headquartered in Dallas, with offices in New York, St. Louis, Mexico City and
Buenos Aires, that specializes in acquisitions, recapitalizations and other
principal investing activities. Hicks Muse has an investment philosophy
emphasizing growth of sales and earnings in existing portfolio companies by
pursuing strategic acquisitions. Since the firm's inception in 1989, Hicks Muse
has completed or has pending 245 transactions having a combined transaction
value exceeding $31.0 billion. John R. Muse and Lawrence D. Stuart, Jr., general
partners in EIP, became directors of the Company effective with the purchase. As
of October 31, 1998, EIP owned 2,182,084 shares of Common Stock, representing
approximately 8.5% of the outstanding Common Stock.
At the time of the purchase by EIP, Hicks Muse expressed their interest in
assisting the Company through an additional cash investment in the Company.
Hicks Muse initially proposed an investment of $40 million to $50 million to
allow the Company to repay debt, strengthen the Company's balance sheet and
provide liquidity through a prolonged period of low crude oil prices. Management
of the Company recognized that additional capital would be required for the
Company to take advantage of acquisition opportunities that might become
available in the oil and gas industry due to the effect of lower oil prices on
the value of reserves. Management of the Company acknowledged the experience and
substantial financial resources of Hicks Muse and discussed with Hicks Muse a
proposed transaction whereby an affiliate of Hicks Muse would make a larger
capital investment in the Company in exchange for some type of equity security
of the Company. Based on its experience through an affiliate as a shareholder of
the Company from May 1998, its prior research into the Company and the oil and
gas industry and Hicks Muse's confidence in the oil and gas industry's long-term
prospects, Hicks Muse agreed to make a $250 million investment in the Company so
long as it could obtain majority control of the Company. After several
discussions, the Company and HM4, an affiliate of Hicks Muse, agreed on the
terms of the Transaction as set forth in the Agreement.
TERMS OF THE TRANSACTION
Pursuant to the Agreement, the Company will issue 41,666,666 shares of
Common Stock to HM4, or approximately 62.0% of the Common Stock outstanding
after the Transaction. The aggregate consideration to be paid to the Company by
HM4 for the shares of Common Stock is $249,999,996.00, or $6.00 per share of
Common Stock. After recording the expenses from the Transaction, including the
$10 million in fees to be paid as described below, as a reduction in the paid-in
capital related to the share issuance, the net proceeds to the Company will be
approximately $234 million.
The Transaction requires shareholder approval under the Marketplace Rules,
since the Transaction involves a "change in control" of the Company. In
addition, the obligations of the parties to effect the Transaction are also
subject to other conditions, including, among other things, the obtaining of all
necessary consents and the listing of the shares to be issued having been
approved by Nasdaq. The Company is aware of no other material governmental or
regulatory approvals required for the consummation of the Transaction, other
than compliance with applicable securities laws.
In connection with HM4's proposed investment in the Company, Hicks Muse
agreed to assist the Company in pursuing additional transactions that would add
value to the Company. The Company and another Hicks Muse affiliate, Hicks, Muse
& Co. Partners, L.P. ("HMCo"), entered into an Amended and Restated Financial
Advisory Agreement (the "Financial Advisory Agreement") effective August 21,
1998, the date the Company entered into the initial agreement regarding the
Transaction. Pursuant to the Financial Advisory Agreement, the Company retained
HMCo for financial advisory services only (and not finder or
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broker services) in connection with certain additional transactions including
any acquisition of a majority of either the Company's outstanding capital stock
or the combined voting power of the Company's outstanding securities, any sale
or acquisition of oil and gas properties by the Company involving consideration
of $100 million or more, any acquisition by the Company of a majority of the
voting power or other ownership interests of another entity involving
consideration of $100 million or more, and any merger, recapitalization,
reorganization or similar transaction or sale of substantially all of the assets
of the Company. The Company expects that the financial advisory services to be
rendered by HMCo to the Company in connection with such a transaction will be
similar to those provided by an investment banking firm and would include (i)
performing valuation analyses, (ii) advising on optimal capital structures and
related capital market activities, in the case of acquisitions, and (iii)
assisting in negotiating the financial aspects of a transaction. Also under the
Financial Advisory Agreement, the Company has paid or will pay HMCo both of the
following fees solely for financial advisory services in connection with the
Transaction: (i) a cash fee of $1,250,000 that was paid on August 21, 1998, the
date the Company entered into the initial agreement regarding the Transaction,
and (ii) a cash fee of $8,750,000 to be paid at the closing of the Transaction,
if the shareholders of the Company approve the Transaction before December 31,
1998. The fee to be paid to HMCo in connection with the Transaction is for a
variety of advisory services provided to the Company regarding the effect of the
Transaction on the Company's operations after the Transaction and assuming the
consummation of the Transaction. These advisory services included advising the
Company on its economic model of theoretical acquisitions after the Transaction,
on debt and equity capital structures assuming various acquisitions after the
Transaction and on improving the Company's liquidity to allow it to take
advantage of anticipated acquisition opportunities after the Transaction. The
Financial Advisory Agreement terminates on the earlier of August 21, 2008, or
the date on which HM4 and its affiliates cease to own beneficially, directly or
indirectly, at least 5% of the Company's outstanding equity securities.
IF THE SHAREHOLDERS OF THE COMPANY DO NOT APPROVE THE TRANSACTION BEFORE
DECEMBER 31, 1998, THE COMPANY WILL BE OBLIGATED, PURSUANT TO THE FINANCIAL
ADVISORY AGREEMENT, TO PAY TO HMCO ON OR BEFORE DECEMBER 31, 1998, A FEE OF
$8,750,000, $5,000,000 OF WHICH MAY, AT THE COMPANY'S OPTION AND SUBJECT TO
CERTAIN CONDITIONS, BE PAID BY ISSUING TO HMCO 1,000,000 SHARES OF COMMON STOCK.
HMCO IS OBLIGATED TO PERFORM FUTURE SERVICES UNDER THE FINANCIAL ADVISORY
AGREEMENT ONLY AFTER THE CLOSING OF THE TRANSACTION.
At the closing of the Transaction, the Company and HMCo will enter into a
Monitoring and Oversight Agreement (the "Monitoring and Oversight Agreement")
under which the Company will pay HMCo $250,000 per year for financial oversight
and monitoring services. The services that will be provided to the Company under
the Monitoring and Oversight Agreement could not otherwise be obtained by the
Company without the addition of personnel or the engagement of outside
professional advisors. These services relate generally to the Company's
day-to-day financial activities as opposed to the advisory services to be
provided in connection with extraordinary transactions under the Financial
Advisory Agreement. These services include, but are not limited to, assistance
in negotiation of credit facilities and compliance with financial covenants. The
Company also will enter into an Amended and Restated Shareholder Agreement with
HM4 and EIP (the "Shareholder Agreement") at the Closing pursuant to which the
Company (a) will agree to continue to cause two nominees of EIP to be
recommended to the shareholders of the Company for election to the Board of
Directors of the Company and, at the closing of the Transaction, to cause two
additional nominees of HM4 to be elected to the Board of Directors of the
Company and (b) will extend both demand and piggyback registration rights to
apply to shares of the Common Stock owned by HM4 and those shares already owned
by EIP; and (iii) the Company will enter into indemnification agreements with
each director of the Company and will purchase additional directors' and
officers' liability insurance. The Shareholder Agreement contains certain
provisions whereby each of EIP and HM4 will agree that it will not, prior to May
12, 2000, (i) subject any shares of Common Stock owned by either of them to a
voting trust or other similar arrangement, (ii) act together with an
unaffiliated third party for the purpose of acquiring, holding, voting or
disposing of shares of Common Stock or (iii) sell or transfer greater than 10%
of the fully diluted common equity of the Company to any unaffiliated third
party or greater than 5% of the outstanding Common Stock to an unaffiliated
holder of greater than 10% of the outstanding shares of Common Stock.
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USE OF PROCEEDS
The Company currently intends to use the net proceeds from the Transaction
initially to repay a portion of the existing debt incurred under the Company's
bank credit facility. On October 31, 1998, the amount outstanding under the
Company's bank credit facility is $290.5 million. After the repayment of most of
its outstanding debt, the Company believes that it will be positioned to take
advantage of the consolidation of oil and gas assets that is expected to result
as exploration and production companies attempt to deal with the effects of
sustained lower revenues due to depressed crude oil prices. The lower oil prices
cause existing reserves to be undervalued, allowing the Company to purchase
quality reserves at lower than historical costs that will go up in value as oil
prices rise. In addition to capital expenditures for the continuation of the
Company's exploitation and exploration efforts on its existing properties, the
Company will be reviewing acquisition opportunities that will build on its
strategy of acquiring controlling interests in underdeveloped crude oil and
natural gas properties to maximize reserves and production from such properties
through relatively low-risk activities such as development drilling, multiple
completions, recompletions, workovers, enhancement of production facilities and
secondary recovery projects. No assurance can be made, however, that the Company
will be successful in finding or completing any such acquisition opportunities.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY (WITH MESSRS. STUART AND MUSE NOT
PARTICIPATING) HAS UNANIMOUSLY APPROVED THE TRANSACTION AND THE AGREEMENT, HAS
DETERMINED THAT THE TRANSACTION AND THE AGREEMENT ARE IN THE BEST INTERESTS OF
THE SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE TRANSACTION AND THE AGREEMENT.
Prior to approving the Transaction, the Board of Directors of the Company
considered various alternatives to the Transaction, including public equity
offerings, high yield debt issuances and other private placements of equity
securities. In approving the Transaction, the Board concluded that the sale of
Common Stock to HM4 presented the best course of action for the Company at this
time. The Board did not pursue the other alternatives considered in that such
alternatives would likely have been to the exclusion of the Hicks Muse offer
without any assurance that a better offer or transaction could be realized.
The material factors considered by the Board in making such recommendation
include the following:
- The proposed purchase price of $6.00 per share for the shares of Common
Stock represented approximately a 28.0% premium over the closing market
price of $4.69 for the Common Stock on Nasdaq on August 21, 1998, the
date of the initial agreement in the Transaction. On November 5, 1998,
the closing price of the Common Stock on Nasdaq was $4.56. The issuance
of public equity or debt securities likely would not have provided the
Company with such a premium due to the recent fluctuations in the
securities markets, especially with respect to energy industry securities
such as the Common Stock.
- The Transaction will provide the Company with substantial cash to repay
its existing debt, thereby providing it with greater financial
flexibility to take advantage of the consolidation of oil and gas assets
that is expected to result as exploration and production companies
attempt to deal with the effects of sustained lower revenues due to
depressed crude oil prices.
- An internal financial analysis of the Transaction was prepared by
management of the Company and presented to the Board of Directors. In
addition, the Board of Directors received the opinion of an outside
financial advisor regarding the fairness of the Transaction to the
shareholders of the Company.
- The Transaction provides the Company with a strong equity partner. Hicks
Muse is a Dallas, Texas based private investment firm specializing in
leveraged acquisitions and strategic investments.
OPINION OF FINANCIAL ADVISOR
General. The Company first retained Jefferies & Company, Inc. ("Jefferies")
in August 1998 to provide it with an opinion as to the fairness of the
Transaction from a financial point of view. Jefferies, as part of its
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investment banking activities, is continually engaged in the valuation of
businesses and their securities in connection with private placements of
securities, mergers and acquisitions, negotiated underwritings, competitive
bidding, secondary distributions of listed and unlisted securities, financial
restructurings and other financial services.
Jefferies delivered a formal written opinion to the Board of Directors on
August 20, 1998 to the effect that, as of such date and based upon and subject
to the assumptions, limitations and qualifications set forth in such opinion,
the Transaction was fair from a financial point of view to the holders of the
Common Stock. In connection with rendering its opinion, Jefferies reviewed and
analyzed, among other things, (i) the terms of the Transaction as set forth in
the agreements describing the Transaction; (ii) the historical and current
financial condition and results of operations of the Company, including certain
public filings of the Company; (iii) certain non-public financial and
non-financial information prepared by the Company; (iv) published information
regarding the financial performance and operating characteristics of a selected
group of companies that Jefferies deemed comparable to the Company; (v) the
business prospects of the Company considering its current capital structure
after giving effect to the Transaction; (vi) the historical and current market
price of the Company's common stock; (vii) publicly available industry data
Jefferies considered relevant to their inquiry; (viii) the terms, to the extent
publicly available, of recent oil and gas independent producer transactions that
Jefferies believes to be comparable to the Transaction; (ix) the value of
certain intangible benefits that may accrue to the Company as a result of the
Transaction; (x) the financing alternatives (other than the Transaction)
currently available to the Company and its current liquidity; and (xi) such
other factors as Jefferies deemed relevant to its opinion. Jefferies also took
into account general economic, monetary, political and market conditions as well
as their experience with similar transactions and the valuation of similar
securities.
In rendering its opinion, Jefferies relied upon and assumed the accuracy
and completeness of all of the historical and projected financial and other
information provided to them by the Company. Jefferies did not conduct a
physical inspection of any of the properties or facilities of the Company, nor
have they made or considered any independent evaluations or appraisals of any of
such properties or facilities.
A COPY OF JEFFERIES' OPINION IS ATTACHED AS ANNEX B HERETO AND SHOULD BE
READ IN ITS ENTIRETY BY THE SHAREHOLDERS OF THE COMPANY. THE JEFFERIES OPINION
ADDRESSES THE FAIRNESS OF THE TRANSACTION FROM A FINANCIAL POINT OF VIEW TO THE
SHAREHOLDERS BUT DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE
COMPANY AS TO HOW ANY SUCH SHAREHOLDER SHOULD VOTE AT THE MEETING.
Methodology and Analyses. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. The Company has been advised by Jefferies that the two most
common analyses used in reviewing the fairness of a transaction such as the
Transaction are a comparative company trading analysis, based on a peer group of
companies in the same industry as the Company with similar capitalizations and
debt structures, and a comparative transaction analysis, based on similar
private equity placement transactions. Both of these analyses were used by
Jefferies for its fairness opinion on the Transaction.
With respect to the comparative company trading analysis, Jefferies advised
the Company that the analysis was used by it as a benchmark for reviewing value
of the Common Stock and was subject to a further subjective review as to where
in the range the Company might be expected to fall based on its capitalization,
debt structure (including the range of trading and discount on the Company's
outstanding senior notes), trading multiples and an examination of the Company's
discounted cash flow. Jefferies reviewed and compared certain financial
information relating to the Company as of August 7, 1998 to corresponding
financial information, ratios and public market multiples as of such date for
the following publicly traded oil and gas exploration and production companies:
Bellwether Exploration, Comstock Resources, Costilla Energy, Denbury Resources,
National Energy, Swift Energy, St. Mary's Land and Exploration and Wiser Oil
Company (the "Comparable Companies"). Such analysis indicated that the ratio of
stock price to projected cash flow per share resulted in (a) for calendar year
1998, a range of 2.6x to 6.3x with a median of 4.0x for the Comparable
Companies, compared to 11.6x for the Company, and (b) for calendar year 1999, a
range of 1.9x to 4.1x with a median of 2.9x for the Comparable Companies,
compared to 3.8x for the Company. Such
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<PAGE> 11
analysis also indicated that the ratio of total enterprise value to EBITDA
resulted in (a) for calendar year 1998, a range of 3.8x to 7.8x with a median of
6.4x for the Comparable Companies, compared to 12.5x for the Company, and (b)
for the calendar year 1999, a range of 3.2x to 6.0x with a median of 4.3x for
the Comparable Companies, compared to 7.5x for the Company. The results
indicated that the Company's Common Stock was trading at a premium as compared
to the Comparable Companies.
With respect to the comparative transaction analysis, Jefferies examined
similar private equity placement transactions where there was a change of
control but less than all of the outstanding shares were being purchased. The
purpose of such analysis was to determine premiums paid, if any, for stock
purchased in transactions that resulted in a change of control. The companies
which were analyzed and which sold stock resulting in a change of control were
HS Resources Inc., Seagull Energy Corp., Parker & Parsley Petroleum Co.,
Forcenergy Inc., Louis Dryfus National Gas Corp., Meridian Resource Corp., Titan
Exploration, Southern Mineral Corp., Chesapeake Energy Corp. and Ocean Energy.
In the selected transactions the amount paid as compared to the market price of
the respective company's stock five trading days prior to the announcement of
each transaction ranged from a 9.5% discount to market to a 66.7% premium to
market, with a median of an 18.9% premium to market. Jefferies concluded that
the premium being paid by HM4 was in excess of the median of the premiums paid
in the comparative transactions.
In requesting the opinion, the Company did not impose any limitations on
the scope of the investigations that Jefferies conducted to enable it to deliver
its opinion. In arriving at the fairness opinion, Jefferies did not attribute
any particular weight to any single analysis or fact and made qualitative
judgments based on the significance and relevance of each analysis and factor.
Jefferies has advised the Company that it believes its analyses should be
considered as a whole and that considering any isolated portions of the analyses
on the factors considered, without considering all analyses and factors, could
create an incomplete or misleading view of the process underlying the opinion.
The Jefferies opinion is necessarily based upon economic, market, financial
and other conditions as they existed on, and on information made available to it
as of, the date of its opinion. Jefferies does not have any obligation to
update, revise or reaffirm its opinion.
Fees and Reimbursement of Expenses. Pursuant to its arrangement with
Jefferies, the Company paid Jefferies a fee of $500,000 for rendering its
fairness opinion and has agreed to reimburse Jefferies for its reasonable
out-of-pocket expenses incurred in connection with rendering its opinion.
EFFECTS OF THE TRANSACTION ON SHAREHOLDERS
Pursuant to the Agreement, 41,666,666 shares of Common Stock will be issued
to HM4 in the Transaction. Together with the 2,182,084 shares of Common Stock
owned by EIP, Hicks Muse affiliates will own 43,848,750 shares of Common Stock,
or 65.2% of the Common Stock after the Transaction. Pursuant to the Shareholder
Agreement, Hicks Muse affiliates will have the right to designate up to four
individuals to serve on the Company's Board of Directors. John R. Muse and
Lawrence D. Stuart, Jr., are currently serving on the Board of Directors as
designees of EIP. Two additional individuals will be designated by HM4 to be
elected as members of the Board of Directors immediately after the Transaction
by the Board of Directors, as permitted by Texas law.
The following table illustrates the pro forma effect of the issuance of the
shares on the financial position and results of operations of the Company for
the six months ended June 30, 1998, as if the shares were issued and outstanding
at April 1, 1998, as compared to actual results for the same period.
<TABLE>
<CAPTION>
ACTUAL RESULTS PRO FORMA
-------------- -----------
<S> <C> <C>
Net Earnings (Loss) (in thousands)......................... $ (63,912) $ (59,937)
Basic Earnings (Loss) Per Common Share..................... $ (2.50) $ (1.29)
Basic Weighted Average Shares Outstanding.................. 25,603,512 46,551,946
Shareholders' Equity (in thousands)........................ $ 78,191 $ 315,665
</TABLE>
9
<PAGE> 12
The pro forma net loss is different from the actual net loss due to a
reduction in interest expense that would occur if the net proceeds from the
issuance of the shares were used to repay outstanding indebtedness. Basic
earnings (loss) per common share represents net earnings (loss) divided by basic
weighted average shares outstanding. See the discussion under the heading
"Earnings Per Common Share" in Note 1 of the Notes to Consolidated Financial
Statements, Years Ended December 31, 1995, 1996 and 1997, contained elsewhere
herein.
REASONS FOR SEEKING SHAREHOLDER APPROVAL
Shareholder approval of the Amendment is being sought due to the
requirements of Texas law. The Marketplace Rules require shareholder approval of
any transaction deemed to be a "change in control". Shareholder approval of the
Transaction is being sought solely because of the requirements of the
Marketplace Rules. Hicks Muse affiliates are entitled to vote the shares they
currently own (aggregating 8.5% of the outstanding Common Stock on the Record
Date) on the proposal. If the shareholders do not approve the Amendment and the
Transaction, the Company will need to find alternative sources of financing in
order to allow it to fund future working capital and capital expenditures. The
Common Stock will continue to be listed on Nasdaq following the Transaction. The
Company is unable to predict the potential effects of the Transaction on stock
appreciation, trading activity and the market price of the Common Stock.
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<PAGE> 13
VOTING
GENERAL
To approve the Amendment, it is necessary to obtain the affirmative vote of
the holders of the greater of (i) two-thirds of the shares of Common Stock
entitled to vote that are represented at the Meeting in person or by proxy and
(ii) a majority of the shares of Common Stock issued and outstanding and
entitled to vote as of the Record Date. To approve the Transaction, it is
necessary to obtain the affirmative vote of a majority of the shares of Common
Stock entitled to vote that are represented at the Meeting in person or by
proxy. No shareholders of the Company have indicated to the Company their
intentions regarding their vote on the Transaction or the Amendment.
The enclosed form of proxy provides a means for shareholders to vote for
the approval of the Amendment and the Transaction, to vote against the Amendment
and the Transaction or to abstain from voting with regard to the approval of the
Amendment and the Transaction. Each properly executed proxy received in time for
the meeting will be voted as specified therein. IF A SHAREHOLDER EXECUTES AND
RETURNS A PROXY BUT DOES NOT SPECIFY OTHERWISE, THE SHARES REPRESENTED BY SUCH
SHAREHOLDER'S PROXY WILL BE VOTED "FOR" THE APPROVAL OF THE AMENDMENT AND "FOR"
THE APPROVAL OF THE TRANSACTION.
BECAUSE THE APPROVAL OF THE AMENDMENT MAY REQUIRE A VOTE BASED ON THE TOTAL
OUTSTANDING NUMBER OF SHARES, ABSTENTIONS AND BROKER NON VOTES WILL BE
EQUIVALENT TO A VOTE AGAINST THE AMENDMENT. ACCORDINGLY, THE COMPANY URGES EACH
SHAREHOLDER TO VOTE AND URGES SHAREHOLDERS WHOSE SHARES ARE HELD IN THE NAME OF
THEIR BROKER, BANK OR OTHER NOMINEE TO INSTRUCT SUCH PERSON TO VOTE THEIR
SHARES.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE APPROVAL OF THE AMENDMENT AND "FOR" THE APPROVAL OF THE TRANSACTION.
DISSENTERS' RIGHTS
Neither Texas law nor the Articles of Incorporation, as amended, of the
Company provide for any rights to dissenters to the Amendment or the
Transaction.
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<PAGE> 14
INTEREST OF CERTAIN PERSONS IN THE TRANSACTION
No person who has served as an executive officer or director of the Company
since January 1, 1997, or any associate of such persons, has any substantial
interest, direct or indirect, or is expected to derive any material benefit as a
result of the Transaction other than as a holder of shares of Common Stock. See
"Security Ownership of Certain Beneficial Owners and Management". However,
because affiliates of Hicks Muse will own 65.2% of the Common Stock after the
Transaction, they will be in a position to effectively control the Company and
cause the Company to effect certain transactions. John R. Muse and Lawrence D.
Stuart, Jr., directors of the Company, are each Managing Directors of Hicks
Muse. In addition, Messrs. Muse and Stuart are each general partners of EIP,
limited partners in HMCo and limited partners of a limited partner of HM4.
Messrs. Muse and Stuart were not present during discussions of the Board of
Directors with regard to the Transaction and did not vote on the Transaction.
The Agreement provides that HM4 shall be entitled to reimbursement of its
reasonable out-of-pocket fees, costs and expenses incurred by it in connection
with its due diligence efforts or the transactions contemplated by the
Agreement. Such fees, costs and expenses are payable by the Company at the
closing of the Transaction or in the event of certain termination events set
forth in the Agreement. In addition, the Agreement provides that the Company
shall pay HM4 $3,000,000 if the Agreement is terminated because the shareholders
do not approve the Transaction and the Company enters into certain specified
alternative transactions within one year after such termination.
Pursuant to the Shareholder Agreement, HM4 will be able to nominate two
additional individuals to the Board of Directors of the Company. In order to
accommodate HM4's right to name two additional directors after the Transaction,
the Board of Directors will increase the size of the Board of Directors by one
member to nine members and one current member of the Board of Directors will
resign.
The Company has entered into a Financial Advisory Agreement and will be
entering into a Monitoring and Oversight Agreement with HMCo. The Company will
also enter into indemnification agreements with each director of the Company and
will purchase directors' and officers' liability insurance. Finally, the Company
has continuing indemnification obligations to the various Hicks Muse affiliates
under the Agreement, the Shareholder Agreement and the Financial Advisory
Agreement regarding the Company's representations and warranties contained in
such agreements and the performance by the Company of its obligations under such
agreements. See "The Transaction -- Terms of the Transaction".
Alan Edgar, who became a director of the Company in August 1998, entered
into an arrangement with the Company in June 1998 whereby he agreed to seek
equity investors for the Company, which efforts resulted in the Transaction.
Pursuant to such arrangements, the Company agreed to pay to Mr. Edgar a fee of
2.3% of the total consideration received by the Company for any such
transaction. As a result of the Transaction, Mr. Edgar will receive a fee of
$5,750,000 at the closing of the Transaction, to be paid from the proceeds of
the Transaction. The terms of the Company's arrangements with Mr. Edgar were
comparable to those which the Company could have obtained from an unaffiliated
third party.
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere herein. Certain information
contained herein, including information with respect to the Company's plans and
strategy for its business, are forward-looking statements. These statements are
based on certain assumptions and analyses made by management of the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate. Such statements are subject to a number of assumptions, risks and
uncertainties, general economic and business conditions, prices of crude oil and
natural gas, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Such statements are not
guarantees of future performance and actual results or developments may differ
materially from those projected in the forward-looking statements.
For purposes of determining barrel of oil equivalent ("BOE") herein,
natural gas is converted to barrels ("Bbl") on a 6,000 cubic feet ("Mcf") to 1
Bbl basis.
SUBSEQUENT EVENT -- STOCK PURCHASE
As described elsewhere herein, the Company and HM4 have entered into the
Agreement, providing for the sale by the Company to HM4 of 41,666,666 shares of
Common Stock for a purchase price of $249,999,996, or $6.00 per share, subject
to shareholder approval. See "The Transaction".
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources. For the six months ended June 30, 1998, cash flow used by
operating activities was $7,000 compared with cash flow provided by operating
activities of $17.3 million for the same period in 1997. Operating revenues, net
of lease operating expenses, production taxes and general and administrative
expenses, increased only $2.8 million (15%) during the first half of 1998 over
the first half of 1997, despite an 80% increase in equivalent production between
periods, primarily due to price decreases between such comparable periods of 33%
and 4% for crude oil and natural gas, respectively. Additionally, interest
expense increased $11.3 million between periods as a result of borrowings to
finance the Company's capital expenditure program and the December 1997
acquisition of the Oklahoma Properties. Changes in operating assets and
liabilities used $6.0 million of cash for operating activities for the six
months ended June 30, 1998, primarily due to the increase in trade receivables,
including approximately $3.0 million related to the final closing settlement on
the acquisition of the Oklahoma Properties.
The Company's net loss of $63.9 million for the six months ended June 30,
1998 includes non-cash writedowns totalling $73 million on the crude oil and
natural gas properties. These writedowns and the partially offsetting related
deferred tax benefit significantly increased the Company's net loss for the six
months ended June 30, 1998. See "-- Results of Operations for the Six Months
Ended June 30, 1998 Compared with Six Months Ended June 30, 1997" for a detailed
discussion on the writedowns of the crude oil and natural gas properties.
At June 30, 1998, the Company had a working capital deficit of $0.8 million
compared to a working capital deficit of $2.0 million at December 31, 1997. The
working capital deficits are primarily due to current payables and accrued
liabilities associated with drilling and recompletion activities and accrued
interest payable at the end of each period.
The $544,000 decrease in current assets from December 31, 1996 to December
31, 1997 is primarily the result of the sale of marketable securities held in
1996 and a decrease in accounts receivable, partially offset by an increase in
the deferred tax receivable. The decrease in accounts receivable is due to a
decrease in receivables from oil and gas purchasers despite an increase in
revenues during the year, due to lower oil prices at year end and improved
timing in collecting purchaser receivables, and a decrease in accounts
receivable from working interest owners. The $2.0 million increase in current
assets from December 31, 1997 to June 30,
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<PAGE> 16
1998 is primarily due to increased receivables related to the Oklahoma
Properties, partially offset by a decrease in oil and gas purchaser receivables,
due to declining crude oil and natural gas prices, and a reduction in the
deferred tax receivable.
The $8.1 million increase in current liabilities from December 31, 1996 to
December 31, 1997 is primarily due to increased accrued liabilities relating to
interest expense, compensation, environmental costs, capital expenditures and
the costs related to the acquisition of the Oklahoma Properties, partially
offset by a reduction in trade payables. The $815,000 increase in current
liabilities from December 31, 1997 to June 30, 1998 is primarily due to the
increase in trade payables associated with the Company's assumption of operator
responsibilities relating to the acquisition of the Oklahoma Properties,
partially offset by a reduction of accrued liabilities related to compensation,
capital expenditures and costs related to the acquisition of the Oklahoma
Properties.
As of June 30, 1998, the amount available to the Company ("Borrowing Base")
under its revolving credit facility (the "Restated Credit Agreement") for
general corporate purposes was $300 million. Outstanding advances under the
Restated Credit Agreement at June 30, 1998 were $259 million, all of which are
classified as long term. The Restated Credit Agreement is scheduled to terminate
January 2, 2003. Amounts outstanding up to $270 million under the Restated
Credit Agreement accrue interest at the option of the Company at (i) Libor plus
a maximum of 1.50% or (ii) the prime rate. Amounts outstanding in excess of $270
million accrue interest at the option of the Company at (i) Libor plus 2.50% or
(ii) the prime rate plus 1.0%. At June 30, 1998, the lenders under the Restated
Credit Agreement were Banque Paribas, Houston Agency; Bank One, Texas, N.A.;
MeesPierson Capital Corp.; Bank of Scotland; Den Norske Bank; Christiana Bank;
Credit Lyonnais; Bank of Montreal; and Toronto Dominion Bank.
The Restated Credit Agreement contains certain financial and other
covenants including (i) the maintenance of minimum amounts of shareholders'
equity ($108 million plus 50% of the accumulated consolidated net income
beginning in 1998 for the cumulative period excluding adjustments for any
writedown of property, plant and equipment, plus 75% of the cash proceeds of any
sales of capital stock of the Company), (ii) maintenance of minimum ratios of
cash flow to interest expense (1.5 : 1) as well as current assets (including
unused Borrowing Base) to current liabilities (1 : 1), (iii) limitations on the
Company's ability to incur additional debt and (iv) restrictions on the payment
of dividends. In the second quarter, the minimum ratio of cash flow to interest
expense was amended whereby the coverage ratio from June 30, 1998 to March 31,
1999 was decreased from 2.5 to 1 to 1.5 to 1, increasing thereafter on a
quarterly basis to 2.5 to 1 on June 30, 2000.
The Company's 8 7/8% Senior Subordinated Notes due 2007 (the "Senior
Notes") bear interest of 8 7/8% per annum payable semi-annually on April 15 and
October 15. Currently, $150 million of Senior Notes are outstanding. The
indenture issued in conjunction with the Senior Notes also contains certain
covenants, including covenants that limit (i) indebtedness, (ii) restricted
payments, (iii) distributions from restricted subsidiaries, (iv) transactions
with affiliates, (v) sales of assets and subsidiary stock (including sale and
leaseback transactions), (vi) dividends and other payment restrictions affecting
restricted subsidiaries and (vii) mergers or consolidations.
Capital Expenditures. During the first six months of 1998, the Company
incurred capital expenditures of $41.0 million compared with $33.3 million for
the first six months of 1997. The capital expenditures incurred during the first
six months of 1998 were largely in connection with the continuing development
efforts, including recompletions, workovers and waterfloods, on existing wells
in the Company's Brookhaven, Laurel, Martinville and Summerland fields. In
addition, during the first six months of 1998, the Company drilled twenty wells
as follows: five producing oil wells in the Laurel field, four producing oil
wells in the Martinville field, two producing oil wells in the Summerland field,
three producing oil wells and one dry hole in the Brookhaven field and two
producing gas wells and three dry holes in the Monroe field. The Company also
had three drilling wells at June 30, 1998, two in the Laurel field and one in
the East Fitts field. General and administrative costs directly associated with
the Company's exploration and development activities were $2.8 million for the
first six months of 1998, compared with $1.5 million for the first six months of
1997, and are included in total capital expenditures. The increase in
capitalized general and administrative cost is
14
<PAGE> 17
primarily due to increased capitalization of the Company's exploitation
department resulting from an increased staff combined with a greater percentage
of time allocation of existing staff to meet the requirements of the Company's
increased exploration and development activities.
The Company has no material capital commitments and is consequently able to
adjust the level of its expenditures as circumstances warrant. Management
believes that it will be able to provide adequate cash to fund the anticipated
lower level of capital expenditures and working capital needs of the Company
through 1998. However, the Company's assets are comprised of reserves which
deplete with production. For the Company to experience growth and create
increasing value it must find significant new quantities of oil and gas
reserves. Therefore, for the Company to replace production and grow reserves, it
must raise additional capital for future significant amounts of capital
expenditures.
As discussed above, significant amounts of capital expenditures are
required to replace production and grow reserves. While the Company has
identified many capital expenditure opportunities that accomplish the "growth"
objective, it must balance the timing of such capital expenditures with the
availability of capital raised and cash flow generated by the Company. The
Company's short-term capital needs will be for its base capital budget for 1999
of approximately $60 million and for an acquisition or series of acquisitions
with purchase prices ranging from $10 million to $500 million. Funds for these
capital plans are expected to be derived from cash flow from operations,
especially to the extent crude oil prices begin increasing, and availability
under the Company's bank credit facilities. The longer term capital needs of the
Company will be for future development of properties currently owned by the
Company and properties that may be acquired during 1999. If the shareholders of
the Company do not approve the Transaction, the Company's ability to find an
alternative transaction to the Transaction, such as other equity issuances or
asset dispositions, will impact greatly upon the Company's ability to fulfill
its short and long-term capital spending program and there can be no assurances
that the Company will be able to find or enter into an appropriate alternative
transaction.
The Company's borrowing base is based upon the agent banks' consensus
pricing strip, which uses escalating future prices. This consensus pricing strip
is not directly related to current New York Mercantile Exchange ("NYMEX")
pricing. Each individual bank has its own internal forecast of product prices,
based upon their own beliefs. These forecasts or "price strips" are used for
determining borrowing bases for their customers' loans. The three agent banks
for the Company's credit facility meet and develop a compromise "consensus
pricing strip". Sustained periods of low product prices usually affect forward
outlooks. The lower the "pricing strip", the lower the present worth of future
production and thus a lower borrowing base for commercial bank loans. So long as
such consensus pricing strip combined with the Company's proved reserves
calculate a borrowing base in excess of the current borrowings and future
capital expenditures of the Company, then the Company would not have any
limitations to the available capital resources. However, the sustained low crude
oil price environment may have an adverse affect on the consensus pricing strip.
In such a case, the Company could face limitations on its ability to provide
debt financings adequate to fund future capital expenditures, and if adverse
enough, could cause some repayment of excess borrowings over borrowing base to
occur. Although the Company believes it could resolve future limitations on
available capital resources through a variety of means, including, but not
limited to, waivers, equity capital infusion, or sales of assets, there can be
no assurance it can do so.
Hedging Activities. Crude oil and natural gas prices are subject to
significant seasonal, political and other variables that are beyond the
Company's control. In an effort to reduce the effect on the Company of the
volatility of the prices received for crude oil and natural gas, the Company has
entered, and expects to continue to enter, into crude oil and natural gas
hedging transactions. The Company's hedging program is intended to stabilize
cash flow and thus allow the Company to minimize its exposure to price
fluctuations. Because all hedging transactions are tied directly to the
Company's crude oil and natural gas production, the Company does not believe
that such transactions are of a speculative nature. Gains and losses on these
hedging transactions are reflected in crude oil and natural gas revenues at the
time of sale of the hedged production. Any gain or loss on the Company's natural
gas hedging transactions is generally determined as the difference between the
contract price and the average settlement price on NYMEX for the last three days
during the month in which the hedge is in place. The Company has 15,000 million
British thermal units ("Mmbtu") of natural gas production per day hedged over
the period from July 1998 through August 1998, at
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<PAGE> 18
a minimum price of $2.00 per Mmbtu and a maximum price of $2.54 per Mmbtu. At
June 30, 1998, there were no deferred or unrealized hedging gains or losses.
Year 2000 Issue. The Company has assessed and continues to assess the
impact of the "year 2000" issue on its reporting systems and operations. The
"year 2000" issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
occurs, date sensitive systems will recognize the year 2000 as 1900 or not at
all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
The Company projects all computer systems and software will be year 2000
compliant during 1998. Management does not estimate future expenditures related
to the year 2000 exposure to be material.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Operating Revenues. During the first six months of 1998, production
revenues increased 33% to $39.3 million as compared to $29.5 million for the
same period in 1997. This increase was due to a 106% increase in crude oil
production and a 24% increase in natural gas production, partially offset by
decreases in the prices received for crude oil and natural gas (including
hedging gains and losses discussed below) of 33% and 4%, respectively. For the
three months ended June 30, 1998, production revenue increased 30% to $18.1
million as compared to $14.0 million for the same period in 1997. This increase
was principally due to a 96% increase in crude oil production, a 21% increase in
natural gas production and a 10% increase in the prices received for natural
gas. The increased revenue from production increases and the gas price increase
was substantially offset by a decrease in the prices received for crude oil of
34%.
The increase in daily natural gas production during the first six months of
1998 is primarily due to a 26% increase in production as a result of the
December 1997 acquisition of the Oklahoma Properties. The 106% increase in daily
crude oil production during the first six months of 1998 is primarily due to an
83% increase in production as a result of the acquisition of the Oklahoma
Properties and a 19% increase in production due to significant production
increases made in the Martinville and Brookhaven fields, with such production
increasing by 60% and 116%, respectively.
Average crude oil prices, including hedging gains and losses, decreased
during the first six months of 1998 compared to the same period in 1997 due to
declining oil prices which can be attributed to several factors, including: lack
of cold weather, increased storage inventories and perceptions of the effects of
increased quotas or lack of adherence to quotas from the Organization of
Petroleum Exporting Countries ("OPEC"). The posted price for the Company's crude
oil averaged $12.36 per Bbl for the six months ended June 30, 1998, a 36%
decrease from the average posted price of $19.35 per Bbl experienced in the
first six months of 1997. The price per Bbl received by the Company is adjusted
for the quality and gravity of the crude oil and is generally lower than the
posted price.
The realized price for the Company's natural gas, including hedging gains
and losses, decreased 4% from $2.17 per Mcf in the first six months of 1997 to
$2.09 per Mcf in the first six months of 1998, due to a lack of cold weather and
market volatility. Natural gas prices increased 10% in the second quarter of
1998 as compared to the second quarter of 1997, which partially offset the lower
gas prices received in the first quarter of 1998 as compared to the first
quarter of 1997.
Production revenues for the six months ended June 30, 1998 included no
crude oil hedging gains or losses compared to crude oil hedging losses of
$396,000 ($0.31 per Bbl) for the same period in 1997. Production revenues in
1998 included natural gas hedging gains of $466,000 ($0.11 per Mcf) compared to
natural gas hedging gains of $86,000 ($0.02 per Mcf) for the same period in
1997. The Company also has 15,000 Mmbtu of natural gas production per day hedged
from July 1998 through August 1998 at a minimum price of $2.00 per Mmbtu and a
maximum price of $2.54 per Mmbtu. Any gain or loss on the Company's crude oil
hedging transactions is determined as the difference between the contract price
and the average closing price for West Texas Intermediate ("WTI") on the NYMEX
for the contract period. Any gain or loss on the Company's natural gas hedging
transactions is generally determined as the difference between the contract
price and the average settlement price for the last three days during the month
in which the hedge is in place. Consequently, hedging activities do not affect
the actual sales price received for the Company's crude oil and natural gas.
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<PAGE> 19
Interest and other income decreased to $118,000 in the first six months of
1998 from $149,000 for the same period in 1997 primarily due to $137,000 of
interest received in the first quarter of 1997 on a federal tax refund,
partially offset by 1998 earnings of $33,000 on the sale of investments and
$66,000 of interest income on temporary investments.
Expenses. Production expenses (including production taxes) were $14.5
million for the first six months of 1998 compared to $7.2 million for the first
six months of 1997 and $7.1 million for the second quarter of 1998 compared to
$3.6 million for the same period in 1997. On a BOE basis, production costs
increased 12% to $4.28 per BOE in 1998 compared to $3.83 per BOE in 1997 for the
six month periods and $4.18 per BOE in 1998 compared to $3.65 per BOE in 1997
for the three month periods. The increase in expenses for the comparable six
month periods is primarily due to increased production and an increase of
approximately $6.6 million relating to the recently acquired Oklahoma
Properties, partially offset by reduced operating costs per BOE on the Company's
Mississippi properties due to improved operating efficiencies.
General and administrative costs decreased 9% between the comparable six
month periods and decreased 36% between the comparable three month periods. The
decreases are primarily due to operator overhead charges to third parties
related to the Oklahoma Properties, which are reflected as a reduction in
general and administrative costs, and an increase in capitalization of salaries
and other general and administrative costs directly associated with the
Company's increased exploration and development activities, partially offset by
increased personnel costs due to staff additions to handle the increased capital
spending activities in Mississippi and increased costs associated with the
acquisition of the Oklahoma Properties. The decrease for the comparable three
month periods is significantly larger than the decrease for the comparable six
month periods because the operator overhead charges related to the Oklahoma
Properties for the first and second quarters of 1998 were all recorded in the
second quarter of 1998 when such billing information became available.
Interest expense increased 241% for the six month period ended June 30,
1998 compared to the same period in 1997, due to higher borrowing levels during
1998 as compared to 1997 and due to the sale of $150 million of the Company's
8 7/8% Senior Subordinated Notes due 2007 on October 3, 1997, which bear a
higher interest rate than borrowings under the Restated Credit Agreement. The
borrowing levels increased throughout 1997 and the second quarter of 1998 due to
additional borrowings to fund the Company's capital expenditure program and the
December 1997 acquisition of the Oklahoma Properties.
Depletion and depreciation expense increased 68% to $15.0 million for the
six months ended June 30, 1998 from $9.0 million for the comparable period in
1997, due to increased production, partially offset by a lower rate per BOE
which decreased to $4.45 in 1998 from $4.78 in 1997. Depletion and depreciation
expense increased 63% to $7.2 million for the three months ended June 30, 1998,
as compared to $4.4 million for the comparable period in 1997, due to increased
production volumes, partially offset by a lower rate per BOE which decreased to
$4.28 in 1998 from $4.56 in 1997.
In accordance with generally accepted accounting principles, at a point in
time coinciding with the quarterly and annual reporting periods, the Company
must test the carrying value of its crude oil and natural gas properties, net of
related deferred taxes, against a calculated amount based on estimated reserve
volumes valued at then current realized prices held flat for the life of the
properties discounted at 10% per annum plus the lower of cost or estimated fair
value of unproved properties (the "cost center ceiling"). At March 31, 1998 and
June 30, 1998, the carrying values exceeded the cost center ceilings, resulting
in non-cash writedowns of the crude oil and natural gas properties of $32
million and $41 million, respectively. These writedowns resulted from the
declines in crude oil prices in the first and second quarters of 1998.
Due to the factors discussed above, the Company's net losses for the three
and six months ended June 30, 1998 were $41.6 million and $63.9 million,
respectively, as compared to net incomes of $1.1 million and $3.2 million,
respectively, for the same periods in 1997. The 1998 losses include first and
second quarter writedowns of the crude oil and natural gas properties of $32
million and $41 million, respectively.
17
<PAGE> 20
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Operating Revenues. During 1997, production revenues increased 16% to $63.1
million as compared to $54.3 million in 1996. This increase was principally due
to a 15% increase in crude oil production, a 16% increase in natural gas
production and an increase in the price received for natural gas (including
hedging gains and losses discussed below) of 8%.
The 16% increase in daily natural gas production is primarily a result of
the continued positive response from the Company's development efforts in the
North Padre, Martinville and Brookhaven fields. The 15% increase in daily crude
oil production during 1997 is due to significant production increases made in
the Martinville, Soso and Brookhaven fields, with production increasing by 125%,
51% and 87%, respectively, in such fields. These production increases were
partially offset by a production decrease in the Summerland field due to the
unusually high frequency of weather-related power outages and mechanical
problems during the first quarter of 1997 and normal production declines due to
the maturity of the field.
Average crude oil prices realized in 1997, including hedging gains and
losses discussed below, remained comparable to 1996. Even though posted crude
oil prices received in 1997 declined from 1996 prices, the average prices
realized in 1996 and 1997 were comparable due to crude oil hedging losses
experienced in 1996. The posted price for the Company's crude oil averaged
$18.34 per Bbl in 1997, a 9% decrease over the average posted price of $20.23
per Bbl experienced in 1996. The price per Bbl received by the Company is
adjusted for the quality and gravity of the crude oil and is generally lower
than the posted price.
The realized price for the Company's natural gas, including hedging gains
and losses discussed below, increased 8% from $2.07 per Mcf in 1996 to $2.23 per
Mcf in 1997. Although the average natural gas prices received, net of fuel used
in gathering, in 1996 and 1997 were comparable at $2.25 per Mcf and $2.22 per
Mcf, respectively, the natural gas hedging losses in 1996 reduced the realized
price in 1996 by $.18 per Mcf while 1997 hedging gains increased the realized
price in 1997 by $.01 per Mcf.
Production revenues for 1997 included crude oil hedging losses of $.3
million ($.11 per Bbl) compared to crude oil hedging losses of $4.7 million
($1.92 per Bbl) in 1996. Production revenues in 1997 also included natural gas
hedging gains of $.1 million ($.01 per Mcf) compared with natural gas hedging
losses of $1.2 million ($.18 per Mcf) for 1996. The Company has 10,000 Mmbtu of
natural gas production per day hedged from January through March 1998 at a
minimum price of $2.70 per Mmbtu and a maximum price of $3.28 per Mmbtu. In
March 1998, the Company hedged an additional 15,000 Mmbtu per day of natural gas
production over the period from April to August 1998, at a minimum price of
$2.00 per Mmbtu and a maximum price of $2.54 per Mmbtu.
Interest and other income decreased to $646,000 in 1997 from $1 million in
1996 primarily due to $472,000 of interest earned during 1996 on the receivable
from the sale of the marketing and pipeline segment of operations and due to an
unrealized gain of $450,000 on marketable securities in 1996, partially offset
by $137,000 of interest received in the first quarter of 1997 on a federal tax
refund and $465,000 of interest earned in the fourth quarter of 1997 on cash
investments.
Expenses. Production expenses (including production taxes) were $16 million
for 1997 compared to $13.9 million for 1996. This increase primarily reflects
additional production volumes. On a BOE basis, production costs increased to
$3.90 per BOE in 1997 compared to $3.88 per BOE in 1996.
General and administrative costs decreased 1% between years from $7.3
million in 1996 to $7.2 million in 1997. General and administrative costs
expensed in 1997 were less than such costs expensed in 1996, even though total
general and administrative costs increased, due to an increase in the
capitalization of salaries and other general and administrative costs directly
associated with the Company's increased exploration and development activities.
Total general and administrative cost increased due to higher compensation and
employee related costs attributable to staff additions and higher professional
fees.
Interest expense increased 31% in 1997 compared to 1996, due to higher
borrowing levels during 1997 as compared to 1996 and due to the sale of $150
million of the Senior Notes on October 3, 1997 which bear a higher interest rate
than the Restated Credit Agreement. The average interest rate paid on
outstanding indebtedness was 7.84% in 1997, compared to 7.6% in 1996.
18
<PAGE> 21
Depletion and depreciation expense increased 18% to $19.2 million in 1997
from $16.3 million in 1996. These increases are primarily the result of
increased production volumes and an increased rate per BOE, which increased to
$4.69 in 1997, compared with $4.55 in 1996.
In accordance with generally accepted accounting principles, at a point in
time coinciding with the quarterly and annual reporting periods, the Company
must test the carrying value of its crude oil and natural gas properties, net of
related deferred taxes, against a calculated amount based on estimated reserve
volumes valued at then current realized prices held flat for the life of the
properties discounted at 10% per annum plus the lower of cost or estimated fair
value of unproved properties. If the carrying value exceeds the cost center
ceiling, the excess must be expensed in such period and the carrying value of
the oil and gas lowered accordingly. Amounts required to be written off may not
be reinstated for any subsequent increase in the cost center ceiling.
Based on this test at December 31, 1997, using the year end WTI posted
reference price of $16.17 per Bbl of crude oil and a year end price of $2.26 per
Mcf of natural gas, the carrying value of the crude oil and natural gas
properties were lower than the cost center ceiling therefore no writeoff was
required. Assuming the price of natural gas remains constant and the ratio of
crude oil reserves to total reserves and the crude oil components of such
reserves do not change significantly from such quantities estimated in the year
end reserve report used in the December 31, 1997 test, the Company's carrying
value of its crude oil and natural gas properties would not exceed the cost
center ceiling at any WTI posted reference price above $14.72 per Bbl of crude
oil. The Company's capital expenditure program is, in large measure, designed to
increase production of both crude oil and natural gas from its proved reserves.
Such increases have the effect of increasing the present value of the discounted
future cash flows, thus increasing the cost center ceiling. The Company has
experienced increases in its daily rate of production during the first quarter
of 1998.
The Company's net operating loss carryforwards ("NOLs") for United States
and Canadian federal income tax purposes were approximately $67.5 million at
December 31, 1997 and expire between 1998 and 2011. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
requires that the tax benefit of such NOLs be recorded as an asset to the extent
that management assesses the utilization of such NOLs to be "more likely than
not." It is expected that future reversals of existing taxable temporary
differences will generate taxable amounts sufficient to utilize the majority of
the NOL carryforwards prior to their expiration. A valuation allowance has been
established with respect to approximately $10.4 million of these NOLs as it is
uncertain whether they will be utilized before they expire.
In estimating the realizability of the NOLs, management considered the
impact of softening commodity prices in its tax forecast and determined that an
increase in the valuation allowance was needed because the Company may not have
adequate taxable income in the short term to utilize all of its expiring NOLs
over the next few years. The increase in the valuation allowance was not
substantial because management believes the Company's ability to realize the
value of its deferred tax assets in the long term is not impaired by the current
softening in commodity prices.
The Company's net earnings for 1997 were $6.3 million, as compared to net
earnings of $5.9 million for 1996 for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Operating Revenues. During 1996, production revenues increased 33% to $54.3
million as compared to $40.9 million in 1995 (including hedging gains and losses
discussed below). This increase was principally due to increases of 13% in crude
oil production, 21% in crude oil prices and 30% in natural gas prices which were
slightly offset by a 6% decrease in natural gas production.
The 13% increase in daily crude oil production for 1996 to 6,742 Bbls is
primarily a result of continued development activity, including recompletions
and workovers on existing wells and drilling new wells and waterflood operations
in the Martinville, Soso and Summerland fields and waterflooding and exploration
success in Martinville. In addition, 1996 includes crude oil production from the
Brookhaven field for the entire year as compared to only five months in 1995.
Natural gas production for 1996 was 6% lower than 1995,
19
<PAGE> 22
primarily due to operational problems associated with the natural gas gathering
system caused by unusually cold, wet weather during the winter months of 1996.
Although the Monroe gas field (the Company's primary gas field) is experiencing
normal production declines, production from new development wells in the field
should offset such declines absent the operational problems discussed above.
In 1996, the posted price for the Company's crude oil averaged $20.23 per
Bbl, a 21% increase over the average posted price of $16.73 experienced in 1995.
The crude oil prices received by the Company during 1996 increased more
significantly than the average posted price because the Company amended its
marketing arrangements for the sale of substantially all of its crude oil during
1995 and again in March 1996, to improve the price and resultant revenues it
receives for its crude oil.
The price for the Company's natural gas, including hedging gains and
losses, increased 30% in 1996 compared to 1995 due to increased demands for
natural gas.
Production revenues for 1996 included crude oil hedging losses of $4.7
million ($1.92 per Bbl) compared to crude oil hedging losses of $0.6 million
($0.27 per Bbl) in 1995. Production revenues in 1996 also included natural gas
hedging losses of $1.2 million ($0.18 per Mcf) compared with natural gas hedging
gains of $1.0 million ($0.15 per Mcf) in 1995.
Interest and other income increased to $1.0 million in 1996 from $92,000 in
1995 due to $472,000 of interest earned during 1996 on the receivable from the
sale of the marketing and pipeline segment of operations and due to an
unrealized gain of $450,000 on marketable securities.
Expenses. Production expenses were $13.9 million for 1996 compared to $12.5
million for 1995. This increase primarily reflects additional production
volumes. On a BOE basis, production costs increased to $3.88 per BOE in 1996
compared to $3.71 per BOE in 1995, primarily due to an increase of $.15 per BOE
in production taxes as a result of higher crude oil and natural gas prices.
General and administrative costs increased 35% in 1996 to $7.3 million,
primarily due to increased compensation and employee related costs attributable
to staff additions made during the last half of 1995 and during 1996 to handle
the increased drilling and recompletion activity. Additionally, 1996 expenses
include an estimated bonus accrual of approximately $812,000 associated with the
Company's 1996 bonus plan, which is awarded based on the Company's after tax
return on equity for the year. As a result of these increases, general and
administrative expenses per BOE increased 26% from $1.61 in 1995 to $2.03 in
1996.
Depletion and depreciation expense increased 11% to $16.3 million in 1996.
This increase is primarily the result of increased production volumes. The
depletion rate per BOE in 1996 increased 4% to $4.55 compared with $4.38 for
1995.
Interest expense increased 5% to $8.5 million in 1996 from $8.1 million in
1995 due to higher borrowing levels, which were partially offset by a decrease
in interest rates. Borrowing levels increased by $2.0 million to $105.4 million
prior to the paydown of $20.5 million on April 3, 1996 from the proceeds of a
natural gas pipeline sale. Borrowing levels during the remainder of 1996
increased by $35.6 million to $120.5 million to fund increased drilling
activities. The average interest rate paid on outstanding indebtedness under the
Restated Credit Agreement was 7.6% in 1996, compared to 8.4% in 1995.
The Company's net earnings in 1996 were $5.9 million, as compared to $1.8
million in 1995 (including $1.6 million of income from discontinued operations)
for the reasons discussed above.
20
<PAGE> 23
OIL AND GAS OPERATIONS
The following table sets forth, for Coho's major producing fields, average
net daily production of crude oil and natural gas on a BOE basis for each of the
years in the three-year period ended December 31, 1997, and the number of
productive wells producing at December 31, 1997, all of which are crude oil
wells unless otherwise indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AT DECEMBER 31, 1997
----------------------- ----------------------------------
1995 1996 1997
----- ----- ------ NET AVERAGE
BOE/ BOE/ BOE/ PRODUCTIVE PERCENTAGE WORKING
FIELD DAY DAY DAY WELLS OPERATED INTEREST
- ----- ----- ----- ------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Brookhaven, Mississippi........ 130(a) 416 952 21 100% 94%
Laurel, Mississippi............ 3,470 3,317 3,248 36 100 92
Martinville, Mississippi....... 343 580 1,349 23 100 94
Monroe, Louisiana(b)........... 3,097 2,892 2,848 2,670 100 98
Soso, Mississippi.............. 470 772 1,197 25 100 93
Summerland, Mississippi........ 1,242 1,451 1,125 20 100 90
Oklahoma properties(c)......... -- -- -- 545 69 58
Other(d)....................... 453 341 508 10 42 53
----- ----- ------ ------
Total................ 9,205 9,769 11,227 3,350 92 85
===== ===== ====== ======
</TABLE>
- ---------------
(a) Calculated as a 365 day average, although the effective acquisition date
was July 1, 1995.
(b) All gross and net wells located in Monroe, Louisiana, are productive
natural gas wells.
(c) These properties were acquired effective December 31, 1997. No production
was recorded in 1997.
(d) Of the wells indicated, two wells are productive natural gas wells.
The following table summarizes the developed and undeveloped acreage owned
or leased by Coho at December 31, 1997:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
----------------- ---------------
GROSS NET GROSS NET
------- ------- ------ ------
<S> <C> <C> <C> <C>
Mississippi.................................... 24,851 23,122 22,821 20,274
Louisiana...................................... 125,770 105,496 1,598 1,419
Oklahoma(a).................................... 40,830 25,969 -- --
Texas.......................................... 2,796 2,796 1,626 1,626
Offshore Gulf of Mexico........................ 5,760 2,269 -- --
------- ------- ------ ------
Total................................ 200,007 159,652 26,045 23,319
======= ======= ====== ======
</TABLE>
- ---------------
(a) The Company is currently conducting due-diligence on the acreage acquired
and is unable to determine the undeveloped acreage at this time. The
Company does not believe a significant amount of acreage will be considered
undeveloped.
At December 31, 1997, the Company also held a 50% working interest in an
exploratory permit in Tunisia, North Africa, covering 1,412,000 gross acres.
Additionally, the Company held a 100% working interest in an offshore permit in
Tunisia covering approximately 115,000 gross acres, which the Company has
subsequently released.
21
<PAGE> 24
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as to persons or entities who,
to the knowledge of the Company based on information received from or on behalf
of such persons, were the beneficial owners of more than 5% of the outstanding
shares of Common Stock as of October 31, 1998. Unless otherwise specified, such
persons have sole voting power and sole dispositive power with respect to all
shares attributable to it.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS(1)
------------------------------------ -------------------- -----------
<S> <C> <C>
Energy Investment Partnership No. 1.................... 2,182,084(2) 8.5%
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Wellington Management Company.......................... 1,295,857(3) 5.1%
75 State Street
Boston, Massachusetts 02109
</TABLE>
- ---------------
(1) Based on 25,603,512 shares issued and outstanding as of October 31, 1998.
(2) The partners of Energy Investment Partnership No. 1 have shared voting and
dispositive power with respect to the 2,182,084 shares of Common Stock. The
general partners of EIP, who each can be deemed to beneficially own and have
voting and dispositive power with respect to the shares of Common Stock held
by EIP and whose address is the same as that set forth above for EIP, are
Charles W. Tate, Dan H. Blanks, David B. Deniger, Thomas O. Hicks, Jack D.
Furst, John R. Muse, Lawrence D. Stuart, Jr. and Michael J. Levitt. The
foregoing information is based solely on a Schedule 13D dated May 20, 1998,
as amended on August 25, 1998, filed by the foregoing entities with the
Securities and Exchange Commission (the "Commission").
(3) Based solely on information contained in a Schedule 13G dated January 13,
1998 filed with the Commission. Wellington Management Company acts as a
financial advisor and has shared voting power with respect to 630,467
shares, and shared dispositive power with respect to 1,295,857 shares, of
Common Stock that are owned by its clients.
The following table sets forth certain information with respect to Common
Stock beneficially owned as of October 31, 1998 by (i) each director of the
Company, (ii) the chief executive officer of the Company and the four most
highly compensated executive officers of the Company other than the chief
executive officer and (iii) all directors and executive officers as a group.
Unless otherwise specified, such persons have sole voting power and sole
dispositive power with respect to all shares attributable to him or her.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNERSHIP(1) OF CLASS
----------------------- --------
<S> <C> <C>
Jeffrey Clarke.......................................... 649,161 2.5%
Louis F. Crane.......................................... 31,000 *
Alan Edgar.............................................. 300,000 1.2%
Larry L. Keller......................................... 88,506 *
Eddie L. LeBlanc, III................................... 251,000 *
Kenneth H. Lambert...................................... 428,714(2) 1.7%
Douglas R. Martin....................................... 20,000 *
John R. Muse............................................ 2,182,084(3) 8.5%
Anne Marie O'Gorman..................................... 242,317 *
R. M. Pearce............................................ 425,000 1.6%
Lawrence D. Stuart, Jr.................................. 2,182,084(3) 8.5%
Jake Taylor............................................. 71,400 *
All directors and executive officers as a group (16
persons).............................................. 4,877,477(1) 19.1%
</TABLE>
(footnotes
continued on next page)
22
<PAGE> 25
- ---------------
* Less than 1%
(1) Includes 579,373, 17,000, 73,334, 250,000, 19,000, 420,000, 17,000, 225,983
and 1,836,531 shares that may be acquired within 60 days upon the exercise
of stock options held by Messrs. Clarke, Crane, Keller, LeBlanc, Martin,
Pearce and Taylor, Ms. O'Gorman and all directors and executive officers as
a group, respectively.
(2) Mr. Lambert is the beneficial owner of the shares held by Lambert Management
Ltd., Lambert Holdings, Ltd., Edmonton International Industries Ltd., 372268
Alberta Ltd., 249172 Alberta Ltd., and 297139 Alberta Ltd. The number of
shares shown as beneficially owned by Mr. Lambert include the shares owned
by such entities and also include 49,046 shares that may be acquired by Mr.
Lambert within 60 days upon the exercise of stock options. Included in Mr.
Lambert's total shares are 31,984 which are held by family members; Mr.
Lambert claims no beneficial interest in these shares.
(3) Represents shares of Common Stock held of record by EIP. Messrs. Muse and
Stuart are general partners in EIP and as a result may be deemed to have
voting and dispositive power with respect to the shares of Common Stock held
by EIP. The foregoing information is based solely on a Schedule 13D dated
May 20, 1998, as amended on August 25, 1998, filed by EIP, Messrs. Muse and
Stuart and others with the Commission. See also "The Transaction -- Purpose
and Background of the Transaction."
In addition to the foregoing options, Messrs. Crane, Keller, Lambert,
Martin, Muse, Stuart and Taylor, and all executive officers and directors as a
group held options to acquire 1,000, 45,000, 1,000, 1,000, 5,000, 5,000 and
197,500 shares of Common Stock, respectively, which options were not exercisable
within 60 days.
23
<PAGE> 26
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"). At October 31, 1998,
25,603,512 shares of Common Stock were outstanding and no shares of Preferred
Stock were outstanding. A total of 3,043,177 shares of Common Stock are reserved
for issuance upon the exercise of options granted under the Company's stock
option plans.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share in the
election of directors and on all other matters submitted to a vote of the
shareholders. Such holders have the right to cumulate their votes in the
election of directors. Holders of Common Stock have no redemption or conversion
rights and no preemptive or other rights to subscribe for securities of the
Company. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably in
all of the assets remaining, if any, after satisfaction of all debts and
liabilities of the Company, and the preferential rights of any series of
Preferred Stock then outstanding. The shares of Common Stock outstanding are,
and the shares to be offered hereby will be, fully paid and non-assessable.
Holders of Common Stock have an equal and ratable right to receive
dividends, when, as and if declared by the Board of Directors out of funds
legally available therefor and only after payment of, or provision for, full
dividends on all outstanding shares of any series of Preferred Stock and after
the Company has made provisions for any required sinking or purchase funds for
series of Preferred Stock.
PREFERRED STOCK
The Preferred Stock may be issued, from time to time, in one or more
series, and the Board of Directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, redemption
rights and terms, liquidation preferences, conversion rights, voting rights and
sinking fund provisions applicable to each such series of Preferred Stock. If
the Company issues a series of Preferred Stock in the future that has voting
rights or preferences over the Common Stock in respect to the payment of
dividends and upon the Company's liquidation, dissolution or winding up, the
rights of the holders of the Common Stock offered hereby may be adversely
affected. The issuance of shares of Preferred Stock could be utilized, under
certain circumstances, in an attempt to prevent an acquisition of the Company.
The Company has no present intention to issue any shares of Preferred Stock.
RIGHTS PLAN
In September 1994, the Company adopted a Rights Plan which, as amended,
provided for the distribution by the Company of one common share purchase right
(a "Right") for each outstanding share of Common Stock to holders of record of
Common Stock at the close of business on September 28, 1994, and for the
issuance of one Right for each share of Common Stock thereafter issued prior to
the earlier of the date the Rights first become exercisable, the date of
redemption of the Rights and September 12, 2004, the expiration date of the
Rights. Until such time that the Rights become exercisable, the Rights will be
evidenced by the certificates representing the shares of Common Stock with
respect to which the Rights were issued and may only be traded with such shares.
The Rights become exercisable on the earlier of (i) ten business days after
a public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person"), which term does not include the Company, any subsidiary
of the Company, any employee benefit plan of the Company or the Company's
subsidiaries, or any entity holding Common Stock for or pursuant to any such
plan, have acquired beneficial ownership of 20% or more of the Common Stock and
(ii) ten business days after the commencement of, or the first public
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in beneficial ownership by a person or group
(excluding the Company, any subsidiary of the Company, any employee benefit plan
of the Company or of its subsidiaries, and any entity holding Common Stock for
or pursuant to any such plan) of 20% or more of the Common Stock outstanding.
24
<PAGE> 27
At any time up until ten business days after the acquisition by an
Acquiring Person of 20% or more of the Common Stock, the Board of Directors of
the Company may redeem the Rights in whole, but not in part, at a price of $.01
per Right.
The Rights Plan was amended immediately prior to the execution of the
Agreement to exclude each of EIP and HM4 and its affiliates and associates as an
"Acquiring Person" under the Rights Plan.
TRANSFER AGENT AND REGISTRAR
The transfer agents for the Common Stock are Chase Mellon Shareholder
Services, L.L.C. and Montreal Trust Company of Canada and the registrar is Chase
Mellon Shareholder Services, L.L.C.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Arthur Andersen L.L.P., the independent auditors of the
Company, are expected to attend the Meeting, will be afforded an opportunity to
make a statement if they desire to do so, and will be available to respond to
appropriate questions by shareholders.
PROPOSALS FOR NEXT ANNUAL MEETING
Any proposals of holders of Common Stock intended to be presented at the
annual meeting of shareholders of the Company to be held in 1999 must be
received by the Company at its principal executive offices, 14785 Preston Road,
Suite 860, Dallas, Texas 75240, Attention: Secretary, not later than December
12, 1998 in order to be included in the proxy statement and form of proxy
relating to such meeting. Shareholder proposals submitted outside the processes
of Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended,
will be considered untimely if received by the Company after February 23, 1999.
PROXY SOLICITATION
The cost of preparing, assembling and mailing the material in connection
with the solicitation of proxies will be borne by the Company. It is expected
that the solicitation of proxies will be primarily by mail, but solicitations
may also be made personally or by telephone or telegraph by officers and other
employees of the Company. Arrangements will also be made with brokerage firms
and other custodians, nominees and fiduciaries who hold the voting securities of
record for the forwarding of solicitation materials to the beneficial owners
thereof. The Company has retained Chase Mellon Shareholder Services, L.L.C. to
aid in the solicitation of proxies, for whose services the Company will pay a
fee of $7,500, plus out-of-pocket costs and expenses.
By order of the Board of Directors,
/s/ JEFFREY CLARKE
Jeffrey Clarke
Chairman, President and
Chief Executive Officer
25
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets, December 31, 1996 and 1997..... F-3
Consolidated Statements of Earnings, Years Ended December
31, 1995, 1996 and 1997................................... F-4
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1995, 1996 and 1997.......................... F-5
Consolidated Statements of Cash Flows, Years Ended December
31, 1995, 1996 and 1997................................... F-6
Notes to Consolidated Financial Statements, Years Ended
December 31, 1995, 1996 and 1997.......................... F-7
Report of Independent Public Accountants.................... F-24
Condensed Consolidated Balance Sheets, December 31, 1997 and
June 30, 1998 (unaudited)................................. F-25
Condensed Consolidated Statements of Operations, Three and
Six Months Ended June 30, 1997 and 1998 (unaudited)....... F-26
Condensed Consolidated Statements of Cash Flows, Six Months
Ended June 30, 1997 and 1998 (unaudited).................. F-27
Notes to Condensed Consolidated Financial Statements, Six
Months Ended June 30, 1998 (unaudited).................... F-28
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Coho Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Coho
Energy, Inc. (a Texas corporation) and subsidiaries for the years ended December
31, 1997 and 1996, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coho Energy, Inc. and
subsidiaries for the years ended December 31, 1997 and 1996, and results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 20, 1998
F-2
<PAGE> 30
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
-------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 1,864 $ 3,817
Account receivable, principally trade..................... 11,884 10,724
Deferred income taxes..................................... 913 1,818
Investment in marketable securities....................... 1,962 --
Other current assets...................................... 995 715
-------- --------
17,618 17,074
Property and equipment, at cost net of accumulated depletion
and depreciation, based on full cost accounting method
(note 3).................................................. 210,212 531,409
Other assets................................................ 2,211 6,645
-------- --------
$230,041 $555,128
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, principally trade....................... $ 5,752 $ 4,888
Accrued liabilities and other payables.................... 2,546 7,545
Accrued interest.......................................... 804 3,901
Accrued compensation...................................... 812 1,423
Accrued environmental costs............................... -- 1,300
Accrued hedging liabilities............................... 881 --
Current portion of long term debt (note 4)................ 161 38
-------- --------
10,956 19,095
Long term debt, excluding current portion (note 4).......... 122,777 369,924
Deferred income taxes (note 5).............................. 14,842 20,306
-------- --------
148,575 409,325
-------- --------
Commitments and contingencies (note 9)...................... -- 3,700
Shareholders' equity (note 7)
Preferred stock, par value $0.01 per share Authorized
10,000,000 shares, none issued.........................
Common stock, par value $0.01 per share Authorized
50,000,000 shares Issued 20,347,126 and 25,603,512
shares at December 31, 1996 and 1997,
respectively........................................... 203 256
Additional paid-in capital................................ 83,516 137,812
Retained earnings (deficit)............................... (2,253) 4,035
-------- --------
Total shareholders' equity........................ 81,466 142,103
-------- --------
$230,041 $555,128
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 31
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Operating revenues
Crude oil and natural gas production (note 10)............ $40,903 $54,272 $63,130
------- ------- -------
Operating expenses
Crude oil and natural gas production...................... 10,514 11,277 13,747
Taxes on oil and gas production........................... 1,943 2,598 2,223
General and administrative................................ 5,400 7,264 7,163
Depletion and depreciation................................ 14,717 16,280 19,214
------- ------- -------
Total operating expenses.......................... 32,574 37,419 42,347
------- ------- -------
Operating income (loss)..................................... 8,329 16,853 20,783
------- ------- -------
Other income and expenses
Interest and other income................................. 92 1,012 646
Interest expense.......................................... (8,140) (8,476) (11,120)
------- ------- -------
(8,048) (7,464) (10,474)
------- ------- -------
Earnings from continuing operations before income taxes..... 281 9,389 10,309
------- ------- -------
Income taxes (note 5)
Current (recovery) expense................................ 457 (411) 163
Deferred (reduction) expense.............................. (345) 3,894 3,858
------- ------- -------
112 3,483 4,021
------- ------- -------
Net earnings from continuing operations..................... 169 5,906 6,288
Discontinued operations (note 2)
Income (loss) from discontinued marketing and
transportation operations (less applicable income tax
expense (benefit) of $1,384 in 1995)................... 1,611 -- --
------- ------- -------
Net earnings................................................ 1,780 5,906 6,288
Dividends on preferred stock................................ (944) -- --
------- ------- -------
Net earnings applicable to common stock..................... $ 836 $ 5,906 $ 6,288
======= ======= =======
Basic earnings (loss) from continuing operations per common
share..................................................... $ (.02) $ .29 $ .29
======= ======= =======
Diluted earnings (loss) from continuing operations per
common share.............................................. $ (.02) $ .29 $ .28
======= ======= =======
Basic earnings per common share............................. $ .05 $ .29 $ .29
======= ======= =======
Diluted earnings per common share........................... $ .05 $ .29 $ .28
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 32
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NUMBER OF
COMMON ADDITIONAL RETAINED
SHARES COMMON PAID-IN EARNINGS
OUTSTANDING STOCK CAPITAL (DEFICIT) TOTAL
----------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............. 16,782,925 $168 $ 65,243 $(8,995) $ 56,416
Issued on
(i) Exchange of preferred stock
(note 7)....................... 3,225,000 32 16,093 -- 16,125
(ii) Satisfaction of accrued
preferred dividends (note
7)............................ 157,338 2 942 -- 944
Net earnings........................... -- -- -- 1,780 1,780
Dividends on preferred stock........... -- -- -- (944) (944)
---------- ---- -------- ------- --------
Balance at December 31, 1995............. 20,165,263 202 82,278 (8,159) 74,321
Issued on
(i) Exercise of Employee Stock
Options........................ 81,863 -- 414 -- 414
(ii) Acquisition of working
interest.......................... 100,000 1 824 -- 825
Net earnings........................... -- -- -- 5,906 5,906
---------- ---- -------- ------- --------
Balance at December 31, 1996............. 20,347,126 203 83,516 (2,253) 81,466
Issued on
(i) Exercise of Employee Stock
Options........................ 256,386 3 1,733 -- 1,736
(ii) Public offering of common
stock............................. 5,000,000 50 49,173 -- 49,223
(iii) Warrants...................... -- -- 3,390 -- 3,390
Net earnings........................... -- -- -- 6,288 6,288
---------- ---- -------- ------- --------
Balance at December 31, 1997............. 25,603,512 $256 $137,812 $ 4,035 $142,103
========== ==== ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 33
COHO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................................. $ 1,780 $ 5,906 $ 6,288
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depletion and depreciation................................ 15,876 16,280 19,214
Deferred income taxes..................................... 653 3,894 3,858
Amortization of debt issue costs and other................ 918 271 591
Changes in:
Accounts receivable....................................... (4,696) (6,983) 1,160
Other assets.............................................. 1,188 (489) (351)
Accounts payable and accrued liabilities.................. (3,221) 40 4,346
Investment in marketable securities....................... -- (1,512) 1,962
Deferred income taxes and other current liabilities....... 337 (560) --
-------- -------- ---------
Net cash provided (used) by operating activities............ 12 ,835 16,847 37,068
-------- -------- ---------
Cash flows from investing activities
Acquisitions.............................................. -- -- (259,355)
Property and equipment.................................... (29,970) (52,384) (72,667)
Changes in accounts payable and accrued liabilities
related to exploration and development................. 986 (902) 3,559
Cash included in net assets of discontinued operations.... (352) -- --
Proceeds on sale of property and equipment................ -- 21,476 --
-------- -------- ---------
Net cash used in investing activities....................... (29,336) (31,810) (328,463)
-------- -------- ---------
Cash flows from financing activities
Increase in long term debt................................ 19,140 52,600 402,894
Debt issuance costs....................................... -- -- (4,275)
Repayment of long term debt............................... (1,822) (37,617) (155,989)
Increase in gas storage loan.............................. 4,000 -- --
Repayment of gas storage loan............................. (5,000) -- --
Proceeds from exercised stock options..................... -- 414 1,495
Issuance of common stock.................................. -- -- 49,223
-------- -------- ---------
Net cash provided by financing activities................... 16,318 15,397 293,348
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ (183) 434 1,953
Cash and cash equivalents at beginning of year.............. 1,613 1,430 1,864
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 1,430 $ 1,864 $ 3,817
======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 34
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Coho Energy, Inc. ("CEI") was incorporated in June 1993 as a Texas
corporation and conducts a majority of its operations through its subsidiary,
Coho Resources, Inc. ("CRI"), and its subsidiaries (collectively the "Company").
Prior to September 29, 1993, CRI was a publicly held company of which Coho
Resources Limited, a publicly held Alberta, Canada Company ("CRL"), held a 68%
ownership interest. As a result of the reorganization effective on September 29,
1993 (the "1993 Reorganization"), CRI and CRL became wholly-owned subsidiaries
of CEI.
Principles of Presentation
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles as presently established in the
United States and include the accounts of CEI as successor to CRI, and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to the prior year
statements to conform with the current year presentation.
Substantially all of the Company's exploration, development and production
activities are conducted in the United States and Tunisia jointly with others
and, accordingly, the financial statements reflect only the Company's
proportionate interest in such activities.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and highly liquid debt instruments purchased with an original maturity of
three months or less.
Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Instruments in Debt and Equity Securities", the Company
has classified all equity securities as trading securities and adjusted such
securities to market value at the end of each period. Unrealized gains and
losses on trading securities, as determined on a specific identification basis,
are reported in earnings. Trading securities, as of December 31, 1996, had a
fair value of $1,962,000 and gross unrealized gains of $722,000.
Crude Oil and Natural Gas Properties
The Company's crude oil and natural gas producing activities, substantially
all of which are in the United States, are accounted for using the full cost
method of accounting. Accordingly, the Company capitalizes all costs incurred in
connection with the acquisition of crude oil and natural gas properties and with
the exploration for and development of crude oil and natural gas reserves,
including related gathering facilities. All internal corporate costs relating to
crude oil and natural gas producing activities are expensed as incurred.
Proceeds from disposition of crude oil and natural gas properties are accounted
for as a reduction in capitalized costs, with no gain or loss recognized unless
such dispositions involve a significant alteration in the depletion rate in
which case the gain or loss is recognized.
Depletion of crude oil and natural gas properties is provided using the
equivalent unit-of-production method based upon estimates of proved crude oil
and natural gas reserves and production which are converted to a common unit of
measure based upon their relative energy content. Unproved crude oil and natural
gas properties are not amortized but are individually assessed for impairment.
The costs of any impaired properties
F-7
<PAGE> 35
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are transferred to the balance of crude oil and natural gas properties being
depleted. Estimated future site restoration and abandonment costs are charged to
earnings at the rate of depletion of proved crude oil and natural gas reserves
and are included in accumulated depletion and depreciation.
In accordance with the full cost method of accounting, the net capitalized
costs of crude oil and natural gas properties as well as estimated future
development, site restoration and abandonment costs are not to exceed their
related estimated future net revenues discounted at 10%, net of tax
considerations, plus the lower of cost or estimated fair value of unproved
properties.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
During fiscal year 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived-Assets To Be Disposed
Of." The Company has no long-lived assets which are subject to the impairment
test requirements in SFAS No. 121. The Company's only long-lived assets are oil
and gas properties, which are subject to the full cost ceiling test in
accordance with the full cost method of accounting, as discussed above.
Other Assets
Other assets generally include deferred financing charges which are
amortized over the term of the related financing under the straight line method.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to apply Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations to
account for stock-based compensation. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Earnings Per Common Share
The Company accounts for earnings per share ("EPS") in accordance with FASB
Statement No. 128 "Earnings Per Share." Under Statement 128, no dilution for any
potentially dilutive securities is included for basic EPS. Diluted EPS are based
upon the weighted average number of common shares outstanding including common
shares plus, when their effect is dilutive, common stock equivalents consisting
of stock
F-8
<PAGE> 36
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options and warrants. Previously reported EPS were equivalent to the diluted EPS
calculated under Statement 128.
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------ ------------------------------ ------------------------------
COMMON COMMON COMMON
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
---------- ---------- ---- ---------- ---------- ---- ---------- ---------- ----
(IN 000'S) (IN 000'S) (IN 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net earnings................ $1,780 $5,906 $6,288
Less preferred dividend..... (944) -- --
------ ------ ------
BASIC EARNINGS PER SHARE.... 836 17,931,933 $.05 5,906 20,178,917 $.29 6,288 21,692,804 $.29
==== ==== ====
Stock Options............... -- 162,651 641,099
------ ---------- ------ ---------- ------ ----------
DILUTED EARNINGS PER
SHARE..................... $ 836 17,931,933 $.05 $5,906 20,341,568 $.29 $6,288 22,333,903 $.28
====== ========== ==== ====== ========== ==== ====== ========== ====
</TABLE>
Basic EPS were computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted EPS were
calculated based upon the weighted number of common shares outstanding during
the year including common stock equivalents, consisting of stock options for the
three years and warrants for 1997, when their effect is dilutive. In 1995,
conversion of the stock options would have been anti-dilutive and, therefore,
was not considered in diluted EPS. In 1997, conversion of the warrants would
have been anti-dilutive and, therefore, was not considered in diluted EPS.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
Hedging Activities
Periodically, the Company enters into futures contracts which are traded on
the stock exchanges in order to fix the price on a portion of its crude oil and
natural gas production. Changes in the market value of crude oil and natural gas
futures contracts are reported as an adjustment to revenues in the period in
which the hedged production or inventory is sold. The gain or loss on the
Company's hedging transactions is determined as the difference between the
contract price and a reference price, generally closing prices on the New York
Mercantile Exchange.
Revenue Recognition Policy
Revenues generally are recorded when products have been delivered and
services have been performed.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures which improve the condition of a
property as compared to the condition when originally constructed or acquired or
prevent environmental contamination are capitalized. Expenditures which relate
to an existing condition caused by past operations, and do not contribute to
future operations, are expensed. The Company accrues remediation costs when
environmental assessments and/or remedial efforts are probable and the cost can
be reasonably estimated.
F-9
<PAGE> 37
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Business Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information", which requires information to be reported
in segments. The Company currently operates in a single reportable segment,
therefore, no additional disclosure will be required.
2. DISCONTINUED OPERATIONS
On April 3, 1996, the Company's wholly owned subsidiary, Interstate Natural
Gas Company ("ING"), sold the stock of three wholly owned subsidiaries that
comprised its natural gas marketing and transportation segment to an unrelated
third party for cash of $19.5 million, the assumption of net liabilities of
approximately $2.3 million and the payment of taxes of $1.2 million generated as
a result of the tax treatment of the transaction. The marketing and
transportation segment is accounted for as discontinued operations, and
accordingly, its operations are segregated in the accompanying statements of
operations.
Revenues of the marketing and transportation segment were $71,773,000 for
1995. Certain expenses have been allocated to discontinued operations, including
interest expense, which was allocated on the ratio of net assets discontinued to
the total net assets acquired from ING applied to the $20 million of cash
borrowed to acquire ING.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Crude oil and natural gas leases and rights including
exploration, development and equipment thereon, at cost... $ 328,836 $ 669,247
Accumulated depletion and depreciation...................... (118,624) (137,838)
--------- ---------
$ 210,212 $ 531,409
========= =========
</TABLE>
Overhead expenditures directly associated with exploration for and
development of crude oil and natural gas reserves have been capitalized in
accordance with the accounting policies of the Company. Such charges totalled
$1,788,000, $2,452,000 and $4,081,000 in 1995, 1996 and 1997, respectively.
During 1995, 1996 and 1997, the Company did not capitalize any interest or
other financing charges on funds borrowed to finance unproved properties or
major development projects.
Unproved crude oil and natural gas properties totalling $8,284,000 and
$82,872,000 (including $70,000,000 for the recently acquired Oklahoma
properties) at December 31, 1996 and 1997, respectively, have been excluded from
costs subject to depletion. These costs are anticipated to be included in costs
subject to depletion within the next five years.
Depletion and depreciation expense per equivalent barrel of production was
$4.38, $4.55 and $4.69 in 1995, 1996 and 1997, respectively.
F-10
<PAGE> 38
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revolving credit facility................................... $120,500 $221,000
8 7/8% Senior Subordinated Notes Due 2007................... -- 150,000
Promissory notes............................................ 2,323 --
Other....................................................... 234 68
-------- --------
123,057 371,068
Unamortized original issue discount on senior subordinated
notes..................................................... -- (1,106)
Unamortized discount on promissory notes.................... (119) --
Current maturities on long term debt........................ (161) (38)
-------- --------
$122,777 $369,924
======== ========
</TABLE>
Revolving Credit Facility
In August 1992, the Company established a revolving credit and term loan
facility with a group of international and domestic financial institutions. The
agreement, as amended and restated ("the Restated Credit Agreement"), provides a
maximum commitment amount available to the Company ("Borrowing Base") of $300
million for general corporate purposes. Outstanding advances as of December 31,
1997, were $221 million, leaving $79 million in available borrowing under the
credit facility for general corporate purposes. The average effective interest
rates for 1996 and 1997 were 7.55% and 7.37%, respectively. The Restated Credit
Agreement, which permits advances and repayments, terminates January 2, 2003.
The repayment of all advances is guaranteed by Coho Energy, Inc. and outstanding
advances are secured by substantially all of the assets of the Company.
Loans under the Restated Credit Agreement bear interest, at the option of
the Company, at the bank prime rate or a Eurodollar rate plus a maximum of 1.5%
(currently 1.5%) and are secured by a lien on substantially all of the Company's
crude oil and natural gas properties and the capital stock of the Company's
wholly owned subsidiaries. If the outstanding amount of the loan exceeds the
Borrowing Base at any time, the Company is required to either provide collateral
with value equal to such excess or prepay the principal amount of the notes
equal to such excess in five (5) equal monthly installments provided the entire
excess shall be paid prior to the immediately succeeding redetermination date.
The fee on the portion of the unused credit facility is .375% per annum. The
commitment fee applicable to increases from time to time in the Borrowing Base
is .375% of the incremental Borrowing Base amount.
The Restated Credit Agreement contains certain financial and other
covenants including (i) the maintenance of minimum amounts of shareholder's
equity, (ii) maintenance of minimum ratios of cash flow to interest expense as
well as current assets to current liabilities, (iii) limitations on the
Company's and CRI's ability to incur additional debt, and (iv) restrictions on
the payment of dividends.
8 7/8% Senior Subordinated Notes
On October 3, 1997, the Company completed a sale to the public of $150
million of 8 7/8% Senior Subordinated Notes due 2007 ("Senior Notes"). Proceeds
of the offering, net of offering costs, were approximately $144.5 million. The
proceeds from this offering, together with the proceeds from the common stock
offering discussed in Note 7, were used to repay indebtedness outstanding under
the Restated Credit Agreement and for general corporate purposes.
The Senior Notes are unsecured senior subordinated obligations of the
Company and rank pari passu in right of payment with all existing and future
senior subordinated indebtedness of the Company. The Senior Notes mature on
October 15, 2007 and bear interest from October 3, 1997 at the rate of 8 7/8%
per annum
F-11
<PAGE> 39
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payable semi-annually, commencing on April 15, 1998. Certain subsidiaries of the
Company issued guarantees of the Senior Notes on a senior subordinated basis.
The Indenture issued in conjunction with the Senior Notes (the "Indenture")
contains certain covenants, including covenants that limit (i) indebtedness,
(ii) restricted payments, (iii) distributions from restricted subsidiaries, (iv)
transactions with affiliates, (v) sales of assets and subsidiary stock
(including sale and leaseback transactions), (vi) dividends and other payment
restrictions affecting restricted subsidiaries and (vii) mergers or
consolidations.
Promissory Notes
In August 1995, the Company entered into noninterest bearing promissory
notes aggregating $4.2 million ($3.8 million net of discount based on an imputed
interest rate of 8.13%) which were paid in two installments of $1.9 million in
August 1996 and $2.3 million in August 1997 in connection with the Brookhaven
Acquisition (Note 6).
Debt Repayments
Based on the balances outstanding and current terms under the Restated
Credit Agreement and the Senior Notes indenture, estimated aggregate principal
repayments for each of the next five years are as follows: 1998 -- $52,000;
1999 -- $16,000; 2000 -- $0; 2001 -- $0; 2002 -- $0 and $371,000,000 thereafter.
5. INCOME TAXES
Deferred income taxes are recorded based upon differences between financial
statement and income tax basis of assets and liabilities. The tax effects of
these differences which give rise to deferred income tax assets and liabilities
at December 31, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards.......................... $26,087 $25,176
Alternative minimum tax credit carryforwards.............. 1,866 1,095
Employee benefits......................................... 46 565
Other..................................................... (46) 165
------- -------
Total gross deferred tax assets........................... 27,953 27,001
Less valuation allowance.................................. (4,150) (4,594)
------- -------
Net deferred tax assets................................... 23,803 22,407
------- -------
DEFERRED TAX LIABILITIES
Property and equipment, due to differences in depletion
and depreciation....................................... 37,732 40,895
------- -------
NET DEFERRED TAX LIABILITY.................................. $13,929 $18,488
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1997 includes $2,052,000 and $2,051,000, respectively, related to Canadian
deferred tax assets.
To determine the amount of net deferred tax liability it is assumed no
future capital expenditures will be incurred other than the estimated
expenditures to develop the Company's proved undeveloped reserves.
F-12
<PAGE> 40
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles the differences between recorded income tax
expense and the expected income tax expense obtained by applying the basic tax
rate to earnings (loss) before income taxes:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ -------
<S> <C> <C> <C>
Earnings (loss) before income taxes from continuing
operations............................................... $ 281 $9,389 $10,309
===== ====== =======
Expected income tax expense (recovery) (statutory
rate -- 34%)............................................. $ 95 $3,192 $ 3,505
State taxes -- deferred.................................... 232 (353) 552
Federal benefit of state taxes............................. (78) 120 (188)
Change in valuation allowance.............................. (168) 471 444
Other...................................................... 31 53 (293)
----- ------ -------
$ 112 $3,483 $ 4,020
===== ====== =======
</TABLE>
At December 31, 1997, the Company had the following income tax
carryforwards available to reduce future years' income for tax purposes:
<TABLE>
<CAPTION>
EXPIRES AMOUNT
--------- -------
<S> <C> <C>
Net operating loss carryforwards for federal income tax
purposes.................................................. 1998 $ 5,043
1999 1,727
2000 4,253
2001 3,016
2002 211
2003-2011 49,252
-------
$63,502
=======
Operating loss carryforwards for Canadian income tax
purposes.................................................. 1999-2003 $ 4,046
=======
Operating loss carryforwards for federal alternative minimum
tax purposes.............................................. 2009-2010 $12,832
=======
Federal alternative minimum tax credit carryforwards........ -- $ 1,095
=======
Operating loss carryforwards for Mississippi income tax
purposes.................................................. 2010-2012 $14,440
=======
Operating loss carryforwards for Louisiana income tax
purposes.................................................. 2004-2012 $10,161
=======
</TABLE>
6. ACQUISITIONS
Effective December 31, 1997, the Company acquired from Amoco Production
Company ("Amoco") interests in certain crude oil and natural gas properties
("Amoco Properties") located primarily in southern Oklahoma for cash
consideration of approximately $257.5 million and warrants to purchase one
million shares of common stock at $10.425 per share for a period of five years
valued at $3.4 million. The Amoco Properties are in more than 25,000 gross acres
concentrated in southern Oklahoma, including 14 major producing oil fields. The
aggregate purchase price was $267.8 million, including transaction costs of
approximately $1.9 million and assumed liabilities of $5 million. Investing
activities in the cash flow statement for the year ended December 31, 1997
related to this acquisition, exclude the noncash portions of the purchase price
of $3.4 million attributable to the warrants and $5 million for assumed
liabilities.
The following unaudited proforma information of the Company for the years
ended December 31, 1996 and 1997 have been prepared assuming the acquisition of
the Amoco Properties occurred on January 1, 1996.
F-13
<PAGE> 41
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such proforma information is not necessarily indicative of what actually could
have occurred had the acquisition taken place on January 1, 1996 or 1997.
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Revenues.................................................... $99,150 $109,428
Net earnings................................................ 6,167 6,422
Basic earnings per share.................................... .31 .30
Diluted earnings per share.................................. .30 .29
</TABLE>
On August 18, 1995, the Company acquired from a third party approximately
93% of the working interests in a unitized oil field containing 11 active wells
and 159 inactive wells located in the Brookhaven field in Mississippi (the
"Brookhaven Acquisition"). The total cost of the acquisition was $5.6 million in
cash as follows: $1.4 million paid on the acquisition date; $1.9 million due in
August 1996 and $2.3 million due in August 1997. The net cost was $5.1 million
net of discount based on an imputed interest rate of 8.13% for the promissory
notes due in 1996 and 1997. Only the $1.4 million cash portion of the
acquisition cost is reflected in the consolidated statement of cash flows for
the year ended December 31, 1995 (the year of acquisition).
7. SHAREHOLDERS' EQUITY
On October 3, 1997, the Company completed the sale to the public of
5,000,000 shares of common stock at $10.50 per share. Proceeds of the offering,
net of offering costs, were approximately $49.2 million. The proceeds from this
offering, together with the proceeds from the Senior Notes offering discussed in
Note 4, were used to repay indebtedness outstanding under the Company's Restated
Credit Agreement and for general corporate purposes.
In December 1997, the Company issued warrants, valued at $3,390,000, to
purchase one million shares of common stock at $10.425 per share for a period of
five years to Amoco Production Company as partial consideration for the purchase
of certain crude oil and natural gas properties discussed in Note 6.
In December 1996, the Company issued 100,000 shares of common stock, valued
at approximately $825,000, to Churchill Resource Investments Inc. as
consideration for the purchase of interest in certain crude oil properties.
The redeemable preferred stock issued in connection with the acquisition of
ING in 1994 was non-voting and entitled to receive cumulative quarterly
dividends at a coupon rate equal to the prime lending rate per annum (8.5% for
the first quarter of 1995 and 9% for the second and third quarters of 1995). If
the preferred stock were not redeemed by September 4, 1995, the coupon rate
increased 1/2% per quarter to a maximum rate of 18% per annum. On August 30,
1995, the Company exchanged 3,225,000 shares of Common Stock for the 161,250
shares of Series A Preferred Stock with a stated value of $16,125,000 and issued
157,338 shares of Common Stock to the holders of the preferred stock to satisfy
the accrued dividend obligation through August 30, 1995 of $944,000. These
noncash transactions are not reflected in the consolidated statement of cash
flows for the year ended December 31, 1995.
8. STOCK-BASED COMPENSATION
Options to purchase the Company's common stock have been granted to
officers, directors and key employees pursuant to the Company's 1993 Stock
Option Plan and 1993 Non Employee Director Stock Option Plan, or assumed from
the Company's subsidiaries in the 1993 Reorganization. The stock option plans
provide for the issuance of five year options with a three year vesting period
and a grant price equal to or above market value. Some exceptions have been made
to provide immediate or shortened vesting periods as approved by the Company's
board of directors. On December 2, 1997, the Company granted, subject to
shareholder approval, 407,500 stock options which will be voted on May 12, 1998
and are included in 1997
F-14
<PAGE> 42
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted shares. A summary of the status of the Company's stock option plans at
December 31, 1995, 1996 and 1997 and changes during the years then ended
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1....... 1,533,813 $5.63 1,700,313 $5.56 1,815,784 $5.55
Granted...................... 166,500 4.98 202,000 5.19 1,286,000 8.73
Exercised.................... -- -- (81,863) 5.05 (256,386) 5.82
Canceled..................... -- -- (4,666) 5.43 (21,583) 6.50
--------- ----- --------- ----- --------- -----
Outstanding at December 31..... 1,700,313 5.56 1,815,784 5.55 2,823,815 6.96
--------- ----- --------- ----- --------- -----
Exercisable at December 31..... 1,048,402 5.75 1,390,118 5.69 2,250,903 6.31
Available for grant at December
31........................... 39,670 118,836 36,419
</TABLE>
Significant option groups outstanding at December 31, 1997 and related
weighted average price and life information follows:
<TABLE>
<CAPTION>
WTD AVG
OPTIONS OPTIONS EXERCISE REMAINING
GRANT DATE OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
- ---------- ----------- ----------- -------- ------------
<S> <C> <C> <C> <C>
December 2, 1997.......................... 410,000 2,500 $10.50 7
August 22, 1997........................... 16,000 -- 9.38 7
May 12, 1997.............................. 8,000 -- 8.13 5
March 3, 1997............................. 836,000 745,750 7.88 4
June 13, 1996............................. 12,000 12,000 6.63 4
February 22, 1996......................... 150,000 150,000 5.13 5
January 8, 1996........................... 40,000 13,333 5.00 5
September 25, 1995........................ 50,000 50,000 5.00 4
September 12, 1995........................ 38,666 25,003 5.00 5
August 3, 1995............................ 24,000 24,000 4.88 4
April 14, 1995............................ 32,500 21,668 5.00 4
December 4, 1994.......................... 105,000 105,000 5.01 5
November 10, 1994......................... 240,000 240,000 5.00 4
June 7, 1994.............................. 79,883 79,883 5.49 3
March 28, 1994............................ 5,000 5,000 4.50 2
October 22, 1993.......................... 378,089 378,089 6.00 3
September 29, 1993........................ 105,067 105,067 6.84 2
November 18, 1992......................... 6,667 6,667 5.25 2
October 19, 1992.......................... 286,943 286,943 5.52 2
</TABLE>
The weighted average fair value at date for options granted during 1995,
1996 and 1997 was $2.25, $2.21 and $4.02 per option, respectively. The fair
value of options at date of grant was estimated using the Black-Scholes model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Expected life (years)....................................... 5 5 5
Interest rate............................................... 6.28% 5.37% 6.44%
Volatility.................................................. 43.43% 38.79% 43.76%
Dividend yield.............................................. -- -- --
</TABLE>
F-15
<PAGE> 43
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123 "Accounting for Stock-Based Compensation", the Company's pro
forma net income and earnings per share from continuing operations would have
been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ------
<S> <C> <C> <C> <C>
Net income (loss) As reported................... $169 $5,906 $6,288
Pro forma..................... $(67) $5,625 $4,385
Basic earnings (loss) per share As reported................... $.01 $ .29 $ .29
Pro forma..................... $ -- $ .27 $ .20
Diluted earnings (loss) per share As reported................... $.01 $ .29 $ .28
Pro forma..................... $ -- $ .27 $ .20
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
(a) In July, 1994, the Company, together with several other companies, was
named as a defendant in a lawsuit filed in Jones County, Mississippi. The
lawsuit, involves claims by a landowner for purported damages caused by
naturally occurring radioactive materials ("NORM") at various wellsite locations
on land leased by the Company in Mississippi. The plaintiff is seeking
significant compensatory and punitive damages, including damages for "emotional
distress." This lawsuit has been dormant for two years and the land involved has
been remediated.
Additionally, in 1996 and 1997, the Company, together with several other
companies, was named as a defendant in a number of lawsuits of the same nature
as the July, 1994 lawsuit. All of the suits are principally identical and seek
damages for land damage, health hazard, mental and emotional distress, etc. None
of the suits seek specific award amounts, but all seek punitive damages.
In connection with the acquisition of the Amoco Properties on December 18,
1997, the Company assumed the responsibility for costs and expenses associated
with the assessment, remediation, removal, transportation and disposal of the
asbestos or NORM associated with the Amoco Properties. Additionally, the Company
is responsible for all other environmental claims up to approximately $10.3
million and all environmental claims not identified and presented to Amoco by
December 18, 1998. The Company is not currently aware of any such claims and is
performing due diligence to identify all potential environmental claims.
While the Company is not able to determine its exposure in the remaining
suits at this time, the Company believes that the claims will have no material
adverse effect on its financial position or results of operations.
The Company is involved in various other legal actions arising in the
ordinary course of business. While it is not feasible to predict the ultimate
outcome of these actions or those listed above, management believes that the
resolution of these matters will not have a material adverse effect, either
individually or in the aggregate, on the Company's financial position or results
of operations. The Company has accrued $5 million, including $1.3 million which
has been reflected in current accrued liabilities, for future remediation costs.
(b) The Company has leased (i) 38,568 square feet of office space in
Dallas, Texas under a non-cancellable lease extending through October 2000, (ii)
5,000 square feet of office space in Laurel, Mississippi under a non-cancellable
lease extending through June 2000, and (iii) various vehicles under
non-cancellable leases extending through February 2000. Rental expense totalled
$487,000, $694,000 and $799,000 in 1995, 1996 and 1997, respectively. Minimum
rentals payable under these leases for each of the next five years are as
follows: 1998 -- $784,000; 1999 -- $706,000; 2000 -- $564,000; 2001 -- $0 and
2002 -- $0. Total rentals payable over the remaining terms of the leases are
$2,054,000.
F-16
<PAGE> 44
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Like other crude oil and natural gas producers, the Company's
operations are subject to extensive and rapidly changing federal, state and
local environmental regulations governing emissions into the atmosphere, waste
water discharges, solid and hazardous waste management activities, noise levels
and site restoration and abandonment activities. The Company's policy is to make
a provision for future site restoration charges on a unit-of-production basis.
Total future site restoration costs are estimated to be $6,000,000, including
the Oklahoma properties but excluding the Monroe gas field discussed below. A
total of $1,061,000 has been included in depletion and depreciation expense with
respect to such costs as of December 31, 1997.
Certain governmental agencies are presently studying whether the oil and
gas industry's practice of utilizing mercury meters poses any potential
environmental problems that require more stringent regulation. Operators in the
Monroe Field have been asked to monitor their operations and assist in gathering
data. During 1995, the Company voluntarily negotiated a remediation plan with
the governmental agencies responsible for the two wildlife refuges in the Monroe
Field. Under the plan, the Company began removal of the mercury meters within
the two wildlife refuges in 1996. The Company continues to cooperate with the
various agencies in their studies. At this time, the Company believes that minor
mercury spillages and leaks may have occurred in the past. However, the Company
believes that such spillages and leaks are less than the amounts reportable
under prior or existing statutes and laws. The Company makes a provision for
future site restoration charges on a unit-of-production basis for the Monroe
field gas which is included in depletion and depreciation expense; a total of
$1,030,000 has been included in depletion and depreciation expense with respect
to such costs as of December 31, 1997.
(d) The Company has entered into employment agreements with certain of its
officers. In addition to base salary and participation in employee benefit plans
offered by the Company, these employment agreements generally provide for a
severance payment in an amount equal to two times the rate of total annual
compensation of the officer in the event the officer's employment is terminated
for other than cause. If the officer's employment is terminated for other than
cause following a change in control in the Company, the officer generally is
entitled to a severance payment in the amount of 2.99 times the rate of total
annual compensation of the officer.
The officers' aggregate base salary and bonus portion of total annual
compensation covered under such employment agreements is approximately $1.3
million.
(e) The Company has entered into executive severance agreements with its
other officers which are designed to encourage executive officers to continue to
carry out their duties with the Company in the event of a change in control of
the Company. In the event of the officer's employment is terminated for other
than cause following a change of control, these severance agreements generally
provide for a severance payment in an amount equal to 1.5 times the highest
salary plus bonus paid to such officer in any of the five years preceding the
year of termination.
The highest salary plus bonus paid to the officers covered under such
severance agreements during the preceding five year period would aggregate
approximately $876,000.
(f) In conjunction with the acquisition of the Amoco Properties, the
acquisition of ING and the 1993 reorganization (Note 1), the Company has granted
certain persons the right to require the Company, at its expense, to register
their shares under the Securities Act of 1933. These registration rights may be
exercised on up to 4 occasions. The number of shares of Common Stock subject to
registration rights as of December 31, 1997, is approximately 3,324,287.
10. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
Financial instruments which are potentially subject to concentrations of
credit risk consist principally of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are placed with high credit quality
financial institutions to minimize risk. The carrying amounts of these
instruments approximate fair value
F-17
<PAGE> 45
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
because of their short maturities. The Company has entered into certain
financial arrangements which act as a hedge against price fluctuations in future
crude oil and natural gas production. Included in operating revenues are gains
(losses) of $441,000, $(5,908,000) and $(232,000) for 1995, 1996 and 1997,
respectively, resulting from these hedging programs. At December 31, 1997, the
Company has 10,000 Mmbtu per day of natural gas production hedged over the
period from January through March 1998, at a minimum price of $2.70 per Mmbtu
and a maximum price of $3.28 per Mmbtu. In March 1998, the Company hedged an
additional 15,000 Mmbtu per day of natural gas production over the period from
April through August 1998, at a minimum price of $2.00 per Mmbtu and a maximum
price of $2.54 per Mmbtu. At December 31, 1996 and 1997, the Company had no
deferred hedging gains or losses attributable to crude oil and natural gas
production.
The stated value of long term debt approximates fair market value since the
interest applicable to each instrument approximates market rates.
During the years ended December 31, 1996 and 1997, EOTT Energy Corp.
("EOTT") accounted for 66% and 75%, respectively, of Coho's receipt of operating
revenues, and Mid Louisiana Marketing Company (formerly a wholly owned
subsidiary sold on April 3, 1996 -- see Note 2), accounted for 15% and 21%,
respectively, of Coho's receipt of operating revenues. In 1995, Amerada Hess
Corporation ("Amerada") accounted for 66% of Coho's receipt of operating
revenues. Included in accounts receivable is $2,691,000, $7,222,491 and
$2,969,000 due from these customers at December 31, 1995, 1996 and 1997,
respectively.
11. RELATED PARTY TRANSACTIONS
(a) Corporations controlled by certain directors and shareholders of the
Company have participated with the Company in certain crude oil and natural gas
joint ventures on the same terms and conditions as other industry partners.
These transactions are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Campco International Capital Ltd. (i)
Net crude oil and natural gas revenues.................... $219 $243 $255
Capital expenditures...................................... 77 101 173
Payable to (receivable from) CRI at the balance sheet
date................................................... (3) (22) 16
</TABLE>
- ---------------
(i) Campco International Capital Ltd. is a private company controlled by
Frederick K. Campbell, a director of the Company.
(b) In 1990, the Company made a non-interest bearing loan in the amount of
$205,000 to Jeffrey Clarke, President, Chief Executive Officer and Director of
the Company, to assist him in the purchase of a house in Dallas. The loan is
unsecured, is repayable on the date Mr. Clarke ceases employment with the
Company and is included in other assets at December 31, 1997.
(c) Pursuant to the equity offering, the Company's officers and directors
were precluded from selling stock for a 90 day period beginning October 3, 1997
(the "Lock Up Period"). On October 6, 1997, the Company made non-interest
bearing loans of $622,111, payable on demand, to certain officers and a
director. The loans were made to provide assistance in acquiring stock upon
exercise of expiring stock options during the Lock Up Period.
(d) Certain of the Company's hedging agreements are with an affiliate of
the Company, Morgan Stanley Capital Group, which owned over 10% of the Company's
outstanding common stock until October 3, 1997, when it's ownership dropped to
5.3% as a result of the equity offering discussed in Note 7. Management of the
Company believes that such transactions are on similar terms as could be
obtained from unrelated third parties.
F-18
<PAGE> 46
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CASH FLOW INFORMATION
Supplemental cash flow information is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Cash paid (received) during the period
Interest................................................ $ 7,574 $8,259 $7,774
Income taxes............................................ $(1,131) $ 478 $ 603
</TABLE>
13. CANADIAN ACCOUNTING PRINCIPLES
These financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") as presently established in the United
States. These principles differ in certain respects from those applicable in
Canada. These differences would have affected net earnings (loss) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net earnings (loss) based on US GAAP....................... $1,780 $5,096 $6,288
Adjustment to depletion based on difference in carrying
value of oil and gas properties related to:
ING acquisition(i)....................................... 576 556 562
Business combination with Odyssey Exploration, Inc. in
1990.................................................. (198) (178) (168)
Application of Canadian full cost ceiling test........... (535) (482) (455)
Deferred tax effect of adjustment above.................... 53 35 21
------ ------ ------
Net earnings (loss) based on Canadian GAAP................. $1,676 $5,027 $6,248
====== ====== ======
Net earnings (loss) per common share based on Canadian
GAAP..................................................... $ 0.09 $ 0.25 $ 0.29
====== ====== ======
</TABLE>
- ---------------
(i) Under FAS 109 in the United States, the Company was required to increase
deferred income taxes and property and equipment by $8,355,000 for the
deferred tax effect of the excess of the Company's tax basis of the stock
acquired in the ING acquisition over the tax basis of the net assets of ING
acquired (Note 6). Under Canadian GAAP this adjustment is not required.
The effect on the consolidated balance sheets of the differences between
United States and Canadian GAAP is as follows:
<TABLE>
<CAPTION>
UNDER
AS INCREASE CANADIAN
REPORTED (DECREASE) GAAP
-------- ---------- --------
<S> <C> <C> <C>
DECEMBER 31, 1997
Property and Equipment............................. $531,409 $ 2,131 $533,540
Deferred Income Taxes.............................. 20,306 (4,790) 15,516
Long Term Debt..................................... 369,924 (1,106) 368,818
Deferred Charges................................... -- 1,106 1,106
Shareholder's Equity............................... 142,103 6,921 149,024
DECEMBER 31, 1996
Property and Equipment............................. $210,212 $ 2,191 $212,403
Deferred Income Taxes.............................. 14,842 (4,769) 10,073
Shareholder's Equity............................... 81,466 6,961 88,427
</TABLE>
F-19
<PAGE> 47
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1997
Operating revenues......................... $15,536 $13,985 $15,985 $17,624 $63,130
Operating income........................... 5,604 4,151 4,990 6,038 20,783
Net earnings............................... 2,104 1,081 1,401 1,702 6,288
Basic earnings per share................... $ 0.10 $ 0.05 $ 0.07 $ 0.07 $ 0.29
Diluted earnings per share................. $ 0.10 $ 0.05 $ 0.07 $ 0.06 $ 0.28
1996
Operating revenues......................... $12,367 $12,938 $13,552 $15,415 $54,272
Operating income........................... 3,576 3,738 4,182 5,357 16,853
Net earnings............................... 1,035 1,103 1,326 2,442 5,906
Basic earnings per share................... $ 0.05 $ 0.06 $ 0.06 $ 0.12 $ 0.29
Diluted earnings per share................. $ 0.05 $ 0.06 $ 0.06 $ 0.12 $ 0.29
1995
Operating revenues......................... $ 9,402 $10,000 $10,418 $11,083 $40,903
Operating income........................... 1,574 1,321 1,913 3,521 8,329
Income (loss) from continuing operations... (140) (361) (147) 817 169
Income (loss) from discontinued
operations.............................. 317 26 113 1,155 1,611
Net earnings (loss)........................ 177 (335) (34) 1,972 1,780
Basic earnings (loss) per share:
Continuing operations................... $ (0.02) $ (0.03) $ (0.02) $ 0.04 $ (0.02)
Discontinued operations................. 0.01 (0.01) 0.00 0.06 0.07
------- ------- ------- ------- -------
Net income (loss) per share............. $ (0.01) $ (0.04) $ (0.02) $ 0.10 $ 0.05
======= ======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations................... $ (0.02) $ (0.03) $ (0.02) $ 0.04 $ (0.02)
Discontinued operations................. 0.01 (0.01) 0.00 0.06 0.07
------- ------- ------- ------- -------
Net income (loss) per share............. $ (0.01) $ (0.04) $ (0.02) $ 0.10 $ 0.05
======= ======= ======= ======= =======
</TABLE>
Basic per share figures are computed based on the weighted average number
of shares outstanding for each period shown. Diluted per share figures are
computed based on the weighted average number of shares outstanding including
common stock equivalents, consisting of stock options and warrants, when their
effect is dilutive.
F-20
<PAGE> 48
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS ACTIVITIES
(a) Costs Incurred
Costs incurred for property acquisition, exploration and development
activities were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Property acquisitions
Proved............................................. $ 7,294 $ 1,139 $199,485
Unproved........................................... 2,253 986 73,281
Exploration.......................................... 3,378 6,528 13,374
Development.......................................... 19,194 41,091 53,542
Other................................................ 677 894 729
-------- -------- --------
$ 32,796 $ 50,638 $340,411
======== ======== ========
Property and equipment, net of accumulated
depletion.......................................... $175,899 $210,212 $531,409
======== ======== ========
</TABLE>
(b) Quantities of Oil and Gas Reserves (Unaudited)
The following table presents estimates of the Company's proved reserves,
all of which have been prepared by the Company's engineers and evaluated by
independent petroleum consultants. Substantially all of the Company's crude oil
and natural gas activities are conducted in the United States.
<TABLE>
<CAPTION>
RESERVE QUANTITIES
------------------
OIL GAS
(MBBLS) (MMCF)
------- --------
<S> <C> <C>
Estimated reserves at December 31, 1994..................... 27,515 100,117
Revisions of previous estimates............................. (599) 14,639
Purchase of reserves in place............................... 1,786 9
Extensions and discoveries.................................. 4,274 200
Production.................................................. (2,178) (7,093)
------ -------
Estimated reserves at December 31, 1995..................... 30,798 107,872
Revisions of previous estimates............................. (1,913) 10,335
Purchase of reserves in place............................... 218 --
Extensions and discoveries.................................. 8,186 1,571
Production.................................................. (2,467) (6,646)
------ -------
Estimated reserves at December 31, 1996..................... 34,822 113,132
Revisions of previous estimates............................. 1,601 8,556
Purchase of reserves in place............................... 49,723 32,581
Extensions and discoveries.................................. 11,758 902
Production.................................................. (2,820) (7,666)
------ -------
Estimated reserves at December 31, 1997..................... 95,084 147,505
====== =======
Proved developed reserves at December 31,
1995...................................................... 23,478 94,878
1996...................................................... 24,089 98,936
1997...................................................... 62,663 129,392
</TABLE>
F-21
<PAGE> 49
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Costs Incurred
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Reserves.
The following standardized measure of discounted future net cash flows was
computed in accordance with the rules and regulations of the Securities and
Exchange Commission and Financial Accounting Standards Board Statement No. 69
using year-end prices and costs, and year-end statutory tax rates. Royalty
deductions were based on laws, regulations and contracts existing at the end of
each period. No values are given to unproved properties or to probable reserves
that may be recovered from proved properties.
The inexactness associated with estimating reserve quantities, future
production and revenue streams and future development and production
expenditures, together with the assumptions applied in valuing future
production, substantially diminishes the reliability of this data. The values so
derived are not considered to be an estimate of fair market value. The Company
therefore cautions against its simplistic use.
The following tabulation reflects the Company's estimated discounted future
cash flows from crude oil and natural gas production:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Future cash inflows.............................. $ 766,196 $1,174,356 $1,764,924
Future production costs.......................... (234,309) (301,619) (607,114)
Future development costs......................... (33,824) (52,769) (114,294)
--------- ---------- ----------
Future net cash flows before income taxes........ 498,063 819,968 1,043,516
Annual discount at 10%........................... (229,445) (402,885) (517,239)
--------- ---------- ----------
Present value of future net cash flows before
income taxes ("Present Value of Proved
Reserves")..................................... 268,618 417,083 526,277
Future income taxes discounted at 10%............ (43,679) (79,864) (58,084)
--------- ---------- ----------
Standardized measure of discounted future net
cash flows..................................... $ 224,939 $ 337,219 $ 468,193
========= ========== ==========
West Texas Intermediate posted reference price ($
per Bbl)....................................... $ 18.00 $ 25.25 $ 16.17
Estimated December 31 Company average realized
price
$/Bbl.......................................... $ 15.69 $ 22.02 $ 15.06
$/Mcf.......................................... $ 2.54 $ 3.53 $ 2.26
</TABLE>
F-22
<PAGE> 50
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the significant sources of changes in discounted future
net cash flows relating to proved reserves:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Crude oil and natural gas sales, net of production
costs............................................. $(28,446) $(46,305) $ (47,392)
Net changes in anticipated prices and production
costs............................................. 93,551 128,960 (176,309)
Extensions and discoveries, less related costs...... 24,281 74,560 73,565
Changes in estimated future development costs....... (10,581) (2,580) (6,393)
Development costs incurred during the period........ 19,194 6,321 10,817
Net change due to sales and purchase of reserves in
place............................................. 10,409 1,108 224,579
Accretion of discount............................... 16,441 26,862 41,708
Revision of previous quantity estimates............. 11,768 (1,643) 11,737
Net changes in income taxes......................... (14,289) (36,185) 21,780
Changes in timing of production and other........... (32,408) (38,818) (23,118)
-------- -------- ---------
Net increase (decrease)............................. 89,920 112,280 130,974
Beginning of year................................... 135,019 224,939 337,219
-------- -------- ---------
Standardized measure of discounted future net cash
flows............................................. $224,939 $337,219 $ 468,193
======== ======== =========
</TABLE>
F-23
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Coho Energy, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Coho Energy, Inc. and subsidiaries as of June 30, 1998 and the related condensed
consolidated statements of operations for the three month and six month periods
ended June 30, 1998 and the condensed statement of cash flows for the six month
period ended June 30, 1998, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Coho Energy, Inc. and subsidiaries.
A review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Coho Energy, Inc. as of December
31, 1997 included in the Company's 1997 annual report on Form 10-K, and in our
report dated March 20, 1998, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997 is fairly stated, in all
material respects, in relation to the consolidated balance sheet included in the
Company's 1997 annual report on Form 10-K from which it has been derived.
Arthur Andersen LLP
Dallas, Texas
August 14, 1998
F-24
<PAGE> 52
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 3,817 $ 1,429
Accounts receivable, principally trade.................... 10,724 16,794
Deferred income taxes..................................... 1,818 --
Other current assets...................................... 715 846
-------- --------
17,074 19,069
PROPERTY AND EQUIPMENT, at cost net of accumulated depletion
and depreciation, based on full cost accounting method
(note 2).................................................. 531,409 484,436
OTHER ASSETS................................................ 6,645 6,257
-------- --------
$555,128 $509,762
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, principally trade....................... $ 4,888 $ 8,832
Accrued liabilities and other payables.................... 14,169 11,042
Current portion of long term debt......................... 38 36
-------- --------
19,095 19,910
LONG TERM DEBT, excluding current portion................... 369,924 407,961
DEFERRED INCOME TAXES....................................... 20,306 --
-------- --------
409,325 427,871
-------- --------
COMMITMENTS AND CONTINGENCIES (note 4)...................... 3,700 3,700
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 per share Authorized
10,000,000 shares, none issued.........................
Common stock, par value $0.01 per share Authorized
50,000,000 shares Issued and outstanding 25,603,512
shares................................................. 256 256
Additional paid-in capital................................ 137,812 137,812
Retained earnings (deficit)............................... 4,035 (59,877)
-------- --------
Total shareholders' equity........................ 142,103 78,191
-------- --------
$555,128 $509,762
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-25
<PAGE> 53
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
1997 1998 1997 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Net crude oil and natural gas production........... $29,521 $ 39,290 $13,985 $ 18,147
------- -------- ------- --------
OPERATING EXPENSES
Crude oil and natural gas production............... 6,113 12,584 3,033 6,171
Taxes on oil and gas production.................... 1,070 1,884 530 882
General and administrative......................... 3,623 3,315 1,847 1,175
Depletion and depreciation......................... 8,960 15,019 4,424 7,225
Writedown of crude oil and natural gas
properties...................................... -- 73,000 -- 41,000
------- -------- ------- --------
Total operating expenses................... 19,766 105,802 9,834 56,453
------- -------- ------- --------
OPERATING INCOME (LOSS).............................. 9,755 (66,512) 4,151 (38,306)
------- -------- ------- --------
OTHER INCOME AND EXPENSES
Interest and other income (expense)................ 149 118 (44) 72
Interest expense................................... (4,682) (15,964) (2,391) (8,155)
------- -------- ------- --------
(4,533) (15,846) (2,435) (8,083)
------- -------- ------- --------
EARNINGS (LOSS) FROM OPERATIONS BEFORE INCOME
TAXES.............................................. 5,222 (82,358) 1,716 (46,389)
INCOME TAX PROVISION (BENEFIT)....................... 2,037 (18,446) 635 (4,778)
------- -------- ------- --------
NET EARNINGS (LOSS).................................. $ 3,185 $(63,912) $ 1,081 $(41,611)
======= ======== ======= ========
BASIC EARNINGS (LOSS) PER COMMON SHARE (note 3)...... $ 0.15 $ (2.50) $ 0.05 $ (1.63)
======= ======== ======= ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE (note 3).... $ 0.15 $ (2.50) $ 0.05 $ (1.63)
======= ======== ======= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-26
<PAGE> 54
COHO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 3,185 $(63,912)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depletion and depreciation............................. 8,960 15,019
Writedown of crude oil and natural gas properties...... -- 73,000
Deferred income taxes provision (benefit).............. 1,987 (18,488)
Amortization of debt issue costs and other............. 275 417
Changes in operating assets and liabilities:
Accounts receivable and other assets................... 4,019 (6,230)
Accounts payable and accrued liabilities............... (3,067) 187
Investment in marketable securities.................... 1,962 --
-------- --------
Net cash provided by (used in) operating activities......... 17,321 (7)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment.................................... (33,294) (41,046)
Changes in accounts payable and accrued liabilities
related to exploration and development................. 5,089 630
-------- --------
Net cash used in investing activities....................... (28,205) (40,416)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in long term debt................................ 17,000 38,056
Repayment of long term debt............................... (7,621) (21)
Proceeds from exercised stock options..................... 577 --
-------- --------
Net cash provided by financing activities................... 9,956 38,035
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (928) (2,388)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,864 3,817
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 936 $ 1,429
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest............................................... $ 4,312 $ 16,016
Income taxes........................................... $ 639 $ 19
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-27
<PAGE> 55
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998
(TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT WHERE NOTED)
(UNAUDITED)
1. BASIS OF PRESENTATION
General
The accompanying condensed consolidated financial statements of Coho
Energy, Inc. (the "Company") have been prepared without audit, in accordance
with the rules and regulations of the Securities and Exchange Commission and do
not include all disclosures normally required by generally accepted accounting
principles or those normally made in annual reports on Form 10-K. All material
adjustments, consisting only of normal recurring accruals with the exception of
the adjustment to writedown the carrying value of the crude oil and natural gas
properties discussed in Note 2 below, which, in the opinion of management, were
necessary for a fair presentation of the results for the interim periods, have
been made. The results of operations for the six month period ended June 30,
1998, are not necessarily indicative of the results to be expected for the full
year. The condensed consolidated financial statements should be read in
conjunction with the notes to the financial statements, which are included as
part of the Company's annual report on Form 10-K for the year ended December 31,
1997.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- ---------
<S> <C> <C>
Crude oil and natural gas leases and rights including
exploration, development and equipment thereon, at cost... $ 669,247 $ 710,293
Accumulated depletion and depreciation...................... (137,838) (225,857)
--------- ---------
$ 531,409 $ 484,436
========= =========
</TABLE>
Overhead expenditures directly associated with exploration and development
of crude oil and natural gas reserves have been capitalized in accordance with
the accounting policies of the Company. Such charges totalled $1,454,000 and
$2,768,000 for the six months ended June 30, 1997 and 1998, respectively.
During the six months ended June 30, 1997 and 1998, the Company did not
capitalize any interest or other financing charges on funds borrowed to finance
unproved properties or major development projects.
At December 31, 1997 and June 30, 1998, unproved crude oil and natural gas
properties totalling $82,872,000 and $84,266,000 (both including $70,000,000 for
the recently acquired Oklahoma properties), respectively, were excluded from
costs subject to depletion. These costs are anticipated to be included in costs
subject to depletion during the next three to five years.
At June 30, 1998, capitalized costs of crude oil and natural gas properties
exceeded the estimated present value of future net revenues for the Company's
proved reserves, net of related income tax considerations, resulting in a
writedown in the carrying value of crude oil and natural gas properties of $73
million. The writedown resulted from the decline in crude oil prices during
1998.
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") have been calculated based on the weighted
average number of shares outstanding for the six months ended June 30, 1997 and
1998 of 20,389,991 and 25,603,512, respectively, and for the three months ended
June 30, 1997 and 1998 of 20,406,479 and 25,603,512, respectively. Diluted EPS
have been calculated based on the weighted average number of shares outstanding
(including common shares plus, when their effect is dilutive, common stock
equivalents consisting of stock options and warrants) for the
F-28
<PAGE> 56
COHO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
six months ended June 30, 1997 and 1998 of 20,991,484 and 25,603,512,
respectively, and for the three months ended June 30, 1997 and 1998 of
21,078,544 and 25,603,512, respectively. In 1998, conversion of stock options
and warrants would have been anti-dilutive and, therefore, was not considered in
diluted EPS.
4. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various legal proceedings and claims which
arise in the normal course of business. Based on discussions with legal counsel,
the Company does not believe that the ultimate resolution of such actions will
have a significant effect on the Company's financial position.
Like other crude oil and natural gas producers, the Company's operations
are subject to extensive and rapidly changing federal and state environmental
regulations governing emissions into the atmosphere, waste water discharges,
solid and hazardous waste management activities and site restoration and
abandonment activities. The Company does not believe that any potential
liability, in excess of amounts already provided for, would have a significant
effect on the Company's financial position; however, an unfavorable outcome
could have a material adverse effect on the current year results.
The Company has entered into certain financial arrangements which act as a
hedge against price fluctuations in future crude oil and natural gas production.
Gains and losses on these transactions are recorded in operating revenues when
the future production sale occurs. The Company has 15,000 million British
thermal units ("Mmbtu") of natural gas production per day hedged over the period
from July 1998 through August 1998, at a minimum price of $2.00 per Mmbtu and a
maximum price of $2.54 per Mmbtu. At June 30, 1998, there were no unrealized
hedging gains or losses.
In connection with the acquisition of oil and gas properties in Oklahoma
from Amoco Production Company ("Amoco") on December 18, 1997, the Company
assumed the responsibility for costs and expenses associated with the
assessment, remediation, removal, transportation and disposal of the asbestos or
naturally occurring radioactive materials associated with such properties.
Additionally, the Company is responsible for all other environmental claims up
to approximately $10.3 million and all environmental claims not identified and
presented to Amoco by December 18, 1998. The Company is not currently aware of
any such claims and is performing an ongoing assessment of the properties to
identify all potential environmental claims.
F-29
<PAGE> 57
ANNEX A
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
COHO ENERGY, INC.
AND
HM 4 COHO, L.P.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
NOVEMBER 4, 1998
<PAGE> 58
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS
Section 1.1 Definitions................................................. 1
Section 1.2 References and Titles....................................... 5
ARTICLE II
PURCHASE OF COMMON STOCK
Section 2.1 Purchase of Shares.......................................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company............... 6
Section 3.2 Representations and Warranties of Purchaser................. 21
ARTICLE IV
COVENANTS
Section 4.1 Furnishing of Information................................... 23
Section 4.2 Shareholder Approval; Proxy Statement....................... 23
Section 4.3 Nasdaq Listing.............................................. 23
Section 4.4 Affirmative Covenants of the Company........................ 23
Section 4.5 Negative Covenants of the Company........................... 24
Section 4.6 Approvals................................................... 25
Section 4.7 Shareholder Agreement and Monitoring Agreement.............. 25
Section 4.8 HSR Act Notification........................................ 25
Section 4.9 Indemnification of Directors; Insurance..................... 26
Section 4.10 Notification of Certain Matters............................. 26
Section 4.11 Board of Directors.......................................... 27
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
Section 5.1 Conditions Precedent to Each Party's Obligation............. 27
Conditions Precedent to Obligation of Purchaser at the
Section 5.2 Closing..................................................... 27
Conditions Precedent to Obligations of Company at the
Section 5.3 Closing..................................................... 28
ARTICLE VI
CLOSING
Section 6.1 Closing..................................................... 28
Section 6.2 Actions to Occur at the Closing............................. 29
ARTICLE VII
TERMINATION
Section 7.1 Termination................................................. 29
Section 7.2 Effect of Termination....................................... 30
</TABLE>
i
<PAGE> 59
<TABLE>
<S> <C> <C>
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Indemnification of Purchaser................................ 30
Section 8.2 Indemnification of Company.................................. 30
Section 8.3 Defense of Third-Party Claims............................... 30
Section 8.4 Direct Claims............................................... 31
Section 8.5 Tax Related Adjustments..................................... 31
ARTICLE IX
MISCELLANEOUS
Section 9.1 Survival of Provisions...................................... 32
Section 9.2 No Waiver; Modification in Writing.......................... 32
Section 9.3 Specific Performance........................................ 32
Section 9.4 Severability................................................ 32
Section 9.5 Fees and Expenses 32
Section 9.6 Parties in Interest......................................... 33
Section 9.7 Notices..................................................... 33
Section 9.8 Counterparts................................................ 34
Section 9.9 Entire Agreement............................................ 34
Section 9.10 Governing Law............................................... 34
Section 9.11 Public Announcements........................................ 34
Section 9.12 Assignment.................................................. 34
Section 9.13 Director and Officer Liability.............................. 34
Section 9.14 Effect of Amendment and Restatement......................... 35
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Amended and Restated Shareholder Agreement
Exhibit B Form of Legal Opinion of Fulbright & Jaworski L.L.P.
Exhibit C Amended and Restated Financial Advisory Agreement
Exhibit D Form of Monitoring and Oversight Agreement
Exhibit E Form of Indemnification Agreement
</TABLE>
ii
<PAGE> 60
AMENDED AND RESTATED
STOCK PURCHASE AGREEMENT
AMENDED AND RESTATED STOCK PURCHASE AGREEMENT, dated as of November 4, 1998
to be effective as of August 21, 1998 (the "Effective Date"), by and between
Coho Energy, Inc., a Texas corporation (the "Company"), and HM 4 Coho, L.P., a
Texas limited partnership (together with its permitted assigns, "Purchaser").
WHEREAS, on August 21, 1998, the Company and the Purchaser entered into a
Stock Purchase Agreement (the "Original Agreement"); and
WHEREAS, the Company and the Purchaser now desire to amend and restate the
Original Agreement in its entirety as set forth below, such amendment and
restatement to be effective as of the Effective Date;
In consideration of the mutual covenants and agreements set forth herein
and for good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:
"Additional D&O Policies" has the meaning set forth in Section 4.9(b).
"Affiliate" means, with respect to any Person, any other Person
directly, or indirectly through one or more intermediaries, controlling,
controlled by or under common control with such Person. For purposes of
this definition and this Agreement, the term "control" (and correlative
terms) means the power, whether by contract, equity ownership or otherwise,
to direct the policies or management of a Person.
"Agreement" means this Amended and Restated Stock Purchase Agreement,
as the same may be amended, supplemented or modified from time to time in
accordance with the terms hereof.
"Alternative Transaction" has the meaning set forth in Section 4.4(e).
"Approval" means any approval, authorization, grant of authority,
consent, order, qualification, permit, license, variance, exemption,
franchise, concession, certificate, filing or registration, or any waiver
of the foregoing, or any notice, statement or other communication required
to be filed with or delivered to any Governmental Entity or any other
Person.
"Articles of Amendment" means articles of amendment to the Articles of
Incorporation increasing the number of authorized shares of Common Stock to
100,000,000 to be submitted to the shareholders of the Company for their
approval at the Shareholders' Meeting.
"Articles of Incorporation" means the Articles of Incorporation of the
Company as amended to the Effective Date and as filed with the Secretary of
State of the State of Texas.
"Authorized Preferred Stock" has the meaning set forth in Section
3.1(c)(i).
"Benefit Program or Agreement" has the meaning set forth in Section
3.1(q)(i).
"Board" means the Board of Directors of the Company or any committee
authorized by such Board of Directors to perform any of its obligations
thereunder.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in New
York, New York or Dallas, Texas generally are authorized or required by law
or other government actions to close.
"Bylaws" means the bylaws of the Company as amended to the Effective
Date.
"Closing" has the meaning set forth in Section 6.1.
<PAGE> 61
"Closing Date" has the meaning set forth in Section 6.1.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder as in effect on the Effective Date.
"Common Stock" means the Company's common stock, par value $.01 per
share.
"Commonly Controlled Entity" has the meaning set forth in Section
3.1(q).
"Company" has the meaning set forth in the introductory paragraph
hereof.
"Company Disclosure Schedule" has the meaning set forth in Section
3.1.
"Company Indemnified Costs" means any and all damages, losses, claims,
liabilities, demands, charges, suits, penalties, costs and expenses
(including court costs and reasonable legal fees and expenses incurred in
investigating and preparing for any litigation or proceeding) that any of
the Company Indemnified Parties incurs and that arise out of (i) any breach
or default by Purchaser of any of the representations or warranties under
this Agreement or any agreement or document executed in connection herewith
or (ii) any breach by Purchaser of any of the covenants or agreements under
this Agreement or any other Transaction Documents.
"Company Indemnified Parties" means each of the Company and its
Subsidiaries and each officer, director, employee, stockholder and
Affiliate of the Company.
"Company Options" has the meaning set forth in Section 3.1(c).
"Company SEC Documents" has the meaning set forth in Section 3.1(e).
"Contracts" means all agreements, contracts, or other binding
commitments, arrangements or plans, written or oral (including any
amendments and other modifications thereto), to which the Company or any of
its Subsidiaries is a party or is otherwise bound.
"Credit Facility" has the meaning set forth in Section 3.1(i).
"Cure Period" has the meaning set forth in Section 7.1(b)(i).
"Debt", without duplication, means (a) all indebtedness (including the
principal amount thereof or, if applicable, the accreted amount thereof and
the amount of accrued and unpaid interest thereon) of the Company and its
Subsidiaries, whether or not represented by bonds, debentures, notes or
other securities, for the repayment of money borrowed, (b) all deferred
indebtedness of the Company and its Subsidiaries for the payment of the
purchase price of property or assets purchased, (c) all obligations of the
Company and its Subsidiaries to pay rent or other payment amounts under a
lease of real or personal property which is required to be classified as a
capital lease or a liability on the face of a balance sheet prepared in
accordance with GAAP, (d) any outstanding reimbursement obligation of the
Company or its Subsidiaries with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of the Company or
its Subsidiaries, (e) any payment obligation of the Company or its
Subsidiaries under any interest rate swap agreement, forward rate
agreement, interest rate cap or collar agreement or other financial
agreement or arrangement entered into for the purpose of limiting or
managing interest rate risks, (f) all indebtedness for borrowed money
secured by any Lien existing on property owned by the Company or its
Subsidiaries, whether or not indebtedness secured thereby shall have been
assumed, (g) all guaranties, endorsements, assumptions and other contingent
obligations of the Company or its Subsidiaries in respect of, or to
purchase or to otherwise acquire, indebtedness for borrowed money of
others, (h) all other short-term and long-term liabilities of the Company
or its Subsidiaries of any nature, other than accounts payable and accrued
liabilities incurred in the ordinary course of business, and (i) all
premiums, penalties and change of control payments required to be paid or
offered in respect of any of the foregoing as a result of the consummation
of the transactions contemplated by the Transaction Documents regardless if
any of such are actually paid.
"Effective Date" has the meaning set forth in the introductory
paragraph hereof.
2
<PAGE> 62
"Environmental Laws" has the meaning set forth in Section 3.1(u)(A).
"ERISA" has the meaning set forth in Section 3.1(q)(i).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
"Financial Advisory Agreement" means that certain Amended and Restated
Financial Advisory Agreement between the Company and HMCo of even date
herewith attached as Exhibit C hereto.
"GAAP" has the meaning set forth in Section 3.1(e).
"Governmental Entity" means any agency, bureau, commission, court,
authority, department, official, political subdivision, tribunal or other
instrumentality of any government, whether (i) regulatory, administrative
or otherwise, (ii) federal, state or local or (iii) domestic or foreign.
"Hazardous Materials" has the meaning set forth in Section 3.1(u)(B).
"HMCo" has the meaning set forth in Section 6.2.
"HSR Act" has the meaning set forth in Section 3.1(d)(iii).
"Indemnification Agreement" has the meaning set forth in Section
4.9(a).
"Indemnified Parties" means the Purchaser Indemnified Parties or the
Company Indemnified Parties, as the case may be.
"Indemnifying Party" means any person who is obligated to provide
indemnification hereunder.
"Intangible Property" has the meaning set forth in Section 3.1(t).
"IRS" has the meaning set forth in Section 3.1(p)(ii).
"knowledge" has the meaning set forth in Section 3.1(j).
"Law" means any constitutional provision, statute or other law,
ordinance, rule, regulation or interpretation of any thereof and any Order
of any Governmental Entity (including environmental laws).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
encumbrance, charge or security interest of any kind in or on such asset or
the revenues or income thereon or therefrom.
"Litigation" has the meaning set forth in Section 3.1(k).
"Material Adverse Effect" or "Material Adverse Change" means any
effect, change, event or occurrence that is materially adverse to the
business, operations, properties, condition (financial or otherwise),
results of operations, assets, liabilities or prospects of the Company and
its Subsidiaries taken as a whole.
"Material Contracts" has the meaning given it in Section 3.1(l)(i).
"Monitoring Agreement" means that certain Monitoring and Oversight
Agreement to be entered into between the Company and HMCo. in the form of
Exhibit D hereto.
"Nasdaq" means the Nasdaq Stock Market.
"Oil and Gas Properties" has the meaning set forth in Section 3.1(bb).
"Order" means any decree, injunction, judgment, order, ruling,
assessment or writ.
"PBGC" has the meaning set forth in Section 3.1(q)(ii).
"Plan" has the meaning set forth in Section 3.1(q)(i).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, limited liability company,
joint venture, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
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"Proxy Statement" has the meaning set forth in Section 3.1(d)(iii).
"Purchase Price" has the meaning set forth in Section 2.1(b).
"Purchaser" has the meaning set forth in the introductory paragraph
hereto.
"Purchaser Designees" has the meaning set forth in Section 4.11.
"Purchaser Indemnified Costs" means any and all damages, losses,
claims, liabilities, demands, charges, suits, penalties, costs and expenses
(including court costs and reasonable legal fees and expenses incurred in
investigating and preparing for any litigation or proceeding) that any of
the Purchaser Indemnified Parties incurs and that arise out of (i) any
breach or default by the Company of any of the representations or
warranties under this Agreement or any agreement or document executed in
connection herewith, (ii) any breach by the Company of any of the covenants
or agreements (other than breaches of covenants to be performed by the
Company after the Closing) of the Company under this Agreement or any other
Transaction Document executed in connection herewith or (iii) are incurred
in connection with any litigation or proceedings brought by any shareholder
of the Company (whether such action is brought in such shareholder's name
or derivatively on behalf of the Company) in respect of the transactions
contemplated by this Agreement.
"Purchaser Indemnified Parties" means Purchaser and each officer,
director, employee, stockholder and Affiliate of Purchaser.
"Purchaser's Expenses" means all reasonable out-of-pocket fees, costs
and expenses incurred by Purchaser in connection with its due diligence
efforts or the transactions contemplated by this Agreement, including (i)
fees, costs and expenses of its accountants and counsel and (ii) fees paid
to any Governmental Entity, but expressly excluding any fees paid to Credit
Suisse First Boston Corporation, Purchaser's financial advisor.
"Release" has the meaning set forth in Section 3.1(u)(C).
"Remedial Action" has the meaning set forth in Section 3.1(u)(D).
"Reserve Report" means the most recent reserve information prepared by
the Company's engineers estimating the proved reserves attributable to the
Oil and Gas Properties as of December 31, 1997 and described in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
"Rights Agreement" has the meaning set forth in Section 3.1(x).
"Rule 144" means Rule 144 under the Securities Act of 1933, as
amended, and any successor rule thereto.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Shareholder Agreement" means the Amended and Restated Shareholder
Agreement to be entered into among the Company, Purchaser and the other
party thereto, substantially in the form attached hereto as Exhibit A.
"Shareholders' Meeting" has the meaning set forth in Section 4.2.
"Share Issuance" has the meaning set forth in Section 3.1(c)(ii).
"Shares" means the shares of Common Stock purchased by Purchaser at
the Closing.
"Stock Plans" means the Company's 1993 Stock Option Plan, as amended,
and the 1993 Non-Employee Director Stock Option Plan, as amended.
"Subsidiary" means, (i) a corporation, a majority of whose stock with
voting power, under ordinary circumstances, to elect directors is at the
time, directly or indirectly, owned by the Company, by a
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Subsidiary of the Company or by the Company and another Subsidiary, or (ii)
any other Person (other than a corporation) in which the Company, a
Subsidiary or the Company and a Subsidiary, directly or indirectly, at the
date of determination thereof has at least a majority ownership interest.
"Tax" or "Taxes" has the meaning set forth in Section 3.1(p).
"Tax Return" has the meaning set forth in Section 3.1(p).
"Transaction Documents" means this Agreement, the Shareholders
Agreement and any other documents executed in connection herewith or
therewith.
"Transfer" has the meaning set forth in Section 3.2(e).
SECTION 1.2 References and Titles. All references in this Agreement to
Exhibits, Schedules, Articles, Sections, subsections, and other subdivisions
refer to the corresponding Exhibits, Schedules, Articles, Sections, subsections,
and other subdivisions of this Agreement unless expressly provided otherwise.
Titles appearing at the beginning of any Articles, Sections, subsections, or
other subdivisions of this Agreement are for convenience only, do not constitute
any part of such Articles, Sections, subsections or other subdivisions, and
shall be disregarded in construing the language contained therein. The words
"this Agreement," "herein," "hereby," "hereunder," and "hereof," and words of
similar import, refer to this Agreement as a whole and not to any particular
subdivision unless expressly so limited. The words "this Section," "this
subsection," and words of similar import, refer only to the Sections or
subsections hereof in which such words occur. The word "including" (in its
various forms) means "including without limitation." Pronouns in masculine,
feminine, or neuter genders shall be construed to state and include any other
gender and words, terms, and titles (including terms defined herein) in the
singular form shall be construed to include the plural and vice versa, unless
the context otherwise expressly requires. Unless the context otherwise requires,
all defined terms contained herein shall include the singular and plural and the
conjunctive and disjunctive forms of such defined terms.
ARTICLE II
PURCHASE OF COMMON STOCK
SECTION 2.1 Purchase of Shares.
(a) Subject to the terms and conditions herein set forth, at the Closing
the Company will issue and sell to Purchaser, and Purchaser will purchase from
the Company, 41,666,666 shares of Common Stock.
(b) The purchase price payable for the Shares to be purchased hereunder
shall be $6.00 per Share (or $249,999,996 in the aggregate) (the "Purchase
Price").
(c) Delivery of the Shares shall be made at the Closing by delivery to
Purchaser, against payment of the Purchase Price therefor as provided herein, of
a share certificate representing the total number of Shares.
(d) Payment of the Purchase Price for the Shares to be purchased hereunder
shall be made by or on behalf of Purchaser by wire transfer of immediately
available funds to an account of the Company (the number for which account shall
have been furnished to Purchaser at least two Business Days prior to the Closing
Date).
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company. The Company
represents and warrants to Purchaser as follows (such representations and
warranties shall be deemed to have been made beginning on the Effective Date, in
each case as qualified by matters reflected on the disclosure schedule dated as
of the Effective Date and delivered by the Company to Purchaser on or prior to
the Effective Date (the "Company Disclosure Schedule") and made a part hereof by
reference):
(a) Organization, Standing and Power. Each of the Company and each of
its Subsidiaries is a corporation or other entity duly organized, validly
existing and in good standing under the laws of the jurisdiction in which
it is incorporated or organized and has the requisite corporate or other
such entity power and authority to carry on its business as now being
conducted. Each of the Company and each of its Subsidiaries is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed or to be in good standing, individually or in the aggregate, has
not had and could not reasonably be expected to have a Material Adverse
Effect on the Company. The Company has delivered (or, in the case of the
Company's Subsidiaries, made available) to Purchaser prior to the execution
of this Agreement complete and correct copies of its Articles of
Incorporation and Bylaws, as in effect on the Effective Date, and the
certificate of incorporation and bylaws (or comparable organizational
documents) of its Subsidiaries, in each case as amended to the Effective
Date.
(b) Subsidiaries. Schedule 3.1(b)(i) of the Company Disclosure
Schedule sets forth a true and complete list, as of the Effective Date, of
each Subsidiary of the Company, together with the jurisdiction of
incorporation or organization and the percentage of each Subsidiary's
outstanding capital stock (or other voting or equity securities or
interests, as applicable) owned by the Company or another Subsidiary of the
Company. Except as set forth in Schedule 3.1(b)(ii) of the Company
Disclosure Schedule, all the outstanding shares of capital stock (or other
voting or equity securities or interests, as applicable) of each Subsidiary
of the Company have been validly issued and (with respect to corporate
Subsidiaries) are fully paid and nonassessable and are owned directly or
indirectly by the Company, free and clear of all Liens. Except for the
capital stock of its Subsidiaries and the partnership interests listed in
Schedule 3.1(b)(iii) of the Company Disclosure Schedule, as of the
Effective Date, the Company does not own, directly or indirectly, any
capital stock (or other voting or equity securities or interests, as
applicable) of any corporation, limited liability company, partnership,
joint venture or other entity.
(c) Capital Structure.
(i) The authorized capital stock of Company consists of 50,000,000
shares of Common Stock and 10,000,000 shares of preferred stock, par
value $.01 per share (the "Authorized Preferred Stock"). (A) 25,603,512
shares of Common Stock are issued and outstanding, (B) no shares of
Authorized Preferred Stock are issued and outstanding, (C) no shares of
Common Stock are held by the Company in its treasury and (D) no shares
of Common Stock are held by any of the Company's Subsidiaries.
(ii) As of the Effective Date, there are no bonds, debentures,
notes or other indebtedness issued or outstanding having the right to
vote on any matters on which holders of Common Stock or Authorized
Preferred Stock may vote, including without limitation the approval of
the Articles of Amendment and issuance of the Shares to the Purchaser
(the "Share Issuance").
(iii) Except as set forth in Schedule 3.1(c)(iii) of the Company
Disclosure Schedule, there are no outstanding warrants, stock options,
stock appreciation rights or other rights to receive any capital stock
of the Company granted under the Stock Plans or otherwise. Schedule
3.1(c)(iii) of the Company Disclosure Schedule sets forth a complete and
correct list, as of the Effective Date, of the number, class and series
of shares subject to all warrants, options, stock appreciation rights or
other rights to receive any of the capital stock of the Company
(collectively, "Company Options"), and
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the exercise or base prices thereof. Except for the Company Options and,
except as set forth above or in Schedule 3.1(c)(iii) of the Company
Disclosure Schedule, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Company or any of its Subsidiaries
is a party or by which any of them is bound obligating the Company or
any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock (or other
voting or equity securities or interests, as applicable) of the Company
or of any of its Subsidiaries or obligating the Company or any of its
Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking. Except as set forth in Schedule 3.1(c)(iii) of the Company
Disclosure Schedule, there are no outstanding contractual obligations of
the Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock (or other voting or equity
securities or interests, as applicable) of the Company or any of its
Subsidiaries.
(iv) All outstanding shares of capital stock (or other voting or
equity securities or interests, as applicable) of the Company and its
Subsidiaries are, and all shares which may be issued will be, when
issued, duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive or similar rights.
(v) Except as contemplated hereby or in the other Transaction
Documents or as set forth in Schedule 3.1(c)(iii) of the Company
Disclosure Schedule, there are not as of the Effective Date and there
will not be at the time of the Closing any shareholder agreements,
voting agreements or trusts, proxies or other agreements or contractual
obligations to which the Company or any Subsidiary is a party or bound
with respect to the voting or disposition of any shares of the capital
stock (or other voting or equity securities or interests, as applicable)
of the Company or any of its Subsidiaries and, to the Company's
knowledge, as of the Effective Date, there are no other shareholder
agreements, voting agreements or trusts, proxies or other agreements or
contractual obligations among the shareholders of the Company with
respect to the voting or disposition of any shares of the capital stock
(or other voting or equity securities or interests, as applicable) of
the Company or any of its Subsidiaries.
(d) Authority; No Violations; Approvals.
(i) The Board has approved this Agreement and each of the
transactions contemplated hereby, and declared this Agreement to be in
the best interests of the shareholders of the Company. The Company has
all requisite corporate power and authority to enter into this Agreement
and to consummate each of the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of each of
the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of the Company, other than the
approval of the Articles of Amendment and the Share Issuance by the
requisite votes of the shareholders of the Company as provided in
Section 4.2. This Agreement has been duly executed and delivered by the
Company and, assuming this Agreement constitutes the valid and binding
obligation of Purchaser, constitutes a valid and binding obligation of
Company enforceable in accordance with its terms, subject, as to
enforceability, to bankruptcy, insolvency, reorganization, moratorium
and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
(ii) Except as set forth in Schedule 3.1(d)(ii) of the Company
Disclosure Schedule, the execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, conflict with, or result
in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any material obligation or to the loss
of a material benefit under, or give rise to a right of purchase under,
result in the creation of any Lien upon any of the properties or assets
of the Company or any of its Subsidiaries under, or otherwise result in
a material detriment to the Company or any of its Subsidiaries under,
any provision of (A) the Articles of Incorporation or Bylaws or any
provision of the comparable charter or
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organizational documents of any of its Subsidiaries, (B) any loan or
credit agreement, note, bond, mortgage, indenture, lease, other
agreement or Approval applicable to the Company or any of its
Subsidiaries, (C) any joint venture or other ownership arrangement or
(D) assuming the Approvals referred to in Section 3.1(d)(iii) are duly
and timely obtained or made, any Law or Order applicable to the Company
or any of its Subsidiaries or any of their respective properties or
assets, other than, in the case of clause (B) or (D), any such
conflicts, violations, defaults, rights, Liens, detriments, Laws or
Orders that, individually or in the aggregate, have not had and could
not reasonably be expected to (x) have a Material Adverse Effect on the
Company, (y) impair the ability of the Company to perform its
obligations under any of the Transaction Documents in any material
respect, or (z) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents.
(iii) No Approval from any Governmental Entity is required by or
with respect to the Company or any of its Subsidiaries in connection
with the execution and delivery of this Agreement or any other
Transaction Document by the Company or the consummation by the Company
of the transactions contemplated hereby or thereby, except for: (A) if
applicable, the filing of a notification report by Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and the expiration or termination of the applicable waiting
period with respect thereto; (B) the filing with the SEC of (x) a proxy
statement in preliminary and definitive form relating to the meeting of
the shareholders of the Company to be held in connection with the
approval of the Articles of Amendment and the Share Issuance (the "Proxy
Statement") and (y) such reports under Section 13(a) of the Exchange Act
and such other compliance with the Exchange Act and the rules and
regulations thereunder, as may be required in connection with this
Agreement, the other Transaction Documents and the transactions
contemplated hereby and thereby; (C) such Approvals as may be required
by any applicable state securities or "blue sky" laws; (D) such
Approvals as may be required by any foreign securities, corporate or
other Laws; and (E) any such Approval the failure of which to be made or
obtained has not had and could not reasonably be expected (1) impair the
ability of the Company to perform its obligations under any of the
Transaction Documents in any material respect or (2) delay in any
material respect or prevent the consummation of any of the transactions
contemplated by any of the Transaction Documents.
(e) SEC Documents. The Company has made available to Purchaser a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the SEC since December
31, 1995 and prior to or on the Effective Date (the "Company SEC
Documents"), which are all the documents (other than preliminary materials)
that the Company was required to file with the SEC between December 31,
1995 and the Effective Date. As of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Documents,
and none of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents complied as
to form in all material respects with the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Rule
10-01 of Regulation S-X of the SEC) and fairly present in accordance with
applicable requirements of GAAP (subject, in the case of the unaudited
statements, to normal, recurring adjustments, none of which are material)
the consolidated financial position of the Company and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of the Company and its
consolidated Subsidiaries for the periods presented therein. Except as
disclosed in the Company SEC Documents, there are no agreements,
arrangements or understandings between the Company and any
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party who is or was at any time prior to the Effective Date but after
December 31, 1996 an Affiliate of the Company that are required to be
disclosed in the Company SEC Documents.
(f) Information Supplied. None of the information included or
incorporated by reference in the Proxy Statement will, at the date mailed
to shareholders of the Company or at the time of the Shareholders' Meeting
or as of the Closing, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. If at any time prior to the
Shareholders Meeting any event with respect to the Company or any of its
Subsidiaries, or with respect to other information in the Proxy Statement,
shall occur which is required to be described in an amendment of, or a
supplement to, the Proxy Statement, such event shall be so described, and
such amendment or supplement shall be promptly filed with the SEC and, as
required by Law, disseminated to the shareholders of the Company. The Proxy
Statement, insofar as it relates to the Company or its Subsidiaries, will
comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
(g) Absence of Certain Changes or Events. Except as disclosed in
Schedule 3.1(g) to the Company Disclosure Schedule or as disclosed in, or
reflected in the financial statements included in, the Company SEC
Documents, or except as contemplated by this Agreement, since December 31,
1997, each of the Company and its Subsidiaries have conducted their
business only in the ordinary course consistent with past practice, and
there has not occurred: (i) any event that would have been prohibited by
Section 4.5 if the terms of such Section had been in effect as of and after
December 31, 1997; (ii) any material casualties affecting the Company or
any of its Subsidiaries or any material loss, damage or destruction to any
of their respective properties or assets, including the Oil and Gas
Properties; or (iii) any event, circumstance or fact that has had or could
reasonably be expected to (x) have a Material Adverse Effect on the
Company, (y) impair the ability of the Company to perform its obligations
under any of the Transaction Documents in any material respect, or (z)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents.
(h) No Undisclosed Material Liabilities. Except as disclosed in the
Company SEC Documents, there are no material liabilities or obligations of
the Company or any of its Subsidiaries of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise,
required by GAAP to be recognized or disclosed on a consolidated balance
sheet of the Company and its consolidated Subsidiaries or in the notes
thereto, other than: (i) liabilities adequately provided for on the balance
sheet of the Company dated as of March 31, 1998 (including the notes
thereto) contained in the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 1998; (ii) liabilities incurred in the
ordinary course of business consistent with past practice since March 31,
1998; and (iii) liabilities arising under the Transaction Documents.
(i) No Default. Neither the Company nor any of its Subsidiaries is in
default or violation (and no event has occurred which, with notice or the
lapse of time or both, would constitute a default or violation) of any
term, condition or provision of (i) Articles of Incorporation or Bylaws of
the Company or the comparable charter or organizational documents of any of
its Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease, instrument, permit, concession, franchise, license or any
other contract, agreement, arrangement or understanding to which the
Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries or any of their respective properties or assets is
bound, or (iii) any Law applicable to the Company or any of its
Subsidiaries, except in the case of clause (ii) and (iii), for violations
or defaults that, individually or in the aggregate, have not had and could
not reasonably be expected to (x) have a Material Adverse Effect on the
Company, (y) impair the ability of the Company to perform its obligations
under any of the Transaction Documents in any material respect, or (z)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents. The Company
(i) is not in breach of or default under any financial covenant under the
Company's Fourth Amended and Restated Credit Agreement among the Company,
its Subsidiaries, Banque Paribas, Houston Agency, and the other parties
thereto dated December 18, 1997 (the "Credit Facility") and (ii) does not
have any reason to
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believe that it will be in breach of or default under any financial
covenant under the Credit Facility as of the next date on which the Company
is required to be in compliance with any such financial covenant (other
than any breaches or defaults which the Company reasonably believes will be
waived by the lenders under the Credit Facility).
(j) Compliance with Applicable Laws. The Company and each of its
Subsidiaries has in effect all Approvals of all Governmental Entities
necessary for the lawful conduct of their respective businesses, and there
has occurred no default or violation (and no event has occurred which, with
notice or the lapse of time or both, would constitute a default or
violation) under any such Approval, except for failures to obtain, or for
defaults or violations under, Approvals which failures, defaults or
violations, individually or in the aggregate, have not had and could not
reasonably be expected to (i) have a Material Adverse Effect on the
Company, (ii) impair the ability of the Company to perform its obligations
under any of the Transaction Documents in any material respect, or (iii)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents. Except as
disclosed in the Company SEC Documents, the businesses of the Company and
its Subsidiaries are in compliance with all applicable Laws and Orders,
except for possible noncompliance, which individually or in the aggregate,
has not had and could not reasonably be expected to have any effect
referred to in clause (i), (ii) or (iii) above. No investigation or review
by any Governmental Entity with respect to the Company, any of its
Subsidiaries, the transactions contemplated by this Agreement and the other
Transaction Documents, is pending or, to the knowledge of the Company,
threatened, nor has any Governmental Entity indicated to the Company or any
of its Subsidiaries any intention to conduct the same, other than those the
outcome of which, individually or in the aggregate, has not had and could
not reasonably be expected to have any effect referred to in clause (i),
(ii) or (iii) above. For purposes of this Agreement "knowledge" means the
actual knowledge of the officers, directors or senior managers of Purchaser
or the Company, as the case may be, after reasonable inquiry.
(k) Litigation. Except as disclosed in the Company SEC Documents or
Schedule 3.1(k) of the Company Disclosure Schedule, there is no suit,
action, proceeding or indemnification claim, at law or in equity, pending
before any Governmental Entity, or, to the knowledge of the Company,
threatened, against or affecting the Company or any of its Subsidiaries
("Litigation"), and the Company is not a party to any Litigation, and the
Company and its Subsidiaries have no knowledge of any facts that are likely
to give rise to any Litigation, that (in any case) has had or could
reasonably be expected to (i) have a Material Adverse Effect on the
Company, (ii) impair the ability of the Company to perform its obligations
under any of the Transaction Documents in any material respect, or (iii)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents, nor is there
any Order of any Governmental Entity or arbitrator outstanding against the
Company or any of its Subsidiaries which has had or could reasonably be
expected to have any effect referred to in clause (i), (ii) or (iii) above.
Schedule 3.1(k) of the Company Disclosure Schedule contains an accurate and
complete list of all Litigation and all Orders to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective assets or properties are bound.
(l) Certain Agreements; Contract Interests.
(i) Except as disclosed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1998 and Schedule
3.1(l)(i) of the Company Disclosure Schedule, there are no (A)
employment or consulting Contracts (unless such employment or consulting
Contracts are terminable without liability or penalty on 30 days or less
notice), (B) Contracts under which any party thereto remains obligated
to provide goods or services having a value, or to make payments
aggregating (for Debt or otherwise), in excess of $1,000,000 per year,
(C) other Contracts that are material to the Company and its
Subsidiaries, taken as a whole, or their respective business, and (D)
Contracts with Affiliates, in any such case, to which the Company or any
Subsidiary is a party or to which the Company or any Subsidiary or their
respective assets is bound (such Contracts disclosed or required to be
disclosed, the "Material Contracts"). Each Material Contract is a valid
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and binding obligation of the Company or one of its Subsidiaries and, to
the knowledge of the Company, of each party thereto other than the
Company or its respective Subsidiary and is in full force and effect
without amendment.
(ii) The Company or the relevant Subsidiary and, to the knowledge
of the Company, each other party to the Material Contracts, has
performed in all material respects the obligations required to be
performed by it under the Material Contracts and is not (with or without
lapse of time or the giving of notice, or both) in breach or default
thereunder.
(iii) Schedule 3.1(l)(iii) of the Company Disclosure Schedule
identifies, as to each Material Contract listed thereon, (A) whether the
consent of the other party thereto is required, (B) whether notice must
be provided to any party thereto (and the length of such notice) and (C)
whether any payments are required (and the amount of such payments), in
each case in order for such Material Contract to continue in full force
and effect upon the consummation of the transactions contemplated hereby
and by the other Transaction Documents, and (D) whether such Material
Contract can be canceled by the other party without liability to such
other party due to the consummation of the transactions contemplated
hereby and by the other Transaction Documents.
(iv) A complete copy of each written Material Contract and a
written description of each oral Material Contract has been made
available to Purchaser prior to the Effective Date.
(v) Except as disclosed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 or in Schedule 3.1(l)(v) of the
Company Disclosure Schedule, none of the Company or of its Subsidiaries
is a party to any oral or written agreement, plan or arrangement with
any employee (whether an employee, consultant or an independent
contractor) of the Company or its Subsidiary (A) the benefits of which
are contingent, or the terms of which are materially altered, upon, or
result from, the occurrence of a transaction involving the Company or
its Subsidiary of the nature of any of the transactions contemplated by
this Agreement, (B) providing severance benefits longer than 45 days or
other benefits after the termination of employment or other contractual
relationship regardless of the reason for such termination and
regardless of whether such termination is before or after a change of
control, (C) under which any person may receive payments subject to the
tax imposed by Section 4999 of the Code or (D) any of the benefits of
which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
(vi) The Company has made available to Purchaser (A) true and
correct copies of all loan or credit agreements, notes, bonds,
mortgages, indentures and other agreements and instruments pursuant to
which any Debt of the Company or any of its Subsidiaries is outstanding
or may be incurred and (B) accurate information regarding the respective
principal amounts currently outstanding thereunder.
(m) Title to Properties. Except as disclosed in the Company SEC
Documents or on Schedule 3.1(m), to the Company Disclosure Schedule, the
Company and its Subsidiaries have or will have good and defensible title to
all the producing oil and gas properties described in the Company SEC
Documents as being owned by them or to be owned by them at the time of the
Closing, title investigations have been conducted with respect to such
properties in accordance with customary practices in the oil and gas
industry, free and clear of any Liens except for (i) Liens for taxes not
yet due, and (ii) other Liens that, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
(n) Intentionally omitted.
(o) Status of Shares. Subject to receipt of the approval of the Share
Issuance and the Articles of Amendment by the Company's shareholders as
contemplated by Section 4.2, the issuance and sale of the Shares have been
duly authorized by all necessary corporate action on the part of the
Company and such
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Shares, when delivered to Purchaser at the Closing against payment therefor
as provided herein, will be validly issued, fully paid and non-assessable
and the issuance and sale of the Shares is not and will not be subject to
preemptive rights of any other shareholder of the Company.
(p) Taxes. Except as disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 or Schedule 3.1(p) of the Company
Disclosure Schedule:
(i) Each of the Company, each of its Subsidiaries and any
affiliated, consolidated, combined, unitary or similar group of which
the Company or any of its Subsidiaries is or was a member has (A) duly
filed on a timely basis (taking into account any extensions) all U.S.
federal income Tax Returns (as hereinafter defined), and all other
material Tax Returns, required to be filed or sent by or with respect to
it, and all such Tax Returns are true, correct and complete in all
material respects, (B) duly paid or deposited on a timely basis all
Taxes (as hereinafter defined) that are shown to be due and payable on
or with respect to such Tax Returns (including all required estimated
Tax payments sufficient to avoid material under payment penalties), and
all material Taxes that are otherwise due and payable (except for audit
adjustments not material in the aggregate or to the extent that
liability therefor is reserved for in the Company's most recent audited
financial statements) for which the Company or any of its Subsidiaries
may be liable, (C) established reserves that are adequate for the
payment of all material Taxes not yet due and payable with respect to
the results of operations of the Company and its Subsidiaries through
the Effective Date, and (D) complied in all material respects with all
applicable Laws relating to the reporting, payment and withholding of
Taxes that are required to be withheld from payments to employees,
independent contractors, creditors, shareholders or any other third
party and has in all material respects timely withheld from employee
wages and paid over to the proper governmental authorities all amounts
required to be so withheld and paid over.
(ii) Schedule 3.1(p)(ii) of the Company Disclosure Schedule sets
forth (A) the last taxable period through which the federal income Tax
Returns of the Company and any of its Subsidiaries have been examined by
the Internal Revenue Service ("IRS") or for which the statute of
limitations for assessment has otherwise closed and (B) any affiliated,
consolidated, combined, unitary or similar group or Tax Return in which
the Company or any of its Subsidiaries is or has been a member or joins
or has joined in the filing. Except to the extent being contested in
good faith, all material deficiencies asserted as a result of such
examinations and any examination by any applicable taxing authority have
been paid, fully settled or adequately provided for in the Company's
most recent audited financial statements. Except as disclosed in or
adequately provided for in the Company SEC Documents or disclosed in
Schedule 3.1(p)(ii) of the Company Disclosure Schedule, no audits or
other administrative proceedings or court proceedings are presently
pending, or to the knowledge of the Company, threatened, with regard to
any Taxes for which the Company or any of its Subsidiaries would be
liable, and no material deficiency for any Taxes has been proposed,
asserted or assessed (whether by examination report or prior to
completion of examination by means of notices of proposed adjustment or
other similar requests or notices) pursuant to such examination against
the Company or any of its Subsidiaries by any taxing authority with
respect to any period.
(iii) Neither the Company nor any of its Subsidiaries has executed
or entered into (or prior to the close of business on the Closing Date
will execute or enter into) with the IRS or any taxing authority (A) any
agreement or other document extending or having the effect of extending
the period for assessment or collection of any income or franchise Taxes
for which the Company or any of its Subsidiaries would be liable or (B)
a closing agreement pursuant to Section 7121 of the Code or any similar
provision of state, local, foreign or other income tax Law, which will
require any increase in taxable income or alternative minimum taxable
income, or any reduction in tax credits, for the Company or any of its
Subsidiaries for any taxable period ending after the Closing Date.
(iv) Except as set forth in the Company SEC Documents or Schedule
3.1(p)(iv) of the Company Disclosure Schedule, neither the Company nor
any of its Subsidiaries is a party to an
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<PAGE> 72
agreement that provides for the payment of any amount that would
constitute a "parachute payment" within the meaning of Section 280G of
the Code or that would constitute compensation whose deductibility is
limited under Section 162(m) of the Code.
(v) Except as set forth in the Company SEC Documents, neither the
Company nor any of its Subsidiaries is a party to, is bound by or has
any obligation under, any tax sharing or allocation agreement or similar
agreement or arrangement.
(vi) There are no requests for rulings or outstanding subpoenas
from any taxing authority for information with respect to Taxes of the
Company or any of its Subsidiaries and, to the knowledge of the Company,
no material reassessments (for property or ad valorem tax purposes) of
any assets or any property owned or leased by the Company or any of its
Subsidiaries have been proposed in written form.
(vii) No consent to the application of Section 341(f)(2) of the
Code has been made or filed by or with the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries has agreed
to make any adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of the Company or any of its Subsidiaries, and neither the Company nor
any of its Subsidiaries has any application pending with any taxing
authority requesting permission for any changes in any accounting method
of the Company or any of its Subsidiaries. To the knowledge of the
Company, neither the IRS nor any other taxing authority has proposed in
writing, and neither the Company nor any of its Subsidiaries is
otherwise required to make, any such adjustment or change in accounting
method.
(viii) Except as set forth on Schedule 3.1(p)(viii) of the Company
Disclosure Schedule, there are no material excess loss accounts or
deferred intercompany transactions between the Company and/or any of its
Subsidiaries within the meaning of Treas. Reg. Section 1.1502-13 or
1.1502-19, respectively.
For purposes of this Agreement, "Tax" (and, with correlative meaning,
"Taxes") means (i) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, license, withholding on amounts paid by the Company or any
of its Subsidiaries, payroll, employment, excise, production, severance, stamp,
occupation, premium, property, environmental or windfall profit tax, custom,
duty or other tax, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest and/or any penalty, addition to tax
or additional amount imposed by any taxing authority, (ii) any liability of the
Company or any of its Subsidiaries for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated or consolidated
group, or arrangement whereby liability of the Company or any of its
Subsidiaries for payment of such amounts was determined or taken into account
with reference to the liability of any other person for any period and (iii)
liability of the Company or any of its Subsidiaries with respect to the payment
of any amounts of the type described in (i) or (ii) as a result of any express
or implied obligation to indemnify any other Person.
"Tax Return" means all returns, declarations, reports, estimates,
information returns and statements required to be filed by or with respect to
the Company or any of its Subsidiaries in respect of any Taxes, including (i)
any consolidated federal income tax return in which Company or any of its
Subsidiaries is included and (ii) any state, local or foreign income tax returns
filed on a consolidated, combined or unitary basis (for purposes of determining
Tax liability) in which the Company or any of its Subsidiaries is included.
(q) Employee Benefit Matters.
(i) Schedule 3.1(q) of the Company Disclosure Schedule provides a
description of each of the following which is sponsored, maintained or
contributed to by the Company for the benefit of the employees of the
Company, former employees of the Company, directors of the Company,
former directors of the Company, or any agents, consultants, or similar
representatives providing services to
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<PAGE> 73
or for the Company, or has been so sponsored, maintained or contributed
to within six years prior to the Closing Date for the benefit of such
individuals:
(A) each "employee benefit plan," as such term is defined in
section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") (including, but not limited to, employee benefit
plans, such as foreign plans, which are not subject to the provisions
of ERISA) ("Plan");
(B) each personnel policy, stock option plan, stock purchase
plan, stock appreciation rights, phantom stock plan, collective
bargaining agreement, bonus plan or arrangement, incentive award plan
or arrangement, vacation policy, severance pay plan, policy or
agreement, deferred compensation agreement or arrangement, executive
compensation or supplemental income arrangement, consulting
agreement, employment agreement and each other employee benefit plan,
agreement, arrangement, program, practice or understanding which is
not described in Section 3.1(9)(i) ("Benefit Program or Agreement").
(ii) True, correct and complete copies of each of the Plans,
related trusts, insurance or group annuity contracts and each other
funding or financing arrangement relating to any Plan, including all
amendments thereto, have been furnished to Purchaser. There has also
been furnished to Purchaser, with respect to each Plan required to file
such report and description, the most recent report on Form 5500 and the
summary plan description. True, correct and complete copies or
descriptions of all Benefit Programs and Agreements have also been
furnished to Purchaser. The Purchaser has also been furnished a recent
actuarial report or valuation for each Plan subject to Title IV of
ERISA. Additionally, the most recent determination letter from the
Internal Revenue Service for each of the Plans intended to be qualified
under section 401 of the Internal Revenue Code of 1986, as amended (the
"Code"), and any outstanding determination letter application for such
plans has been furnished.
(iii) Except as otherwise set forth on Schedule 3.1(q) of the
Company Disclosure Schedule,
(A) The Company has substantially performed all obligations,
whether arising by operation of law or by contract, required to be
performed by it in connection with the Plans and the Benefit Programs
and Agreements, and to the knowledge of the Company there have been
no defaults or violations by any other party to the Plans, Benefit
Programs or Agreements;
(B) All reports and disclosures relating to the Plans required
to be filed with or furnished to governmental agencies, Plan
participants or Plan beneficiaries have been filed or furnished in
accordance with applicable Law in a timely manner, and each Plan and
each Benefit Program or Agreement has been administered in
substantial compliance with its governing documents;
(C) Each of the Plans intended to be qualified under section 401
of the Code satisfies the requirements of such section and has
received a favorable determination letter from the Internal Revenue
Service regarding such qualified status and has not, since receipt of
the most recent favorable determination letter, been amended or, to
the knowledge of the Company, operated in a way which would adversely
affect such qualified status;
(D) Each Plan, Benefit Program, and Agreement has been
administered in material compliance with its terms, the applicable
provisions of ERISA, the Code and all other applicable laws and the
terms of all applicable collective bargaining agreements;
(E) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of the Company
threatened against, or with respect to, any of the Plans, Benefit
Programs or Agreements or their assets;
(F) All contributions required to be made to the Plans by the
Company on behalf of the Company or its employees pursuant to their
terms and provisions have been made timely;
(G) No Plan is subject to Title IV of ERISA;
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<PAGE> 74
(H) As to any Plan intended to be qualified under section 401 of
the Code, there has been no termination or partial termination of the
Plan within the meaning of section 411(d)(3) of the Code;
(I) No act, omission or transaction has occurred which would
result in imposition on the Company of (1) breach of fiduciary duty
liability damages under section 409 of ERISA, (2) a civil penalty
assessed pursuant to subsections (c), (i) or (l) of section 502 of
ERISA or (3) a Tax imposed pursuant to Chapter 43 of Subtitle D of
the Code;
(J) To the knowledge of Company, there is no matter pending
(other than routine qualification determination filings) with respect
to any of the Plans before the Internal Revenue Service, the
Department of Labor or the PBGC;
(K) Each trust funding a Plan, which trust is intended to be
exempt from federal income taxation pursuant to section 501(c)(9) of
the Code, satisfies the requirements of such section and has received
a favorable determination letter from the Internal Revenue Service
regarding such exempt status and has not, since receipt of the most
recent favorable determination letter, been amended or operated in a
way which would materially adversely affect such exempt status;
(L) With respect to any employee benefit plan, within the
meaning of section 3(3) of ERISA, which is not listed in Schedule
3.1(q) of the Company Disclosure Statement but which is sponsored,
maintained or contributed to, or has been sponsored, maintained or
contributed to within six years prior to the Closing Date, by any
corporation, trade, business or entity under common control with the
Company, within the meaning of section 414(b), (c) or (m) of the Code
or section 4001 of ERISA ("Commonly Controlled Entity"), (1) no
withdrawal liability, within the meaning of section 4201 of ERISA,
has been incurred, which withdrawal liability has not been satisfied,
(2) no liability to the PBGC has been incurred by any Commonly
Controlled Entity, which liability has not been satisfied, (3) no
accumulated funding deficiency, whether or not waived, within the
meaning of section 302 of ERISA or section 412 of the Code has been
incurred, and (4) all contributions (including installments) to such
plan required by section 302 of ERISA and section 412 of the Code
have been timely made; and
(M) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (1)
require the Company to make a larger contribution to, or pay greater
benefits under, any Plan, Benefit Program or Agreement than it
otherwise would or (2) create or give rise to any additional vested
rights or service credits under any Plan, Benefit Program, or
Agreement.
(iv) Except as otherwise set forth in Schedule 3.1(q) of the
Company Disclosure Schedule, the Company is not a party to any
agreement, nor has it established any policy or practice, requiring it
to make a payment or provide any other form of compensation or benefit
to any person performing services for the Company upon termination of
such services which would not be payable or provided in the absence of
the consummation of the transactions contemplated by this Agreement.
(v) Except as otherwise set forth in Schedule 3.1(q) of the Company
Disclosure Schedule, no payments have or are expected to be made under
the Plans, Benefit Programs and Agreements which, in the aggregate,
would result in all or part of such payments not being deductible by the
payor under sections 280G and or 162(m) of the Code.
(vi) Except as otherwise set forth in Schedule 3.1(q) of the
Company Disclosure Schedule, the Company is not a party to or is bound
by any severance agreement involving $50,000 or more.
(vii) Each Plan which is an "employee welfare benefit plan", as
such term is defined in section 3(1) of ERISA, may be unilaterally
amended or terminated in its entirety without liability except as to
benefits accrued thereunder prior to such amendment or termination.
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(viii) Except as otherwise set forth in Schedule 3.1(q) of the
Company Disclosure Schedule, no Plan, Benefit Program or Agreement
provides retiree medical or retiree life insurance benefits to any
person and the Company is not contractually or otherwise obligated
(whether or not in writing) to provide any person with life insurance or
medical benefits upon retirement or termination of employment, other
than as required by the provisions of section 601 through 608 of ERISA
and section 4980B of the Code.
(ix) As to each Plan described on Schedule 3.1(q) of the Company
Disclosure Schedule which is a multiemployer plan within the meaning of
section 3(37) of ERISA, Schedule 3.1(i) of the Company Disclosure
Schedule accurately describes the dollar amount of withdrawal liability
which would be owed by the Company to such Plan if the Company ceased
contributing to such Plan immediately after consummation of the
transaction contemplated by this Agreement.
(x) Except as otherwise set forth in Schedule 3.1(q) of the Company
Disclosure Schedule, no Plan, Benefit Program or Agreement provides that
payments pursuant to such Plan, Benefit Program or Agreement may be made
in securities of the Company or a Commonly Controlled Entity, nor does
any trust maintained pursuant to any Plan, Benefit Program or Agreement
hold any securities of the Company or a Commonly Controlled Entity.
(r) Schedule 3.1(r) of the Company Disclosure Schedule sets forth by
number and employment classification the approximate numbers of employees
employed by the Company as of the Effective Date, and, except as set forth
therein, none of said employees are subject to union or collective
bargaining agreements with the Company. Except as otherwise set forth in
Schedule 3.1(r) of the Company Disclosure Schedule, the Company has not at
any time on or after January 1, 1995 had or, to the knowledge of Company,
been threatened with any work stoppages or other labor disputes or
controversies with respect to its employees which had a material adverse
effect on the Company.
(s) Labor Matters. Except as set forth in Schedule 3.1(s) of the
Company Disclosure Schedule or in the Company SEC Documents:
(i) neither the Company nor any of its Subsidiaries is a party to
any collective bargaining agreement or other current labor agreement
with any labor union or organization, and there is no current union
representation question involving employees of the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries know of
any activity or proceeding of any labor organization (or representative
thereof) or employee group (or representative thereof) to organize any
such employees;
(ii) there is no unfair labor practice charge or grievance arising
out of a collective bargaining agreement or other grievance procedure
against the Company or any of its Subsidiaries pending, or, to the
knowledge of the Company or any of its Subsidiaries, threatened, that,
individually or in the aggregate, has had or could reasonably be
expected to (A) have a Material Adverse Effect on the Company, (B)
impair the ability of the Company to perform its obligations under any
of the Transaction Documents in any material respect, or (C) delay in
any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents;
(iii) there is no complaint, lawsuit or proceeding in any forum by
or on behalf of any present or former employee, any applicant for
employment or any classes of the foregoing alleging breach of any
express or implied contract of employment, any Law governing employment
or the termination thereof or other discriminatory, wrongful or tortious
conduct in connection with the employment relationship against the
Company or any of its Subsidiaries pending, or, to the knowledge of the
Company or any of its Subsidiaries, threatened, that, individually or in
the aggregate, has had or could reasonably be expected to (A) have a
Material Adverse Effect on the Company, (B) impair the ability of the
Company to perform its obligations under any of the Transaction
Documents in any material respect, or (C) delay in any material respect
or prevent the consummation of any of the transactions contemplated by
any of the Transaction Documents;
(iv) there is no strike, dispute, slowdown, work stoppage or
lockout pending, or, to the knowledge of the Company or any of its
Subsidiaries, threatened, against or involving the Company
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<PAGE> 76
or any of its Subsidiaries that, individually or in the aggregate, has
had or could reasonably be expected to (A) have a Material Adverse
Effect on the Company, (B) impair the ability of the Company to perform
its obligations under any of the Transaction Documents in any material
respect, or (C) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents;
(v) The Company and each of its Subsidiaries are in compliance with
all applicable Laws respecting employment and employment practices,
terms and conditions of employment, wages, hours of work and
occupational safety and health, except for non-compliance that,
individually or in the aggregate, has not had and could not reasonably
be expected to (A) have a Material Adverse Effect on the Company, (B)
impair the ability of the Company to perform its obligations under any
of the Transaction Documents in any material respect, or (C) delay in
any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents; and
(vi) There is no proceeding, claim, suit, action or governmental
investigation pending or, to the knowledge of the Company or any of its
Subsidiaries, threatened, in respect to which any current or former
director, officer, employee or agent of the Company or any of its
Subsidiaries is or may be entitled to claim indemnification from the
Company or any of its Subsidiaries pursuant to the Articles of
Incorporation or Bylaws of the Company or any provision of the
comparable charter or organizational documents of any of its
Subsidiaries, as provided in any indemnification agreement to which the
Company or any Subsidiary of the Company is a party or pursuant to
applicable Law that, individually or in the aggregate, has had or could
reasonably be expected to (A) have a Material Adverse Effect on the
Company, (B) impair the ability of the Company to perform its
obligations under any of the Transaction Documents in any material
respect, or (C) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents.
(t) Intangible Property. The Company and its Subsidiaries possess or
have adequate rights to use all material trademarks, trade names, patents,
service marks, brand marks, brand names, computer programs, databases,
industrial designs and copyrights necessary for the operation of the
businesses of each of the Company and its Subsidiaries (collectively, the
"Intangible Property"), except where the failure to possess or have
adequate rights to use such properties, individually or in the aggregate,
has not had and could not reasonably be expected to (i) have a Material
Adverse Effect on the Company, (ii) impair the ability of the Company to
perform its obligations under any of the Transaction Documents in any
material respect, or (iii) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents. All of the Intangible Property is owned or licensed
by the Company or its Subsidiaries free and clear of any and all Liens,
except those that, individually or in the aggregate, have not had and could
not reasonably be expected to (i) have a Material Adverse Effect on the
Company, (ii) impair the ability of the Company to perform its obligations
under any of the Transaction Documents in any material respect, or (iii)
delay in any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents, and neither
the Company nor any such Subsidiary has forfeited or otherwise relinquished
any Intangible Property which forfeiture, individually or in the aggregate,
has had or could reasonably be expected to have any effect referred to in
clause (i), (ii) or (iii) above. To the knowledge of the Company, the use
of the Intangible Property by the Company or its Subsidiaries does not, in
any material respect, conflict with, infringe upon, violate or interfere
with or constitute an appropriation of any right, title, interest or
goodwill, including any intellectual property right, trademark, trade name,
patent, service mark, brand mark, brand name, computer program, database,
industrial design, copyright or any pending application therefor of any
other person and there have been no claims made and neither the Company nor
any of its Subsidiaries has received any notice of any claim or otherwise
knows that any of the Intangible Property is invalid or conflicts with the
asserted rights of any other person or has not been used or enforced or has
failed to have been used or enforced in a manner that would result in the
abandonment, cancellation or unenforceability of any of the Intangible
Property, except for any such conflict, infringement, violation,
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<PAGE> 77
interference, claim, invalidity, abandonment, cancellation or
unenforceability that, individually or in the aggregate, has not had and
could not reasonably be expected to (i) have a Material Adverse Effect on
the Company, (ii) impair the ability of the Company to perform its
obligations under any of the Transaction Documents in any material respect,
or (iii) delay in any material respect or prevent the consummation of any
of the transactions contemplated by any of the Transaction Documents.
(u) Environmental Matters.
For purposes of this Agreement:
(A) "Environmental Laws" means all federal, state and local laws
(including common laws), rules, regulations, ordinances, orders,
decrees of any Governmental Entity, whether now in existence or
hereafter enacted and in effect at the time of Closing, relating to
pollution or the protection of human health, safety or the
environment of any jurisdiction in which the applicable party hereto
owns or operates assets or conducts business or owned or operated
assets or conducted business (whether or not through a predecessor
entity) (including ambient air, surface water, groundwater, land
surface, subsurface strata, natural resources or wildlife), including
laws and regulations relating to Releases or threatened Releases of
Hazardous Materials or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport or handling of solid waste or Hazardous Materials, and any
similar laws, rules, regulations, ordinances, orders and decrees of
any foreign jurisdiction in which the applicable party hereto owns or
operates assets or conducts business;
(B) "Hazardous Materials" means (x) any radioactive materials,
asbestos in any form that is or could become friable, urea
formaldehyde foam insulation, polychlorinated biphenyls or
transformers or other equipment that contain dielectric fluid
containing polychlorinated biphenyls, (y) any chemicals, materials or
substances which are now defined as or included in the definition of
"solid wastes," "hazardous substances," "hazardous wastes,"
"hazardous materials," "extremely hazardous substances," "restricted
hazardous wastes," "toxic substances" or "toxic pollutants," or words
of similar import, under any Environmental Law and (z) any other
chemical, material, substance or waste, exposure to which is now
prohibited, limited or regulated under any Environmental Law in a
jurisdiction in which the Company or any of its Subsidiaries operates
(for purposes of this Section 3.1(t)).
(C) "Release" means any spill, effluent, emission, leaking,
pumping, pouring, emptying, escaping, dumping, injection, deposit,
disposal, discharge, dispersal, leaching or migration into the indoor
or outdoor environment, or into or out of any property owned,
operated or leased by the applicable party or its Subsidiaries; and
(D) "Remedial Action" means all actions, including any capital
expenditures, required by a Governmental Entity or required under any
Environmental Law, or voluntarily undertaken to (w) clean up, remove,
treat, or in any other way ameliorate or address any Hazardous
Materials or other substance in the indoor or outdoor environment;
(x) prevent the Release or threat of Release, or minimize the further
Release of any Hazardous Material so it does not endanger or threaten
to endanger the public or employee health or welfare of the indoor or
outdoor environment; (y) perform pre-remedial studies and
investigations or post-remedial monitoring and care pertaining or
relating to a Release; or (z) bring the applicable party into
compliance with any Environmental Law.
Except as disclosed in the Company SEC Documents or on Schedule 3.1(u)
of the Company Disclosure Schedule:
(i) The operations of the Company and its Subsidiaries have been
conducted, are and, as of the Closing Date, will be, in compliance with
all Environmental Laws, except where the failure to so comply,
individually or in the aggregate, has not had and could not reasonably
be expected to (A) have a Material Adverse Effect on the Company, (B)
impair the ability of the Company to
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perform its obligations under any of the Transaction Documents in any
material respect, or (C) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents;
(ii) The Company and its Subsidiaries have obtained and will
maintain all permits, licenses and registrations, or applications
relating thereto, and have made and will make all filings, reports and
notices required under applicable Environmental Laws for the continued
operations of their respective businesses, except such matters the lack
or failure of which, individually or in the aggregate, has not had and
could not reasonably be expected to (A) have a Material Adverse Effect
on the Company, (B) impair the ability of the Company to perform its
obligations under any of the Transaction Documents in any material
respect, or (C) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents;
(iii) The Company and its Subsidiaries are not subject to any
outstanding written orders issued by, or contracts with, any
Governmental Entity or other person respecting (A) Environmental Laws,
(B) Remedial Action, (C) any Release or threatened Release of a
Hazardous Material or petroleum or petroleum products or (D) an
assumption of responsibility for environmental liabilities of another
person, except such orders or contracts the compliance with which,
individually or in the aggregate, has not had and could not reasonably
be expected to (x) have a Material Adverse Effect on the Company, (y)
impair the ability of the Company to perform its obligations under any
of the Transaction Documents in any material respect, or (z) delay in
any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents;
(iv) The Company and its Subsidiaries have not received any written
communication alleging, with respect to any such party, the violation of
or liability under any Environmental Law, which violation or liability,
individually or in the aggregate, has not had and could not reasonably
be expected to (A) have a Material Adverse Effect on the Company, (B)
impair the ability of the Company to perform its obligations under any
of the Transaction Documents in any material respect, or (C) delay in
any material respect or prevent the consummation of any of the
transactions contemplated by any of the Transaction Documents;
(v) Neither the Company nor any of its Subsidiaries has any
contingent liability in connection with any existing Release of any
Hazardous Material or petroleum or petroleum products into the indoor or
outdoor environment (whether on-site or off-site) or employee or third
party exposure to Hazardous Materials that, individually or in the
aggregate, has had or could reasonably be expected to (A) have a
Material Adverse Effect on the Company, (B) impair the ability of the
Company to perform its obligations under any of the Transaction
Documents in any material respect, or (C) delay in any material respect
or prevent the consummation of any of the transactions contemplated by
any of the Transaction Documents;
(vi) The operations of the Company or its Subsidiaries involving
the generation, transportation, treatment, storage or disposal of
hazardous or solid waste, as defined and regulated under 40 C.F.R. Parts
260-270 (in effect as of the Effective Date) or any applicable state
equivalent, are in compliance with applicable Environmental Laws, except
where the failure to so comply, individually or in the aggregate, has
not had and could not reasonably be expected to (A) have a Material
Adverse Effect on the Company, (B) impair the ability of the Company to
perform its obligations under any of the Transaction Documents in any
material respect, or (C) delay in any material respect or prevent the
consummation of any of the transactions contemplated by any of the
Transaction Documents; and
(vii) To the knowledge of the Company, there is not now on or in
any property of the Company or its Subsidiaries or any property for
which the Company or its Subsidiaries is potentially liable any of the
following: (A) any underground storage tanks or surface impoundments or
(B) any on-site disposal of Hazardous Material, any of which ((A) or (B)
preceding), individually or in the aggregate, has had or could
reasonably be expected to (x) have a Material Adverse Effect on the
Company, (y) impair the ability of the Company to perform its
obligations under any of the
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Transaction Documents in any material respect, or (z) delay in any
material respect or prevent the consummation of any of the transactions
contemplated by any of the Transaction Documents.
(v) Insurance. Schedule 3.1(v) of the Company Disclosure Schedule sets
forth an insurance schedule of the Company's and each of its Subsidiaries'
directors' and officers' liability insurance. The Company maintains
insurance in such amounts and covering such risks as are in accordance with
normal industry practice for companies engaged in businesses similar to
those of the Company and each of its Subsidiaries (taking into account the
cost and availability of such insurance).
(w) Vote. Pursuant to Section 4.2, the Company will seek, at the
Shareholders' Meeting, the approval of (i) the Share Issuance by the
affirmative vote of a majority of the total votes cast by the holders of
Common Stock present at the Shareholders' Meeting and entitled to vote
thereon, and (ii) the Articles of Amendment by the affirmative vote of the
holders of the greater of (A) a majority of the issued and outstanding
shares of Common Stock entitled to vote thereon or (B) two-thirds of the
shares of Common Stock present at the Shareholders' Meeting in person or by
proxy and entitled to vote thereon. There are no approvals required of the
holders of any class or series of capital stock of the Company necessary to
approve this Agreement and the transactions contemplated hereby other than
as set forth in the preceding sentence.
(x) Amendment to Rights Agreement. The Board has taken, or will take,
all necessary action to amend the Rights Agreement, dated as of September
13, 1994, as amended (the "Rights Agreement"), between the Company and
Chemical Bank, as Rights Agent, so that none of the execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby will cause (i) the rights issued pursuant to the Rights Agreement to
become exercisable under the Rights Agreement or (ii) the distribution of
Rights Certificates (as defined in the Rights Agreement).
(y) Texas Business Combination Law. The Board has approved the
acquisition of the Shares by Purchaser prior to Purchaser's "share
acquisition date" (as defined in Article 13.02 of the Texas Business
Corporation Act) in accordance with the provisions of Article 13.03(A)(1)
of the Texas Business Corporation Act.
(z) No Brokers or Finders. Except as set forth on Schedule 3.1(z), no
agent, broker, finder or investment or commercial banker, or other Person
or firm engaged by or acting on behalf of the Company in connection with
the negotiation, execution or performance of this Agreement is or will be
entitled to any brokerage or finder's or similar fee or other commission as
a result of this Agreement, other than any such fees or commissions that
have been disclosed to Purchaser and as to which the Company shall have
full responsibility.
(aa) Oil and Gas Operations. In those instances in which the Company
serves as operator of a well that is currently a producing well or
undergoing drilling operations, it has drilled and completed (if
applicable) such well, and operated and produced such well, in accordance
with generally accepted oil and gas field practices and in compliance in
all material respects with applicable oil and gas leases and all applicable
Laws, except where any failure or violation could not reasonably be
expected to have a Material Adverse Effect on the Company. All proceeds
from the sale of oil, gas and other hydrocarbons produced by the Company
are being received by the Company in a timely manner and are not being held
in suspense for any reason (except for amounts, individually or in the
aggregate, not in excess of $2,000,000 and held in suspense in the ordinary
course of business).
(bb) Marketing of Production. Except for Contracts listed in the
Company SEC Documents or on Schedule 3.1(l) of the Company Disclosure
Schedule (with respect to all of which Contracts the Company represents
that it or its Subsidiaries are receiving a price for all production sold
thereunder which is computed in accordance with the terms of the relevant
Contract), there exist no Material Contracts for the sale of production
from the leasehold and other interests in oil gas and other mineral
properties owned by the Company or its Subsidiaries (collectively, the "Oil
and Gas Properties") other than (i) Contracts pertaining to the sale of
production at a price equal to or greater than a price that is the market
price from time to time existing in the areas where the Oil and Gas
Properties subject to such
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agreement or arrangement are located, and (ii) Contracts that are
cancelable on 60 days notice or less without penalty or detriment.
(cc) Prepayments. Neither the Company nor any Subsidiary is obligated,
by virtue of a prepayment arrangement, make-up right under a production
sales Contract containing a "take or pay" or similar provision, production
payment or any other arrangement, to deliver hydrocarbons, or proceeds from
the sale thereof, attributable to any of its properties at some future time
without then or thereafter being entitled to received payment of the
contract price therefor, except where any such arrangement would not have a
Material Adverse Effect.
(dd) Gas Imbalances. Except as disclosed in the Company SEC Documents,
neither the Company nor any Subsidiary has (i) any obligation to deliver
gas from the Oil and Gas Properties (or cash in lieu thereof) to other
owners of interests in those properties as a result of past production by
the Company, any Subsidiary or any of their predecessors in excess of the
share to which they were entitled nor (ii) any right to receive deliveries
of gas from the Oil and Gas Properties (or cash in lieu there) from other
owners of interests in those properties as a result of past production by
the company, any Subsidiary or any of their predecessors of less than the
share to which they were entitled; in either case where any such gas
imbalance would have a Material Adverse Effect.
(ee) Customers and Suppliers. None of the current customers or
suppliers of the Company has refused, or communicated in writing to the
Chief Executive Officer of the Company that it will or may refuse, to
purchase or supply products or services from or to the Company or has
communicated in writing that it will or may substantially reduce the amount
of production, goods or services that it is willing to purchase from or
supply to the Company where any such refusal or reduction would have a
Material Adverse Effect.
(ff) Reserve Report. The Company acknowledges and agrees that
Purchaser has been provided with a copy of the Reserve Report. The
Company's and each Subsidiary's ownership of the Oil and Gas Properties
described in the Reserve Report entitle the respective owner to receive a
percentage of the oil, gas and other hydrocarbons produced from each well
or unit equal to not less than the percentage set forth in the Reserve
Report as the "Net Revenue Interest" for such well or unit and cause the
respective owner to be obligated to bear a percentage of the cost of
operation of such well or unit not greater than the percentage set forth in
the Reserve Report as the "Working Interest" for such well or unit, and to
the extent such percentages of production which the respective owner is
entitled to receive, and shares of expenses which the respective owner is
obligate to bear, may change after the date of such report, such changes
were properly reflected (based on reasonable assumptions) in preparing such
report. The underlying historical information used for preparation of the
Reserve Report was, at the time of delivery, true and correct in all
material respects.
(gg) Nonconsent Operations. Except as set forth in Schedule 3.1(gg) of
the Company Disclosure Schedule, there are no operations on the Oil and Gas
Properties in which the Company's or any Subsidiary's commitment would have
exceeded $5,000,000, being conducted as of January 1, 1998, or any time
thereafter, in which the Company or any subsidiary has elected not to
participate.
SECTION 3.2 Representations and Warranties of Purchaser.
(a) Organization, Standing and Power. Purchaser is a limited partnership
duly organized, validly existing, and in good standing under the laws of the
State of Texas and has all requisite corporate power and authority to own,
lease, and operate its properties and to carry on its business as now being
conducted.
(b) Authority. Purchaser represents and warrants to the Company that,
assuming the accuracy of the representations and warranties of the Company in
Section 3.1(d) hereof, (i) the purchase of the Shares to be purchased by it has
been duly and properly authorized and this Agreement has been duly executed and
delivered by it or on its behalf and constitutes the valid and legally binding
obligation of Purchaser, enforceable against it in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights
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generally and to general principles of equity; (ii) the purchase of the Shares
to be purchased by it does not conflict with or violate (A) its certificate of
incorporation or bylaws or (B) any law applicable to it in a manner that could
materially hinder or impair the completion of any of the transactions
contemplated hereby; and (iii) the purchase of Shares to be purchased by it does
not impose any penalty or other onerous condition on Purchaser that could
materially hinder or impact the completion of any of the transactions
contemplated hereby.
(c) Litigation. As of the Effective Date, there is no claim, action, suit,
inquiry, judicial or administrative proceeding pending or, to the knowledge of
Purchaser, threatened against it relating to any of the transactions
contemplated by this Agreement or any other Transaction Document.
(d) Investment Intent. Purchaser represents and warrants to the Company
that the Shares to be acquired by it hereunder are being acquired for its own
account for investment and with no intention of distributing or reselling such
Shares or any part thereof or interest therein in any transaction which would be
in violation of the securities Laws of the United States of America or any state
or any foreign country or jurisdiction.
(e) Transfer Restrictions. If Purchaser should decide to dispose of any of
the Shares to be purchased by it, Purchaser understands and agrees that it may
do so only pursuant to an effective registration statement under the Securities
Act or pursuant to an exemption from registration under the Securities Act. In
connection with any offer, resale, pledge or other transfer (individually and
collectively, a "Transfer") of any Shares other than pursuant to an effective
registration statement, the Company may require that the transferor of such
Shares provide to the Company an opinion of counsel which opinion shall be
reasonably satisfactory in form and substance to the Company, to the effect that
such Transfer is being made pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act and any
State or foreign securities Laws. Purchaser agrees to the imprinting, so long as
appropriate, of substantially the following legend on certificates representing
the Shares:
THE SHARES OF COMMON STOCK (THE "SHARES") EVIDENCED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER
AGREES THAT IT WILL NOT OFFER, RESELL, PLEDGE OR OTHERWISE TRANSFER
(INDIVIDUALLY AND COLLECTIVELY, A "TRANSFER") THE SHARES EVIDENCED HEREBY,
EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, OR (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT SUCH AS THE EXEMPTION SET FORTH IN RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE). IF THE PROPOSED TRANSFER IS TO BE MADE OTHER
THAN PURSUANT TO CLAUSE (A) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE COMPANY AND THE TRANSFER AGENT SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OR ANY STATE OR FOREIGN SECURITIES LAW.
The legend set forth above may be removed if and when the Shares, as the
case may be, represented by such certificate are disposed of pursuant to an
effective registration statement under the Securities Act or the opinion of
counsel referred to above has been provided to the Company. The share
certificates shall also bear any additional legends required by applicable
federal, state or foreign securities Laws, which legends may be removed when, in
the opinion of counsel to the Company, the same are no longer required under the
applicable requirements of such securities Laws. Purchaser agrees that, in
connection with any Transfer of Shares by it pursuant to an effective
registration statement under the Securities Act, Purchaser will comply with all
prospectus delivery requirements of the Securities Act. The Company makes no
representation,
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warranty or agreement as to the availability of any exemption from registration
under the Securities Act with respect to any resale of Shares.
(f) Purchaser Status. Purchaser represents and warrants to, and covenants
and agrees with the Company that (i) at the time it was offered the Shares, it
was, (ii) at the Effective Date, it is, and (iii) at the Closing Date, it will
be, an accredited investor as defined in Rule 501(a) under the Securities Act,
and has such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the Company and an investment in the
Shares, and is able to bear the economic risk of such investment.
ARTICLE IV
COVENANTS
SECTION 4.1 Furnishing of Information. As long as Purchaser owns Shares
representing at least 5% of the aggregate number of shares of Common Stock then
outstanding, from and after the Closing Date the Company will promptly furnish
to Purchaser all reports filed by it pursuant to Section 13(a) or 15(d) of the
Exchange Act (or if the Company is not at the time required to file reports
pursuant to said Section 13(a) or 15(d), annual and quarterly reports comparable
to those required by Sections 13(a) or 15(d) of the Exchange Act).
SECTION 4.2 Shareholder Approval; Proxy Statement. The Company shall take
all actions necessary in accordance with the Articles of Incorporation, the
Bylaws, the rules of Nasdaq and other applicable Law to call a meeting of its
shareholders (the "Shareholders' Meeting") to be held as promptly as practicable
after the date hereof for the purpose of approving the Share Issuance and the
Articles of Amendment. The Company and Purchaser shall consult with each other
in connection with Shareholders' Meeting. The Company shall cause the Board (a)
to recommend to the Company's shareholders approval of the Share Issuance and
the Articles of Amendment, (b) not to withdraw, modify or change such
recommendation and (c) to continue to recommend to the shareholders of the
Company the approval and the adoption of such matters. As promptly as
practicable after the Effective Date, the Company shall prepare and file with
the SEC the Proxy Statement with respect to the approval and adoption by the
Company's shareholders of the Share Issuance and the Articles of Amendment. As
promptly as practicable after the clearance of the Proxy Statement by the SEC,
the Company shall mail the Proxy Statement to its shareholders of record at
least 10 calendar days prior to the Shareholders' Meeting and shall use its
reasonable best efforts to solicit and obtain the affirmative vote of the
requisite percentage of the shareholders of the Company with respect to approval
of the Share Issuance and the Articles of Amendment.
SECTION 4.3 Nasdaq Listing. The Company filed a listing application with
Nasdaq with respect to the Shares promptly after the Effective date. The Company
shall submit a revised listing application with Nasdaq with respect to the
Shares within five business days after the date hereof and Purchaser shall be
entitled to review and comment on such listing application and the submission of
any other materials to Nasdaq in connection with the listing of the Shares. The
Company shall use its reasonable best efforts to cause the Shares to be approved
for listing on Nasdaq, subject to official notice of issuance.
SECTION 4.4 Affirmative Covenants of the Company. The Company hereby
covenants and agrees that, until the earlier of the Closing or the termination
of this Agreement, except as set forth on Schedule 4.4 to the Company Disclosure
Schedule, and unless otherwise expressly contemplated by this Agreement or
consented to in writing by Purchaser, the Company will and will cause each of
its Subsidiaries to:
(a) operate its business in the usual and ordinary course consistent
with past practices except as contemplated by this Agreement or as provided
in or contemplated by the Company Disclosure Schedule;
(b) use all reasonable efforts to preserve substantially intact its
business organization, maintain its rights and franchises, retain the
services of its respective officers and key employees and maintain its
relationships with its respective customers and suppliers;
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(c) maintain and keep its properties and assets in as good a repair
and condition as at present, ordinary wear and tear excepted, and use
commercially reasonable efforts to maintain supplies and inventories in
quantities consistent with its customary business practices;
(d) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained;
(e) immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted
heretofore with respect to any Alternative Transaction (as hereinafter
defined). For purposes of this Agreement, "Alternative Transaction" shall
mean any sale or lease of a material portion of the Company's assets,
merger, consolidation, share exchange, business combination or similar
transaction involving the Company or any of its Subsidiaries or the
acquisition in any manner, directly or indirectly, of a material interest
in any voting stock, interests or other securities of, or a material
portion of the assets of, the Company or any of its Subsidiaries, other
than the transactions contemplated by this Agreement.
SECTION 4.5 Negative Covenants of the Company. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by Purchaser
or as set forth on Schedule 4.5 to the Company Disclosure Schedule, from the
Effective Date until the earlier of the Closing or the termination of this
Agreement, the Company shall not do, and shall not permit any of its
Subsidiaries to do, any of the following:
(a) acquire or agree to acquire (whether pursuant to a definitive
agreement, a non-binding letter of intent or otherwise), by merging or
consolidating with, by purchasing an equity interest in or a portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division
thereof, or otherwise acquire or agree to acquire any assets of any other
Person (other than the purchase of assets from suppliers or vendors in the
ordinary course of business and consistent with past practice);
(b) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, any of its assets or any assets of any of its
Subsidiaries, except for pledges or dispositions of assets in the ordinary
course of business and consistent with past practice;
(c) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate,
directly or indirectly, any inquiries or the making of any proposal or
offer relating to, or that could reasonably be expected to lead to, any
Alternative Transaction, or enter into discussions or negotiate with any
person or entity in furtherance of such inquiries or to obtain an
Alternative Transaction, or agree to, or endorse, any Alternative
Transaction, or authorize or permit any of the officers, directors,
employees or agents of the Company or any of its Subsidiaries or any
investment banker, financial advisor, attorney, accountant or other
representative retained by the Company or any of the Company's Subsidiaries
to take any such action, and the Company shall immediately notify Purchaser
of all relevant terms of any such inquiries or proposals received by the
Company or any of its Subsidiaries or by any such officer, director,
employee, agent, investment banker, financial advisor, attorney, accountant
or other representative relating to any proposed Alternative Transaction
and if such inquiry or proposal is in writing, the Company shall
immediately deliver or cause to be delivered to Purchaser a copy of such
inquiry or proposal; provided, however, that nothing contained in this
subsection (c) shall prohibit the Board from complying with Rule 14e-2 or
Rule 14d-9 promulgated under the Exchange Act with regard to an Alternative
Transaction;
(d) release any third party from its obligations under any existing
standstill agreement or arrangement relating to an Alternative Transaction
or otherwise under any confidentiality or other similar agreement relating
to information material to the Company or any of its Subsidiaries;
(e) adopt or propose to adopt any amendments to its Articles of
Incorporation or Bylaws; reclassify any shares of its capital stock; adopt
resolutions authorizing a liquidation, dissolution, merger, consolida-
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tion, restructuring, recapitalization, or other reorganization of the
Company or any Subsidiary; or make any other material changes in its
capital structure;
(f) (i) change any of its significant accounting policies or (ii) make
or rescind any express or deemed election relating to Taxes, settle or
compromise any claim, action, suit, Litigation, audit or controversy
relating to Taxes, or change any of its methods of reporting income or
deductions for federal or other income Tax purposes from those employed in
the preparation of the federal or other income Tax Returns or other Tax
Returns for the taxable year ending December 31, 1997, except, in the case
of either clause (i) or clause (ii), as may be required by Law or GAAP;
(g) other than borrowings in the ordinary course under the Credit
Facility, incur any Debt, whether or not evidenced by a note, bond,
debenture or similar instrument or under any financing lease, whether
pursuant to a sale-and-leaseback transaction or otherwise, which would
exceed $5,000,000;
(h) make any loans or advances to any Person, other than (i) advances
to employees in the ordinary and usual course of business and (ii)
transactions among or between the Company and its Subsidiaries with respect
to cash management conducted in the ordinary and usual course of the
Company's business;
(i) declare or pay any dividend or make any other distribution with
respect to its capital stock, other than dividends paid by any Subsidiary
to the Company or another Subsidiary in the ordinary and usual course of
the Company's business;
(j) issue, sell or deliver (whether through the issuance or granting
of options, warrants, commitments, subscriptions, rights to purchase, or
otherwise) any of its capital stock or other securities other than as
contemplated herein or pursuant to awards issued and outstanding as of the
Effective Date under the Stock Plans or purchase or otherwise acquire any
of its capital stock, employee or director stock options, warrants or other
equity securities or debt securities;
(k) enter into, adopt, or (except as may be required by law) amend or
terminate any collective bargaining agreement or any Benefit Plan; approve
or implement any employment severance arrangements (other than payments
made under the Company's severance policy in accordance with past practice)
or retain or discharge any officers and executive management personnel;
authorize or enter into any employment, severance, consulting services or
other agreement with any officers and executive management personnel; or
change the compensation or benefits provided to any director, officer, or
employee as of August 1, 1998;
(l) materially amend, terminate, or fail to use all commercially
reasonable efforts to renew any Material Contract (provided that the
Company or its Subsidiaries shall not be required to renew any Material
Contract on terms that are less favorable to the Company or its
Subsidiaries), or default in any material respect (or take or omit to take
any action that, with or without the giving of notice of passage of time,
would constitute a material default) under any Material Contract; or
(m) agree in writing or otherwise to do any of the foregoing.
SECTION 4.6 Approvals. The Company and Purchaser each agree to cooperate
and use their best efforts to obtain (and will immediately prepare all
registrations, filings and applications, requests and notices preliminary to
all) Approvals that may be necessary or which may be reasonably requested by the
Company or Purchaser to consummate the transactions contemplated by this
Agreement and the other Transaction Documents.
SECTION 4.7 Shareholder Agreement and Monitoring Agreement. On or before
the Closing Date, the Company and Purchaser shall enter into the Shareholder
Agreement and the Monitoring Agreement.
SECTION 4.8 HSR Act Notification. To the extent it is determined that the
HSR Act will be applicable to the acquisition of the Shares by Purchaser, each
of the parties hereto shall (a) file or cause to be filed, as promptly as
practicable after the Effective Date, with the Federal Trade Commission and the
United States Department of Justice, all reports and other documents required to
be filed by such party under the HSR Act concerning the transactions
contemplated hereby and (b) promptly comply with or cause to be complied with
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any requests by the Federal Trade Commission or the United States Department of
Justice for additional information concerning the Transaction, in each case so
that the waiting period applicable to this Agreement and the Transaction
contemplated hereby under the HSR Act shall expire as soon as practicable after
the execution and delivery of this Agreement. Each party hereto agrees to
request, and to cooperate with the other party or parties in requesting, early
termination of any applicable waiting period under the HSR Act.
SECTION 4.9 Indemnification of Directors; Insurance.
(a) At or prior to the Closing, the Company shall enter into
indemnification agreements with each of its directors substantially in the form
of Exhibit E hereto with such changes thereto as may be agreed upon by Purchaser
and the Company (each an "Indemnification Agreement"). In addition, at or prior
to the Closing the Company shall enter into Indemnification Agreements with each
of the Purchaser Designees.
(b) At or prior to the Closing Date, the Company shall obtain directors'
and officers' liability insurance policies providing an aggregate of $25,000,000
in additional coverage to the coverage provided by the Company's current
directors' and officers' insurance policy (the "Additional D&O Policies"). The
Company shall use all commercially reasonable efforts to ensure that the
Additional D&O Policies shall, in addition to customary coverage, provide
coverage for any claims arising out of or relating to the activities of any of
the Company's directors and the Purchaser Designees in connection with the
transactions contemplated by this Agreement and shall provide coverage for
Purchaser and any of its Affiliates with respect to any claims brought against
Purchaser or any of its Affiliates arising out of or relating to any act or
omission of any director of the Company in his or her capacity as a director of
the Company.
(c) The Company shall, from and after the Effective Date and for four years
from the Closing Date, maintain in effect the current directors' and officers'
liability insurance policies maintained by the Company (provided that the
Company may substitute therefor policies no less favorable in terms and amounts
of coverage so long as substitution does not result in gaps of lapses in
coverage) with respect to matters occurring on or prior to the Closing Date;
provided, however, that in no event shall the Company be required to expend
pursuant to this Section more than an amount per year equal to 150% of current
annual premiums paid by the Company for such insurance and, in the event the
cost of such coverage shall exceed that amount, the Company shall purchase as
much coverage as possible for such amount, and in any event the Company shall
provide the Covered Parties with the same terms and amounts of coverage as the
Company provides to those persons who are directors and officers of the Company
at the time such policies terminate.
(d) The Company shall amend its existing insurance coverage under the
Company's current policies of directors' and officers' liability insurance, or
obtain comparable replacement policies on terms no less favorable in terms of
coverage and amounts than those in effect on the Effective Date, so that
Purchaser's purchase of the Shares pursuant to this Agreement shall not
constitute a "change of control" of the Company or otherwise cause any director
of the Company or any of persons who become directors of the Company on or after
the Closing Date to be excluded from the coverage provided by such insurance
policies.
(e) In the event the Company or any of its successors or assigns (i)
consolidates with or merges into any other Person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
Person, then, and in each such case, proper provision shall be made so that the
successors and assigns of the Company shall assume the obligations set forth in
this Section 4.9. The rights of the Covered Parties under this Section shall be
in addition to, and not in lieu of, any rights to indemnity that such persons
may have under the Articles of Incorporation of the Company or any other
provisions herein or in other agreements.
SECTION 4.10 Notification of Certain Matters. The Company shall give
prompt notice to Purchaser, and Purchaser shall give prompt notice to the
Company, of (a) the occurrence, or failure to occur, of any event that causes
any representation or warranty contained in any Transaction Document to be
untrue or inaccurate at any time from the Effective Date to the Closing Date and
(b) any failure of the Company or Purchaser to comply with or satisfy, in any
material respect, any covenant, condition or agreement to be complied with or
satisfied by it under any Transaction Document.
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SECTION 4.11 Board of Directors. As of the Effective Date, the Board is
comprised of the individuals listed on Schedule 4.11 to the Company Disclosure
Schedule. The Company shall take, or cause to be taken, such action as may be
necessary or advisable, including increasing the size of the Board by one
member, to ensure that simultaneously with the Closing the Board shall consist
of nine individuals, including (a) two individuals designated by Purchaser (the
"Purchaser Designees"), and (b) the individuals listed in Schedule 4.11 of the
Company Disclosure Schedule less one director whose resignation shall be agreed
upon by Purchaser and the Company. The Company shall take, or cause to be taken,
such action as may be necessary or advisable to ensure that simultaneously with
the Closing each of the audit and compensation committees and the executive
committee, if any, of the Board shall include one or more of the Purchaser
Designees.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
SECTION 5.1 Conditions Precedent to Each Party's Obligation. The
respective obligations of Purchaser and the Company to effect the transactions
contemplated hereby are subject to the satisfaction on or prior to the Closing
Date of the following conditions:
(a) Approvals. All Approvals of, or expirations of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been filed,
occurred, or been obtained, including the expiration or termination of any
applicable waiting period under the HSR Act.
(b) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction, or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the transactions contemplated hereby shall be in
effect.
(c) No Action. No action shall have been taken nor any statute, rule,
or regulation shall have been enacted by any Governmental Entity that makes
the consummation of the transactions contemplated hereby illegal.
SECTION 5.2 Conditions Precedent to Obligation of Purchaser at the
Closing. The obligation of Purchaser to effect the transactions contemplated by
this Agreement to be consummated at the Closing is subject to the satisfaction
of the following conditions unless waived, in whole or in part, by Purchaser:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
material respects (provided that any representation or warranty of the
Company contained herein that is qualified by a materiality standard or a
Material Adverse Effect qualification shall not be further qualified
hereby) as of the Effective Date and as of the Closing Date as though made
on and as of the Closing Date, and Purchaser shall have received a
certificate to the foregoing effect signed on behalf of the Company and its
Subsidiaries by the chief executive officer or by the chief financial
officer of the Company.
(b) Performance of Obligations. The Company shall have performed in
all material respects (provided that any covenant or agreement that is
qualified by a materiality standard or Material Adverse Effect
qualification shall not be further qualified hereby) all obligations
required to be performed by it or them under this Agreement prior to the
Closing Date, and Purchaser shall have received a certificate to such
effect signed on behalf of the Company and its Subsidiaries by the chief
executive officer or by the chief financial officer of the Company.
(c) Consents Under Agreements. Purchaser shall have been furnished
with evidence reasonably satisfactory to it of the consent or approval of
each person that is a party to a Material Contract (including evidence of
the payment or any required payment) and whose consent or approval shall be
required in order to permit the consummation of each of the transactions
contemplated by this Agreement or to prevent a breach of such Contract or
the creation of a right to terminate such Contract, and such consent or
approval shall be in form and substance reasonably satisfactory to
Purchaser.
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(d) Legal Opinion. Purchaser shall have received from Fulbright &
Jaworski L.L.P., corporate counsel to the Company, and its Subsidiaries, an
opinion dated the Closing Date, in substantially the form attached as
Exhibit B hereto, which opinion, if requested by Purchaser, shall expressly
provide that they may be relied upon by Purchaser's lenders, underwriters,
or other sources of financing with respect to the transactions contemplated
hereby.
(e) Nasdaq Listing. The Shares shall have been approved for listing on
Nasdaq, subject to official notice of issuance.
(f) Shareholder Approval. The shareholders of the Company shall have
approved the Share Issuance and the Articles of Amendment by the requisite
votes at the Shareholders' Meeting.
(g) Closing Deliveries. All documents, instruments, certificates or
other items required to be delivered by the Company pursuant to Section
6.2(b) shall have been delivered.
SECTION 5.3 Conditions Precedent to Obligations of Company at the
Closing. The obligation of the Company to effect the transactions contemplated
by this Agreement to be consummated at the Closing is subject to the
satisfaction of the following conditions unless waived, in whole or in part, by
the Company:
(a) Representations and Warranties. The representations and warranties
of Purchaser set forth in this Agreement shall be true and correct in all
material respects (provided that any representation or warranty of
Purchaser contained herein that is qualified by a materiality standard or a
Material Adverse Effect qualification shall not be further qualified
hereby) as of the Effective Date and as of the Closing Date as though made
on and as of the Closing Date, and the Company shall have received a
certificate to the foregoing effect signed on behalf of Purchaser by the
chief executive officer or by the chief financial officer of Purchaser.
(b) Performance of Obligations of Purchaser. Purchaser shall have
performed in all material respects (provided that any covenant or agreement
that is qualified by a materiality standard shall not be further qualified
hereby) the obligations required to be performed by it under this Agreement
prior to the Closing Date, and the Company shall have received a
certificate to such effect signed on behalf of Purchaser by the chief
executive officer or by the chief financial officer of Purchaser.
(c) Nasdaq Listing. The Shares shall have been approved for listing on
Nasdaq, subject to official notice of issuance.
(d) Shareholder Approval. The shareholders of the Company shall have
approved Share Issuance and the Articles of Amendment by the requisite
votes at the Shareholders' Meeting.
(e) Closing Deliveries. All documents, instruments, certificates or
other items required to be delivered by Purchaser pursuant to Section
6.2(a) shall have been delivered.
ARTICLE VI
CLOSING
SECTION 6.1 Closing. Subject to the satisfaction or waiver of the
conditions set forth in Article V, the closing of the purchase and sale of the
Shares pursuant to Section 2.1(a) (the "Closing") shall occur (a) at the offices
of Vinson & Elkins L.L.P., 2001 Ross Avenue, Suite 3700, Dallas, Texas 75201, at
10:00 a.m., local time, on the thirteenth Business Day following the
satisfaction or waiver (subject to applicable Law) of each of the conditions to
the obligations of the parties to effect the transactions to occur at the
Closing as set forth in Sections 5.1, 5.2 and 5.3, respectively, or (b) at such
other location and time as may be mutually agreed upon by the parties hereto.
The date on which the Closing is required to take place is herein referred to as
the "Closing Date." All closing transactions at the Closing shall be deemed to
have occurred simultaneously.
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SECTION 6.2 Actions to Occur at the Closing.
(a) At the Closing, Purchaser shall deliver to the Company the
following:
(i) Purchase Price. The Purchase Price for the Shares in accordance
with Article II hereof;
(ii) Shareholder Agreement. Counterparts of the Shareholder
Agreement executed by Purchaser;
(iii) Monitoring Agreement. Counterparts of the Monitoring
Agreement executed by Hicks, Muse & Co. Partners, L.P. ("HMCo"); and
(iv) Certificates. The certificates described in Sections 5.3(a)
and 5.3(b).
(b) At the Closing, the Company shall deliver to Purchaser (or to its
designee as indicated otherwise) the following:
(i) Share Certificates. Certificates representing the Shares;
(ii) Shareholder Agreement. Counterparts of the Shareholder
Agreement executed by the Company;
(iii) Monitoring Agreement. Counterparts of the Monitoring
Agreement executed by the Company;
(iv) Purchaser's Expenses. An amount equal to Purchaser's Expenses
incurred through the Closing Date in connection with the transactions
contemplated hereby as provided in Section 9.5 by wire transfer of
immediately available funds to an account of Purchaser (which amount and
account number shall have been furnished to the Company at least two
Business Days prior to the Closing Date);
(v) Certificates. The certificates described in Sections 5.2(a) and
5.2(b);
(vi) Consents Under Agreements. The original of each consent or
approval, if any, pursuant to Section 5.2(c); and
(vii) Legal Opinion. The opinion of counsel referred to in Section
5.2(d).
ARTICLE VII
TERMINATION
SECTION 7.1 Termination. This Agreement may be terminated prior to the
Closing:
(a) by mutual consent of Purchaser and the Company;
(b) by either Purchaser or the Company:
(i) in the event of a breach by the other party of any
representation, warranty, covenant or agreement contained in this
Agreement which (A) would give rise to the failure of a condition set
forth in Section 5.2(a) or 5.2(b) or Section 5.3(a) or 5.3(b) and (B)
cannot be or has not been cured within 20 days (the "Cure Period")
following receipt by the breaching party of written notice of such
breach (it is acknowledged and agreed that there shall not be a Cure
Period for breaches of the covenants set forth in the third sentence of
Section 4.2 or in Section 4.5(c));
(ii) if a court of competent jurisdiction or other Governmental
Entity shall have issued an order, decree, or ruling or taken any other
action (which order, decree, or ruling Purchaser and the Company shall
use their best efforts to lift), in each case permanently restraining,
enjoining, or otherwise prohibiting the transactions contemplated by
this Agreement, and such order, decree, ruling, or other action shall
have become final and nonappealable;
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(iii) if the required approval of the shareholders of the Company
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote held at a duly held meeting of shareholders,
or at any adjournment thereof; or
(iv) if the Closing shall not have occurred by the later of (A) the
first anniversary of the Effective Date, and (B) the date to which the
Closing Date is extended pursuant to Section 6.1; provided, however,
that the right to terminate this Agreement under this clause (iv) shall
not be available to any party whose breach of this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur on or
before such date.
The right of any party hereto to terminate this Agreement pursuant to this
Section 7.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
employees, accountants, consultants, legal counsel, agents, or other
representatives whether prior to or after the execution of this Agreement.
Notwithstanding anything in the foregoing to the contrary, a party that is in
material breach of this Agreement shall not be entitled to terminate this
Agreement except, in the case of a default by the Company, with the consent of
Purchaser, or in the case of a default by Purchaser, with the consent of the
Company.
SECTION 7.2 Effect of Termination. In the event of the termination of this
Agreement, written notice thereof shall forthwith be given to the other party
specifying the provision hereof pursuant to which such termination is made, and
this Agreement (except for the provisions of this Section 7.2, Section 4.9,
Article VIII and Article IX, which shall survive such termination) shall
forthwith become null and void. Subject to the provisions of Section 9.5, in the
event of a termination of this Agreement by either the Company or Purchaser as
provided above, there shall be no liability on the part of the Company or
Purchaser, except for liability arising out of a breach of, or misrepresentation
under, this Agreement.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnification of Purchaser. Subject to the provisions of
this Article VIII, the Company agrees to indemnify and hold harmless the
Purchaser Indemnified Parties from and against any and all Purchaser Indemnified
Costs.
SECTION 8.2 Indemnification of Company. Subject to the provisions of this
Article VIII, Purchaser agrees to indemnify and hold harmless the Company from
and against any and all Company Indemnified Costs.
SECTION 8.3 Defense of Third-Party Claims. An Indemnified Party shall give
prompt written notice to any person who is obligated to provide indemnification
hereunder (an "Indemnifying Party") of the commencement or assertion of any
action, proceeding, demand, or claim by a third party (collectively, a
"third-party action") in respect of which such Indemnified Party shall seek
indemnification hereunder. Any failure so to notify an Indemnifying Party shall
not relieve such Indemnifying Party from any liability that it, he, or she may
have to such Indemnified Party under this Section 8.3 unless the failure to give
such notice materially and adversely prejudices such Indemnifying Party. The
Indemnifying Party shall have the right to assume control of the defense of,
settle, or otherwise dispose of such third-party action on such terms as it
deems appropriate; provided, however, that:
(a) The Indemnified Party shall be entitled, at its own expense, to
participate in the defense of such third-party action (provided, however,
that the Indemnifying Party shall pay the attorneys' fees of one counsel
(provided that if any such third-party action is brought in a jurisdiction
other than Texas, the Indemnifying Party shall also pay the attorney's fees
of one local counsel) to the Indemnified Party if (i) the employment of
separate counsel shall have been authorized in writing by any such
Indemnifying Party in connection with the defense of such third-party
action, (ii) the Indemnifying Parties shall not have employed counsel
reasonably satisfactory to the Indemnified Party to have charge of such
third-
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party action, (iii) counsel to the Indemnified Party shall have reasonably
concluded that there may be defenses available to the Indemnified Party
that are different from or additional to those available to the
Indemnifying Party, (iv) counsel to the Indemnified Party and the
Indemnifying Party shall have advised their respective clients in writing,
with a copy delivered to the other party, that there is a conflict of
interest that could make it inappropriate under applicable standards of
professional conduct to have common counsel), or (v) the third-party action
is a proceeding brought by a shareholder of the Company (in such
shareholder's name or derivatively on behalf of the Company) in respect of
the transactions contemplated by this Agreement;
(b) The Indemnifying Party shall obtain the prior written approval of
the Indemnified Party before entering into or making any settlement,
compromise, admission, or acknowledgment of the validity of such
third-party action or any liability in respect thereof if, pursuant to or
as a result of such settlement, compromise, admission, or acknowledgment,
injunctive or other equitable relief would be imposed against the
Indemnified Party or if, in the opinion of the Indemnified Party, such
settlement, compromise, admission, or acknowledgment could have a material
adverse effect on its business;
(c) No Indemnifying Party shall consent to the entry of any judgment
or enter into any settlement that does not include as an unconditional term
thereof the giving by each claimant or plaintiff to each Indemnified Party
of a release from all liability in respect of such third-party action; and
(d) The Indemnifying Party shall not be entitled to control (but shall
be entitled to participate at its own expense in the defense of), and the
Indemnified Party shall be entitled to have sole control over, the defense
or settlement, compromise, admission, or acknowledgment of any third-party
action (i) as to which the Indemnifying Party fails to assume the defense
within a reasonable length of time; or (ii) to the extent the third-party
action seeks an order, injunction, or other equitable relief against the
Indemnified Party which, if successful, would materially adversely affect
the business, operations, assets, or financial condition of the Indemnified
Party; provided, however, that the Indemnified Party shall make no
settlement, compromise, admission, or acknowledgment that would give rise
to liability on the part of any Indemnifying Party without the prior
written consent of such Indemnifying Party.
The parties hereto shall extend reasonable cooperation in connection with
the defense of any third-party action pursuant to this Article VIII and, in
connection therewith, shall furnish such records, information, and testimony and
attend such conferences, discovery proceedings, hearings, trials, and appeals as
may be reasonably requested.
SECTION 8.4 Direct Claims. In any case in which an Indemnified Party seeks
indemnification hereunder which is not subject to Section 8.3 because no
third-party action is involved, the Indemnified Party shall notify the
Indemnifying Party in writing of any Indemnified Costs which such Indemnified
Party claims are subject to indemnification under the terms hereof. The failure
of the Indemnified Party to exercise promptness in such notification shall not
amount to a waiver of such claim unless the resulting delay materially
prejudices the position of the Indemnifying Party with respect to such claim.
SECTION 8.5 Tax Related Adjustments. The Company and Purchaser agree that
any payment of Indemnified Costs made hereunder will be treated by the parties
on their Tax Returns as an adjustment to the Purchase Price. If, notwithstanding
such treatment by the parties, any payment of Indemnified Costs is determined to
be taxable income rather than adjustment to Purchase Price and counsel to the
Indemnified Party shall have advised the Indemnified Party and the Indemnifying
Counsel in writing thereof, then the Indemnifying Party shall indemnify the
Indemnified Party for any Taxes payable by the Indemnified Party or any
subsidiary by reason of the receipt of such payment (including any payments
under this Section 8.5), determined at an assumed marginal tax rate equal to the
highest marginal tax rate then in effect for corporate taxpayers in the relevant
jurisdiction.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Survival of Provisions. The representations, warranties and
covenants (including the indemnification obligations) of the Company and
Purchaser made herein or in any other Transaction Document shall remain
operative and in full force and effect pursuant to their terms regardless of (a)
any investigation made by or on behalf of Purchaser or the Company, as the case
may be, or (b) acceptance of any of the Shares and payment by Purchaser
therefor.
SECTION 9.2 No Waiver; Modification in Writing. No failure or delay on the
part of the Company or a Purchaser in exercising any right, power or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. The
remedies provided for herein are cumulative and are not exclusive of any
remedies that may be available to the Company or Purchaser at law or in equity.
The provisions of this Agreement, including the provisions of this sentence, may
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given without the written consent of the
Company, on the one hand, and Purchaser or its permitted assigns, on the other
hand, provided that notice of any such waiver shall be given to each party
hereto as set forth below. Any amendment, supplement or modification of or to
any provision of this Agreement, or any waiver of any provision of this
Agreement, shall be effective only in the specific instance and for the specific
purpose for which made or given. Except where notice is specifically required by
this Agreement, no notice to or demand on any party hereto in any case shall
entitle the other party to any other or further notice or demand in similar or
other circumstances.
SECTION 9.3 Specific Performance. The parties recognize that in the event
the Company should refuse to perform under the provisions of this Agreement or
any other Transaction Document, monetary damages alone will not be adequate.
Purchaser shall therefore be entitled, in addition to any other remedies which
may be available, including money damages, to obtain specific performance of the
terms of this Agreement. In the event of any action to enforce this Agreement or
any other Transaction Document specifically, the Company hereby waive the
defense that there is an adequate remedy at law.
SECTION 9.4 Severability. If any term or other provision of this Agreement
is invalid, illegal, or incapable of being enforced by any rule of applicable
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated herein are not affected in any
manner materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal, or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated herein are
consummated as originally contemplated to the fullest extent possible.
SECTION 9.5 Fees and Expenses.
(a) At the Closing pursuant to Sections 6.2(b)(iv), the Company shall
pay to Purchaser an amount equal to the Purchaser's Expenses incurred
through the Closing Date in connection with the transactions contemplated
by this Agreement.
(b) Concurrently with a termination of this Agreement pursuant to
Section 7.1(b)(ii), (iii) or (iv) by the Purchaser or the Company (and as a
condition to any such termination by the Company), the Company shall pay to
Purchaser by wire transfer of immediately available funds an amount equal
to the Purchaser's Expenses.
(c) If this Agreement is terminated pursuant to Section 7.1(b)(iii) by
the Purchaser or the Company, and within one year of such termination
definitive documentation with respect to an Alternative Transaction has
been entered into or 50% or more of the outstanding Common Stock has been
acquired pursuant to a tender or exchange offer in connection with an
Alternative Transaction, then
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the Company shall pay $3,000,000 to Purchaser in immediately available
funds within three Business Days after the occurrence of such event.
(d) Pursuant to the terms of the Financial Advisory Agreement, the
Company paid to HMCo a transaction fee of $1,250,000 by wire transfer of
immediately available funds concurrently with the execution of the Original
Agreement. If the shareholders of the Company shall have approved the Share
Issuance and the Articles of Amendment on or before December 31, 1998, the
Company shall pay HMCo a transaction fee in the amount of $8,750,000 by
wire transfer of immediately available funds on the Closing Date. If the
shareholders of the Company shall not have approved the Share Issuance and
the Articles of Amendment on or before December 31, 1998, the Company shall
pay HMCo a transaction fee of $8,750,000 in immediately available funds on
December 31, 1998; provided however, that the Company may elect to pay such
transaction fee by delivering to HMCo the amount of $3,750,000 in cash by
wire transfer of immediately available funds and by issuing to HMCo
1,000,000 shares of Common Stock; provided that such shares shall have been
approved for listing on Nasdaq and that all other Approvals with respect to
the issuance of such shares shall have been received.
Except as otherwise expressly provided in this Agreement or as provided by Law,
all reasonable costs and expenses (including legal fees and expenses) incurred
by Purchaser in connection with the consummation of the transactions
contemplated hereby and by the other Transaction Documents shall be borne solely
and entirely by the Company in addition to its own such costs and expenses.
SECTION 9.6 Parties in Interest. This Agreement shall be binding upon and,
except as provided below, inure solely to the benefit of each party hereto and
their successors and assigns, and nothing in this Agreement, except as set forth
in Section 4.9 (which is expressly intended for the benefit of the Covered
Parties and shall be enforceable by any of the Covered Parties or any of their
respective heirs and representatives) and Article VIII which is intended for the
benefit of all Indemnified Parties, express or implied, is intended to confer
upon any other person any rights or remedies of any nature whatsoever under or
by reason of this Agreement.
SECTION 9.7 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) If to Purchaser, to:
HM 4 Coho, L.P.
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Attention: Lawrence D. Stuart, Jr.
Facsimile: (214) 740-7313
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: Michael D. Wortley
Facsimile: (214) 999-7732
(b) If to the Company, to:
Coho Energy, Inc.
14785 Preston Road, Suite 860
Dallas, Texas 75240
Attention: President
Facsimile: (972) 991-2257
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with a copy to:
Fulbright & Jaworski L.L.P.
2200 Ross Avenue, Suite 2800
Dallas, Texas 75201
Attention: Harva Dockery
Facsimile: (214) 855-8200
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be deemed received on the date of delivery,
if hand delivered, on the date of receipt, if telecopied, three Business Days
after the date of mailing, if mailed by registered or certified mail, return
receipt requested, and one Business Day after the date of sending, if sent by
Federal Express or other recognized overnight courier.
SECTION 9.8 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
SECTION 9.9 Entire Agreement. This Agreement (which term shall be deemed
to include the Exhibits and Schedules hereto and the other certificates,
documents and instruments delivered hereunder) constitutes the entire agreement
of the parties hereto and supersedes all prior agreements, letters of intent and
understandings, both written and oral, among the parties with respect to the
subject matter hereof. There are no representations or warranties, agreements,
or covenants other than those expressly set forth in this Agreement.
SECTION 9.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW PROVISIONS.
SECTION 9.11 Public Announcements. The Company, on the one hand, and
Purchaser, on the other, shall consult with each other before issuing any press
release or otherwise making any public statements with respect to this Agreement
or the transactions contemplated hereby, except for statements required by Law
or by any listing agreements with any national securities exchange or the
National Association of Securities Dealers, Inc., or made in disclosures filed
pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934.
SECTION 9.12 Assignment. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be assigned by any of the parties
hereto, whether by operation of Law or otherwise; provided, however, that upon
notice to the Company, (a) Purchaser may assign or delegate any or all of its
rights or obligations under this Agreement to any Affiliate thereof and (b)
nothing in this Agreement shall limit Purchaser's ability to make a collateral
assignment of its rights under this Agreement to any institutional lender that
provides funds to Purchaser without the consent of the Company. The Company
shall execute an acknowledgment of such collateral assignments in such forms as
Purchaser's lenders may from time to time reasonably request; provided, however,
that unless written notice is given to the Company that any such collateral
assignment has been foreclosed upon, the Company shall be entitled to deal
exclusively with Purchaser as to any matters arising under this Agreement or any
of the other agreements delivered pursuant hereto. In the event of such an
assignment, the provisions of this Agreement shall inure to the benefit of and
be binding on Purchaser's assigns. Any attempted assignment in violation of this
Section shall be null and void.
SECTION 9.13 Director and Officer Liability. The directors, officers, and
stockholders of Purchaser and its Affiliates shall not have any personal
liability or obligation arising under this Agreement (including any claims that
the Company may assert) other than as an assignee of this Agreement.
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SECTION 9.14 Effect of Amendment and Restatement. This Agreement
constitutes an amendment and restatement of the Original Agreement pursuant to
Section 9.2 of the Original Agreement. The Company and the Purchaser hereby
agree that the Original Agreement shall hereinafter be void and of no further
force or effect. References to the "Stock Purchase Agreement" contained in any
other instrument or document referenced in or executed in conjunction with the
Original Agreement shall mean this Agreement.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its duly authorized officer as of the date first written above to
be effective as of August 21, 1998.
COHO ENERGY, INC.
By: /s/ ANNE MARIE O'GORMAN
---------------------------------
Anne Marie O'Gorman
Senior Vice President
HM 4 COHO, L.P.
By: Hicks, Muse Fund IV LLC,
its general partner
By: /s/ DANIEL S. DROSS
---------------------------------
Daniel S. Dross
Senior Vice President
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EXHIBIT A
FORM OF
AMENDED AND RESTATED
SHAREHOLDER AGREEMENT
THIS AMENDED AND RESTATED SHAREHOLDER AGREEMENT (this "Agreement"), dated
as of 1998, is entered into by and between Coho Energy, Inc., a Texas
corporation (the "Company"), HM 4 Coho, L.P., a Texas limited partnership
("Purchaser"), and Energy Investment Partnership No. 1, a Texas general
partnership ("EIP"). Purchaser and EIP are each referred to herein as a
"Holder."
RECITALS
WHEREAS, EIP and the Company entered into a prior Shareholder Agreement
dated May 12, 1998 (the "Original Agreement"), and in connection with an equity
investment in the Company by Purchaser the parties desire to amend and restate
the prior agreement in its entirety as follows:
AGREEMENT
Now, therefor, in consideration of the premises, mutual covenants and
agreements hereinafter contained and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions.
"Advice" shall have the meaning provided in Section 3.5 hereof.
"Affiliate" means, with respect to any Person, any Person who, directly or
indirectly, controls, is controlled by or is under common control with that
Person.
"Affiliated Group", with respect to any Person, means such Person and each
Affiliate and Associate (within the meaning of Rule 12b-2 promulgated under the
Exchange Act) of such Person and each other Person with whom such Person is
acting "as a partnership, limited partnership, syndicate, or other group for the
purpose of acquiring, holding, or disposing of " shares (within the meaning of
Section 13(d)(3) of the Exchange Act, regardless of whether the Company shall at
any time be subject to the requirements of the Exchange Act).
"Agreement" means this Amended and Restated Shareholder Agreement, as such
from time to time may be amended.
"Common Stock" means shares of the Common Stock, $0.01 par value per share,
of the Company, and any capital stock into which such Common Stock thereafter
may be changed.
"Common Stock Equivalents" means, without duplication with any other Common
Stock or Common Stock Equivalents, any rights, warrants, options, convertible
securities or indebtedness, exchangeable securities or indebtedness, or other
rights, exercisable for or convertible or exchangeable into, directly or
indirectly, Common Stock of the Company and securities convertible or
exchangeable into Common Stock of the Company, whether at the time of issuance
or upon the passage of time or the occurrence of some future event.
"Company" shall have the meaning set forth in the introductory paragraph
hereof.
"Demand Registration" shall have the meaning set forth in Section 3.1.1
hereof.
"Demand Request" shall have the meaning set forth in Section 3.1.1 hereof.
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"EIP" shall have the meaning set forth in the introductory paragraph
hereof.
"EIP Designee" shall have the meaning set forth in Section 2.1.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Excluded Registration" means a registration under the Securities Act of
(i) securities registered on Form S-8 or any similar successor form and (ii)
securities registered to effect the acquisition of or combination with another
Person.
"Holder" shall have the meaning set forth in the introductory paragraph
hereof and shall include any direct or indirect transferee of a Holder who shall
elect to become a party to this Agreement and also shall include Hicks, Muse &
Co. Partners, L.P. if such entity receives shares of Common Stock pursuant to
Section 9.5(d) of the Stock Purchase Agreement. "Holders" shall mean each Holder
collectively. If at any time there is more than one Holder, except as otherwise
specifically set forth in this Agreement, any notices, designations, consents,
or similar actions to be taken by the Holder or Holders hereunder shall be taken
by Holders who own a majority of shares of Common Stock owned by all Holders.
"Holder Designee" shall have the meaning provided in Section 2.1.1 hereof.
"Inspectors" shall have the meaning provided in Section 3.4 hereof.
"Material Adverse Effect" shall have the meaning provided in Section 3.1.4
hereof.
"NASD" shall have the meaning provided in Section 3.4 hereof.
"Original Agreement" shall have the meaning set forth in the first recital
hereof.
"Other Registrable Shares" shall have the meaning provided in Section 3.1.4
hereof.
"Person" or "person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or other agency or political
subdivision thereof.
"Purchaser" shall have the meaning set forth in the introductory paragraph
hereof.
"Purchaser Designee" shall have the meaning set forth in Section 2.1.1.
"Records" shall have the meaning provided in Section 3.4 hereof.
"Registrable Shares" means at any time the shares of Common Stock of the
Company owned by the Holder or Holders whether owned on the date hereof or
acquired hereafter; provided, however, that Registrable Shares shall not include
any shares (x) the sale of which has been registered pursuant to the Securities
Act and which shares have been sold pursuant to such registration, or (y) which
have been sold to the public pursuant to Rule 144 of the SEC under the
Securities Act.
"Registration Expenses" shall have the meaning provided in Section 3.6
hereof.
"Requesting Holder" shall have the meaning provided in Section 3.1.1
hereof.
"Required Filing Date" shall have the meaning provided in Section 3.1.1(b)
hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.
"Seller Affiliates" shall have the meaning provided in Section 3.7.1
hereof.
"Stock Purchase Agreement" means that certain Amended and Restated Stock
Purchase Agreement effective as of August 21, 1998 between Purchaser and the
Company.
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"Subsidiary" of any Person means (i) a corporation a majority of whose
outstanding shares of capital stock or other equity interests with voting power,
under ordinary circumstances, to elect directors is at the time, directly or
indirectly, owned by such Person, by one or more subsidiaries of such Person or
by such Person and one or more subsidiaries of such Person, and (ii) any other
Person (other than a corporation) in which such Person, a subsidiary of such
Person or such Person and one or more subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has (x) at least a majority
ownership interest or (y) the power to elect or direct the election of the
directors or other governing body of such Person.
"Suspension Notice" shall have the meaning provided in Section 3.5 hereof.
SECTION 1.2 Rules of Construction. Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) "or" is not exclusive;
(3) words in the singular include the plural, and words in the plural
include the singular;
(4) provisions apply to successive events and transactions; and
(5) "herein," "thereof" and other words of similar import refer to
this Agreement as a whole and not to any particular Article, Section or
other subdivision.
ARTICLE 2
MANAGEMENT OF THE COMPANY AND CERTAIN ACTIVITIES
SECTION 2.1 Board of Directors.
2.1.1 Board Representation. Concurrently with the execution of the
Original Agreement, the Company caused two nominees of EIP to be appointed to
the Board of Directors of the Company (each, an "EIP Designee"). Pursuant to the
terms of the Stock Purchase Agreement, at the Closing (as defined in such
agreement) the Company shall cause the size of the Board of Directors of the
Company to be increased to nine members and cause two nominees of Purchaser
(each, a "Purchaser Designee" and, together with the EIP Designees, the "Holder
Designees") be to elected or appointed to the Board of Directors. For the
purposes of this Article 2, the term "EIP" shall include any Holders that become
Holders by being transferees of EIP and the term "Purchaser" shall include any
Holders that become Holders by being transferees of Purchaser. The Board of
Directors of the Company shall also take all actions necessary to ensure that a
Purchaser Designee (in addition to the existing EIP Designee) is appointed to
the Compensation Committee and Audit Committee of the Board of Directors, and,
if established, the Executive Committee of the Board of Directors. Each Holder
Designee shall serve until the next annual meeting of shareholders of the
Company and until their respective successors are elected and qualified or until
their earlier death, resignation or removal from office. The Company agrees to
continue to cause two EIP Designees and two Purchaser Designees to be nominated
for election to the Board of Directors of the Company at each annual meeting of
the Company's shareholders after the Closing. The Holders agree that no Holder
Designee shall be a director or officer of an independent exploration and
production company that could reasonably be viewed as a competitor of the
Company. To the extent the Company's proxy statement for any annual meeting of
shareholders includes a recommendation regarding the election of any other
nominees to the Company's Board of Directors, the Company agrees to include a
recommendation of its Board of Directors that the shareholders also vote in
favor of the Holders' nominees. The Company shall appoint an EIP Designee and a
Purchaser Designee serving on the Company's Board of Directors to be members of
the Compensation Committee and Audit Committee of the Board of Directors and, if
established, the Executive Committee of the Board of Directors. The Company
shall ensure that the articles of incorporation and bylaws of the Company as in
effect immediately following the date hereof do not, at any time thereafter,
conflict in any respect with the provisions of this Agreement.
2.1.2 Vacancies. If, prior to his election to the Board of Directors of
the Company pursuant to Section 2.1.1 hereof, any Holder Designee shall be
unable or unwilling to serve as a director of the Company,
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then EIP or Purchaser, as the case may be, shall be entitled to nominate a
replacement who shall then be an EIP or Purchaser Designee, as the case may be,
for purposes of this Section 2. If, following an election or appointment to the
Board of Directors of the Company pursuant to Section 2.1.1 hereof, any Holder
Designee shall resign or be removed or be unable to serve for any reason prior
to the expiration of his term as a director of the Company, then EIP or
Purchaser, as the case may be, shall, within 30 days of such event, notify the
Board of Directors of the Company in writing of a replacement Holder Designee,
and the Company shall cause such replacement Holder Designee to be appointed to
the Board of Directors of the Company and each applicable committee thereof to
fill the unexpired term of the Holder Designee who such new Holder Designee is
replacing.
2.1.3 Termination of Rights. The right of EIP to designate directors under
Section 2.1.1 shall terminate upon the first to occur of (i) the termination of
this Agreement, (ii) such time as EIP elects in writing to terminate its rights
under this Article 2, or (iii) such time as EIP and its respective Affiliates
cease to own at least 1,000,000 shares of Common Stock (such number of shares to
be appropriately adjusted to reflect stock splits, stock dividends,
recapitalizations, or other changes to the Common Stock). The right of Purchaser
to designate directors under Section 2.1.1 shall terminate upon the first to
occur of (i) the termination of this Agreement, (ii) such time as Purchaser
elects in writing to terminate its rights under this Article 2, or (iii) such
time as Purchaser (which for the purposes of this clause (iii) shall mean HM4
Coho, L.P. only) and its Affiliates cease to own at least 5% of the outstanding
shares of Common Stock and (B) any single Holder (and Affiliates thereof) that
became a Holder by being a transferee of Purchaser shall not own at least 5% of
the outstanding shares of Common Stock. In addition, from and after any time at
which EIP or any single transferee or group of related transferees of EIP ceases
to own at least 1,000,000 shares of Common Stock and Purchaser and its
respective Affiliates or any single transferee or group of related transferees
of Purchaser or its Affiliates continue to own at least 5% of the outstanding
shares of Common Stock, EIP shall cease to have the right to designate any
Holder Designees and Purchaser shall have the right to designate four Holder
Designees, unless or until such time as Purchaser's right to designate directors
has terminated pursuant to the provisions of the preceding sentence.
2.1.4 Costs and Expenses. The Company will pay all reasonable
out-of-pocket expenses incurred by the Holder Designees in connection with their
participation in meetings of the Board of Directors (and committees thereof) of
the Company and the Boards of Directors (and committees thereof) of the
Subsidiaries of the Company.
2.2 Other Activities of the Holder; Fiduciary Duties. It is understood and
accepted that the Holders and their Affiliates have interests in other business
ventures which may be in conflict with the activities of the Company and its
Subsidiaries and that, subject to applicable law, nothing in this Agreement
shall limit the current or future business activities of the Holders or their
Affiliates whether or not such activities are competitive with those of the
Company and its Subsidiaries. Nothing in this Agreement, express or implied,
shall relieve any officer or director of the Company (including any designee of
a Holder pursuant to Section 2.1.1) or any of its Subsidiaries of any fiduciary
or other duties or obligations they may have to the Company's shareholders.
ARTICLE 3
REGISTRATION RIGHTS
SECTION 3.1 Demand Registration.
3.1.1 Request for Registration.
(a) At any time one or more Holders may request the Company, in writing (a
"Demand Request"), to effect the registration under the Securities Act of all or
part of its or their Registrable Shares (a "Demand Registration"); provided that
the Registrable Shares proposed to be sold by the Holders requesting a Demand
Registration (the "Requesting Holders," which term shall include parties deemed
"Requesting Holders" pursuant to Section 3.1.5 hereof) represent, in the
aggregate, more than 20% of the total number of Registrable Shares held by all
Holders.
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(b) Each Demand Request shall specify the number of Registrable Shares
proposed to be sold. Subject to Section 3.1.6, the Company shall file the Demand
Registration within 30 days after receiving a Demand Request (the "Required
Filing Date") and shall use all commercially reasonable efforts to cause the
same to be declared effective by the SEC as promptly as practicable after such
filing; provided, that the Company need effect only five Demand Registrations;
provided, further, that if any Registrable Shares requested to be registered
pursuant to a Demand Request under this Section 3.1 are excluded from a
registration pursuant to Section 3.1.4 below, the Holders shall have the right,
with respect to each such exclusion, to one additional Demand Registration under
this Section 3.1 with respect to such excluded Registrable Shares.
3.1.2 Effective Registration and Expenses. A registration will not count
as a Demand Registration until it has become effective (unless (i) the
Requesting Holders withdraw all their Registrable Shares, (ii) the Company has
performed its obligations hereunder in all material respects and (iii) there has
not been any event, change or effect which, individually or in the aggregate,
has had or would be reasonably likely to have a material adverse effect on the
business, operations, prospects, assets, condition (financial or otherwise) or
results of operations of the Company, in which case such demand will count as a
Demand Registration unless the Requesting Holders pay all Registration Expenses,
as hereinafter defined, in connection with such withdrawn registration);
provided, that if, after it has become effective, an offering of Registrable
Shares pursuant to a registration is interfered with by any stop order,
injunction, or other order or requirement of the SEC or other governmental
agency or court, such registration will be deemed not to have been effected and
will not count as a Demand Registration. Subject to the following sentence, in
the event that a Demand Request is made by a Holder that is subsequently
withdrawn by that Holder, all Registration Expenses incurred in connection
therewith shall be borne by that Holder and such withdrawn Demand Request shall
not be counted as a Demand Registration in determining the number of Demand
Registrations to which the Holders are entitled pursuant to Section 3.1.1(b). In
the event that a Demand Request is made by a Holder that is subsequently
withdrawn by that Holder, all Registration Expenses shall be borne by the
Company if (i) the Company has not performed its obligations hereunder in all
material respects or (ii) there has been any event, change or effect which,
individually or in the aggregate, has had or would be reasonably likely to have
a material adverse effect on the business, operations, prospects, assets,
condition (financial or otherwise) or results of operations of the Company; and
in such case a withdrawn Demand Request shall not be counted as a Demand
Registration in determining the number of Demand Registrations to which the
Holders are entitled pursuant to Section 3.1.1(b).
3.1.3 Selection of Underwriters. The offering of Registrable Shares
pursuant to a Demand Registration shall be in the form of a "firm commitment"
underwritten offering. The Requesting Holders of a majority of the Registrable
Shares to be registered in a Demand Registration shall select the investment
banking firm or firms to manage the underwritten offering; provided that such
selection shall be subject to the consent of the Company, which consent shall
not be unreasonably withheld.
3.1.4 Priority on Demand Registrations. No securities to be sold for the
account of any Person (including the Company) other than a Requesting Holder and
the holders of the Other Registrable Shares shall be included in a Demand
Registration unless the managing underwriter or underwriters shall advise the
Requesting Holders in writing that the inclusion of such securities will not
materially and adversely affect the price or success of the offering (a
"Material Adverse Effect"). Furthermore, in the event the managing underwriter
or underwriters shall advise the Requesting Holders that even after exclusion of
all securities of other Persons pursuant to the immediately preceding sentence,
the amount of Registrable Shares proposed to be included in such Demand
Registration by Requesting Holders and the holders of the Other Registrable
Shares is sufficiently large to cause a Material Adverse Effect, the Registrable
Shares of the Requesting Holders and the holders of the Other Registrable Shares
to be included in such Demand Registration shall equal the number of shares
which the Requesting Holders are so advised can be sold in such offering without
a Material Adverse Effect and such shares shall be allocated pro rata among the
Requesting Holders and the holders of Other Registrable Shares on the basis of
the number of Registrable Shares held by the Requesting Holders and the number
of shares owned by holders of Other Registrable Shares who have requested shares
to be included in such registration. The term "Other Registrable Shares" shall
mean shares of Common Stock that the Company has a contractual obligation to
register the offer and sale of in a Demand Registration
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pursuant to a validly existing registration rights or similar agreement in
effect on the date of this Agreement (collectively the "Other Registration
Rights Agreements").
3.1.5 Rights of Nonrequesting Holders. Upon receipt of any Demand Request,
the Company shall promptly (but in any event within 10 days) give written notice
of such proposed Demand Registration to all other Holders and all holders of
Other Registrable Shares, who shall have the right, exercisable by written
notice to the Company within 15 days of their receipt of the Company's notice,
to elect to include in such Demand Registration such portion of their
Registrable Securities with respect to Holders and Other Registrable Shares with
respect to holders of Other Registrable Shares as they may request. All Holders
requesting to have their Registrable Shares included in a Demand Registration in
accordance with the preceding sentence shall be deemed to be "Requesting
Holders" for purposes of this Section 3.1.
3.1.6 Deferral of Filing. The Company may defer the filing (but not the
preparation) of a registration statement required by Section 3.1 until a date
not later than 180 days after the Required Filing Date (or, if longer, 180 days
after the effective date of the registration statement contemplated by clause
(ii) below) if (i) at the time the Company receives the Demand Request, the
Company or any of its Subsidiaries are engaged in confidential negotiations or
other confidential business activities, disclosure of which would be required in
such registration statement (but would not be required if such registration
statement were not filed), and the Board of Directors of the Company determines
in good faith that such disclosure would be materially detrimental to the
Company and its shareholders or would have a material adverse effect on any such
confidential negotiations or other confidential business activities, or (ii)
prior to receiving the Demand Request, the Board of Directors had determined to
effect a registered underwritten public offering of the Company's securities for
the Company's account and the Company had taken substantial steps (including,
but not limited to, selecting a managing underwriter for such offering) and is
proceeding with reasonable diligence to effect such offering. A deferral of the
filing of a registration statement pursuant to this Section 3.1.6 shall be
lifted, and the requested registration statement shall be filed forthwith, if,
in the case of a deferral pursuant to clause (i) of the preceding sentence, the
negotiations or other activities are disclosed or terminated, or, in the case of
a deferral pursuant to clause (ii) of the preceding sentence, the proposed
registration for the Company's account is abandoned. In order to defer the
filing of a registration statement pursuant to this Section 3.1.6, the Company
shall promptly (but in any event within 10 days), upon determining to seek such
deferral, deliver to each Requesting Holder and each holder of Other Registrable
Shares that requested the inclusion of shares in the Demand Registration a
certificate signed by an executive officer of the Company stating that the
Company is deferring such filing pursuant to this Section 3.1.6 and a general
statement of the reason for such deferral and an approximation of the
anticipated delay. Within 20 days after receiving such certificate, the holders
of a majority of the Registrable Shares held by the Requesting Holders and for
which registration was previously requested may withdraw such Demand Request by
giving notice to the Company; if withdrawn, the Demand Request shall be deemed
not to have been made for all purposes of this Agreement. The Company may defer
the filing of a particular registration statement pursuant to this Section 3.1.6
only once.
SECTION 3.2 Piggyback Registrations.
3.2.1 Right to Piggyback. Each time the Company proposes to register any
of its equity securities (other than pursuant to an Excluded Registration) under
the Securities Act for sale to the public (whether for the account of the
Company or the account of any securityholder of the Company) or proposes to make
such an offering of equity securities pursuant to a previously filed
registration statement pursuant to Rule 415 under the Securities Act (such as a
"universal shelf" registration statement) and the form of registration statement
to be used permits the registration of Registrable Shares, the Company shall
give prompt written notice to each Holder of Registrable Shares (which notice
shall be given not less than 30 days prior to the effective date of the
Company's registration statement), which notice shall offer each such Holder the
opportunity to include any or all of its or his Registrable Shares in such
registration statement, subject to the limitations contained in Section 3.2.2
hereof. Each Holder who desires to have its or his Registrable Shares included
in such registration statement shall so advise the Company in writing (stating
the number of shares desired to be registered) within 20 days after the date of
such notice from the Company. Any Holder shall have the right to withdraw such
Holder's request for inclusion of such Holder's Registrable Shares in any
registration statement
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pursuant to this Section 3.2.1 by giving written notice to the Company of such
withdrawal. Subject to Section 3.2.2 below, the Company shall include in such
registration statement all such Registrable Shares so requested to be included
therein; provided, however, that the Company may at any time withdraw or cease
proceeding with any such registration if it shall at the same time withdraw or
cease proceeding with the registration of all other equity securities originally
proposed to be registered.
3.2.2 Priority on Registrations. If the Registrable Shares requested to be
included in the registration statement by any Holder differ from the type of
securities proposed to be registered by the Company and the managing underwriter
advises the Company that due to such differences the inclusion of such
Registrable Shares would cause a Material Adverse Effect, then (i) the number of
such Holder's or Holders' Registrable Shares to be included in the registration
statement shall be reduced to an amount which, in the judgment of the managing
underwriter, would eliminate such Material Adverse Effect or (ii) if no such
reduction would, in the judgment of the managing underwriter, eliminate such
Material Adverse Effect, then the Company shall have the right to exclude all
such Registrable Shares from such registration statement provided no other
securities of such type are included and offered for the account of any other
Person in such registration statement. Any partial reduction in number of
Registrable Shares to be included in the registration statement pursuant to
clause (i) of the immediately preceding sentence shall be effected pro rata
based on the ratio which such Holder's requested shares bears to the total
number of shares requested to be included in such registration statement by all
Persons who have requested that their shares be included in such registration
statement. If the Registrable Shares requested to be included in the
registration statement are of the same type as the securities being registered
by the Company and the managing underwriter advises the Company that the
inclusion of such Registrable Shares would cause a Material Adverse Effect, the
Company will be obligated to include in such registration statement, as to each
Holder, only a portion of the shares such Holder has requested be registered
equal to the ratio which such Holder's requested shares bears to the total
number of shares requested to be included in such registration statement by all
Persons who have requested that their shares be included in such registration
statement. If the Company initiated the registration, then the Company may
include all of its securities in such registration statement before any of such
Holder's requested shares are included. If another securityholder initiated the
registration, then the Company may not include any of its securities in such
registration statement unless all Registrable Shares requested to be included in
the registration statement by all Holders are included in such registration
statement. If as a result of the provisions of this Section 3.2.2 any Holder
shall not be entitled to include all Registrable Securities in a registration
that such Holder has requested to be so included, such Holder may withdraw such
Holder's request to include Registrable Shares in such registration statement.
No Holder may participate in any registration statement hereunder unless such
Person (x) agrees to sell such Person's Registrable Shares on the basis provided
in any underwriting arrangements approved by the Company and (y) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements, and other documents reasonably required under the terms of such
underwriting arrangements; provided, however, that no such Person shall be
required to make any representations or warranties in connection with any such
registration other than representations and warranties as to (i) such Person's
ownership of his or its Registrable Shares to be sold or transferred free and
clear of all liens, claims, and encumbrances, (ii) such Person's power and
authority to effect such transfer, and (iii) such matters pertaining to
compliance with securities laws as may be reasonably requested; provided
further, however, that the obligation of such Person to indemnify pursuant to
any such underwriting arrangements shall be several, not joint and several,
among such Persons selling securities, and the liability of each such Person
will be in proportion to, and provided further that such liability will be
limited to, the net amount received by such Person from the sale of his or its
Registrable Shares pursuant to such registration.
3.3 Holdback Agreement. Unless the managing underwriter otherwise agrees,
each of the Company and the Holders agrees, and the Company agrees, in
connection with any underwritten registration, to use its reasonable efforts to
cause its Affiliates to agree, not to effect any public sale or private offer or
distribution of any Common Stock or Common Stock Equivalents during the ten
business days prior to the effectiveness under the Securities Act of any
underwritten registration and during such time period after the effectiveness
under the Securities Act of any underwritten registration (not to exceed 120
days) (except, if applicable, as part of such underwritten registration) as the
Company and the managing underwriter may agree.
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3.4 Registration Procedures. Whenever any Holder has requested that any
Registrable Shares be registered pursuant to this Agreement, the Company will
use its commercially reasonable efforts to effect the registration and the sale
of such Registrable Shares in accordance with the intended method of disposition
thereof, and pursuant thereto the Company will as expeditiously as possible:
(i) prepare and file with the SEC a registration statement on any
appropriate form under the Securities Act with respect to such Registrable
Shares and use its commercially reasonable efforts to cause such
registration statement to become effective;
(ii) prepare and file with the SEC such amendments, post-effective
amendments, and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 180 days (or
such lesser period as is necessary for the underwriters in an underwritten
offering to sell unsold allotments) and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
registration statement;
(iii) furnish to each seller of Registrable Shares and the
underwriters of the securities being registered such number of copies of
such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each
preliminary prospectus), any documents incorporated by reference therein
and such other documents as such seller or underwriters may reasonably
request in order to facilitate the disposition of the Registrable Shares
owned by such seller or the sale of such securities by such underwriters
(it being understood that, subject to Section 3.5 and the requirements of
the Securities Act and applicable state securities laws, the Company
consents to the use of the prospectus and any amendment or supplement
thereto by each seller and the underwriters in connection with the offering
and sale of the Registrable Shares covered by the registration statement of
which such prospectus, amendment or supplement is a part);
(iv) use its commercially reasonable efforts to register or qualify
such Registrable Shares under such other securities or blue sky laws of
such jurisdictions as the managing underwriter reasonably requests; use its
commercially reasonable efforts to keep each such registration or
qualification (or exemption therefrom) effective during the period in which
such registration statement is required to be kept effective; and do any
and all other acts and things which may be reasonably necessary or
advisable to enable each seller to consummate the disposition of the
Registrable Shares owned by such seller in such jurisdictions (provided,
however, that the Company will not be required to (A) qualify generally to
do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph or (B) consent to general service of
process in any such jurisdiction);
(v) promptly notify each seller and each underwriter and (if requested
by any such Person) confirm such notice in writing (A) when a prospectus or
any prospectus supplement or post-effective amendment has been filed and,
with respect to a registration statement or any post-effective amendment,
when the same has become effective, (B) of the issuance by any state
securities or other regulatory authority of any order suspending the
qualification or exemption from qualification of any of the Registrable
Shares under state securities or "blue sky" laws or the initiation of any
proceedings for that purpose, and (C) of the happening of any event which
makes any statement made in a registration statement or related prospectus
untrue or which requires the making of any changes in such registration
statement, prospectus or documents so that they will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and, as promptly as practicable thereafter, prepare and file
with the SEC and furnish a supplement or amendment to such prospectus so
that, as thereafter deliverable to the purchasers of such Registrable
Shares, such prospectus will not contain any untrue statement of a material
fact or omit a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(vi) if requested by the managing underwriter or any seller promptly
incorporate in a prospectus supplement or post-effective amendment such
information as the managing underwriter or any seller
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reasonably requests to be included therein, including, without limitation,
with respect to the Registrable Shares being sold by such seller, the
purchase price being paid therefor by the underwriters and with respect to
any other terms of the underwritten offering of the Registrable Shares to
be sold in such offering, and promptly make all required filings of such
prospectus supplement or post-effective amendment;
(vii) as promptly as practicable after filing with the SEC of any
document which is incorporated by reference into a registration statement
(in the form in which it was incorporated), deliver a copy of each such
document to each seller;
(viii) cooperate with the sellers and the managing underwriter to
facilitate the timely preparation and delivery of certificates (which shall
not bear any restrictive legends unless required under applicable law)
representing securities sold under any registration statement, and enable
such securities to be in such denominations and registered in such names as
the managing underwriter or such sellers may request and keep available and
make available to the Company's transfer agent prior to the effectiveness
of such registration statement a supply of such certificates;
(ix) promptly make available for inspection by any seller, any
underwriter participating in any disposition pursuant to any registration
statement, and any attorney, accountant or other agent or representative
retained by any such seller or underwriter (collectively, the
"Inspectors"), all financial and other records, pertinent corporate
documents and properties of the Company (collectively, the "Records"), as
shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information requested by any such Inspector in
connection with such registration statement; provided, that, unless the
disclosure of such Records is necessary to avoid or correct a misstatement
or omission in the registration statement or the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, the Company shall not be required to provide any information
under this subparagraph (x) if (A) the Company believes, after consultation
with counsel for the Company, that to do so would cause the Company to
forfeit an attorney-client privilege that was applicable to such
information or (B) if either (1) the Company has requested and been granted
from the SEC confidential treatment of such information contained in any
filing with the SEC or documents provided supplementally or otherwise or
(2) the Company reasonably determines in good faith that such Records are
confidential and so notifies the Inspectors in writing unless prior to
furnishing any such information with respect to (A) or (B) such Holder of
Registrable Securities requesting such information agrees to enter into a
confidentiality agreement in customary form and subject to customary
exceptions; and provided, further that each Holder of Registrable
Securities agrees that it will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction, give notice to the
Company and allow the Company at its expense, to undertake appropriate
action and to prevent disclosure of the Records deemed confidential;
(x) furnish to each seller underwriter a signed counterpart of (A) an
opinion or opinions of counsel to the Company, and (B) a comfort letter or
comfort letters from the Company's independent public accountants, each in
customary form and covering such matters of the type customarily covered by
opinions or comfort letters, as the case may be, as the sellers or managing
underwriter reasonably requests;
(xi) cause the Registrable Shares included in any registration
statement to be (A) listed on each securities exchange, if any, on which
similar securities issued by the Company are then listed, or (B) authorized
to be quoted and/or listed (to the extent applicable) on the National
Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") or
the NASDAQ National Market System if the Registrable Shares so qualify;
(xii) provide a CUSIP number for the Registrable Shares included in
any registration statement not later than the effective date of such
registration statement;
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(xiii) cooperate with each seller and each underwriter participating
in the disposition of such Registrable Shares and their respective counsel
in connection with any filings required to be made with the National
Association of Securities Dealers, Inc. ("NASD");
(xiv) during the period when the prospectus is required to be
delivered under the Securities Act, promptly file all documents required to
be filed with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act;
(xv) notify each seller of Registrable Shares promptly of any request
by the SEC for the amending or supplementing of such registration statement
or prospectus or for additional information;
(xvi) prepare and file with the SEC promptly any amendments or
supplements to such registration statement or prospectus which, in the
opinion of counsel for the Company or the managing underwriter, is required
in connection with the distribution of the Registrable Shares;
(xvii) enter into such agreements (including underwriting agreements
in the managing underwriter's customary form) as are customary in
connection with an underwritten registration; and
(xviii) advise each seller of such Registrable Shares, promptly after
it shall receive notice or obtain knowledge thereof, of the issuance of any
stop order by the SEC suspending the effectiveness of such registration
statement or the initiation or threatening of any proceeding for such
purpose and promptly use its best efforts to prevent the issuance of any
stop order or to obtain its withdrawal at the earliest possible moment if
such stop order should be issued.
3.5 Suspension of Dispositions. Each Holder agrees by acquisition of any
Registrable Shares that, upon receipt of any notice (a "Suspension Notice") from
the Company of the happening of any event of the kind described in Section
3.4(v)(C), such Holder will forthwith discontinue disposition of Registrable
Shares until such Holder's receipt of the copies of the supplemented or amended
prospectus, or until it is advised in writing (the "Advice") by the Company that
the use of the prospectus may be resumed, and has received copies of any
additional or supplemental filings which are incorporated by reference in the
prospectus, and, if so directed by the Company, such Holder will deliver to the
Company all copies, other than permanent file copies then in such Holder's
possession, of the prospectus covering such Registrable Shares current at the
time of receipt of such notice. In the event the Company shall give any such
notice, the time period regarding the effectiveness of registration statements
set forth in Section 3.4(ii) hereof shall be extended by the number of days
during the period from and including the date of the giving of the Suspension
Notice to and including the date when each seller of Registrable Shares covered
by such registration statement shall have received the copies of the
supplemented or amended prospectus or the Advice. The Company shall use its
commercially reasonable efforts and take such actions as are reasonably
necessary to render the Advice as promptly as practicable.
3.6 Registration Expenses. All expenses incident to the Company's
performance of or compliance with this Article 3, including, without limitation,
(i) all registration and filing fees, (ii) all fees and expenses associated with
filings required to be made with the NASD (including, if applicable, the fees
and expenses of any "qualified independent underwriter" as such term is defined
in Schedule E of the By-Laws of the NASD, and of its counsel), as may be
required by the rules and regulations of the NASD, (iii) fees and expenses of
compliance with securities or "blue sky" laws (including reasonable fees and
disbursements of counsel in connection with "blue sky" qualifications of the
Registrable Shares), (iv) rating agency fees, (v) printing expenses (including
expenses of printing certificates for the Registrable Shares in a form eligible
for deposit with Depository Trust Company and of printing prospectuses if the
printing of prospectuses is requested by a holder of Registrable Shares), (vi)
messenger and delivery expenses, (vii) the Company's internal expenses
(including without limitation all salaries and expenses of its officers and
employees performing legal or accounting duties), (viii) the fees and expenses
incurred in connection with any listing of the Registrable Shares, (ix) fees and
expenses of counsel for the Company and fees and expenses of the Company's
independent certified public accountants (including the expenses of any special
audit or "cold comfort" letters required by or incident to such performance),
(x) securities acts liability insurance (if the Company elects to obtain such
insurance), (xi) the fees and expenses of any special experts retained by the
Company in
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connection with such registration, (xii) the fees and expenses of other Persons
retained by the Company and (xiii) reasonable fees and expenses of one firm of
counsel for the sellers (which shall be selected by the holders of a majority of
the Registrable Shares being included in any particular registration statement)
(all such expenses being herein called "Registration Expenses"), subject to
Section 3.1.2, will be borne by the Company whether or not any registration
statement becomes effective; provided that, except as expressed otherwise
provided above, in no event shall Registration Expenses include any underwriting
discounts or commissions and transfer taxes.
3.7 Indemnification.
3.7.1 The Company agrees to indemnify and reimburse, to the fullest extent
permitted by law, each seller of Registrable Shares, and each of its employees,
advisors, agents, representatives, partners, officers, and directors and each
Person who controls such seller (within the meaning of the Securities Act or the
Exchange Act) and any agent or investment advisor thereof (collectively, the
"Seller Affiliates") (A) against any and all losses, claims, damages,
liabilities, and expenses, joint or several (including, without limitation,
attorneys' fees and disbursements except as limited by 3.7.3) based upon,
arising out of, related to or resulting from any untrue or alleged untrue
statement of a material fact contained in any registration statement,
prospectus, or preliminary prospectus relating to the offer and sale of
Registrable Shares, or any amendment thereof or supplement thereto, or any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) against any and all
loss, liability, claim, damage, and expense whatsoever, as incurred, to the
extent of the aggregate amount paid in settlement of any litigation or
investigation or proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon, arising out of, related to or
resulting from any such untrue statement or omission or alleged untrue statement
or omission, and (C) against any and all costs and expenses (including
reasonable fees and disbursements of counsel) as may be reasonably incurred in
investigating, preparing, or defending against any litigation, or investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon, arising out of, related to or resulting from
any such untrue statement or omission or alleged untrue statement or omission,
to the extent that any such expense or cost is not paid under subparagraph (A)
or (B) above; except insofar as the same are made in reliance upon and in strict
conformity with information furnished in writing to the Company by such seller
or any Seller Affiliate for use therein or arise from such seller's or any
Seller Affiliate's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such seller or Seller Affiliate with a sufficient number of copies of
the same. The reimbursements required by this Section 3.7.1 will be made by
periodic payments during the course of the investigation or defense, as and when
bills are received or expenses incurred.
3.7.2 In connection with any registration statement in which a seller of
Registrable Shares is participating, each such seller will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the fullest extent permitted by law, each such seller will
indemnify the Company and its directors and officers and each Person who
controls the Company (within the meaning of the Securities Act or the Exchange
Act) against any and all losses, claims, damages, liabilities, and expenses
(including, without limitation, reasonable attorneys' fees and disbursements
except as limited by Section 3.7.3) resulting from any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement, prospectus, or any preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission is contained in any information or
affidavit so furnished in writing by such seller or any of its Seller Affiliates
specifically for inclusion in the registration statement; provided that the
obligation to indemnify will be several, not joint and several, among such
sellers of Registrable Shares, and the liability of each such seller of
Registrable Shares will be in proportion to, and provided further that such
liability will be limited to, the net amount received by such seller from the
sale of Registrable Shares pursuant to such registration statement; provided,
however, that such seller of Registrable Shares shall not be liable in any such
case to the extent that prior to the filing of any such registration statement
or prospectus or amendment thereof or supplement
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thereto, such seller has furnished in writing to the Company information
expressly for use in such registration statement or prospectus or any amendment
thereof or supplement thereto which corrected or made not misleading information
previously furnished to the Company.
3.7.3 Any Person entitled to indemnification hereunder will (A) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give such notice
shall not limit the rights of such Person) and (B) unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that any Person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such Person unless (X) the
indemnifying party has agreed to pay such fees or expenses, or (Y) the
indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to such Person. If such defense is not
assumed by the indemnifying party as permitted hereunder, the indemnifying party
will not be subject to any liability for any settlement made by the indemnified
party without its consent (but such consent will not be unreasonably withheld).
If such defense is assumed by the indemnifying party pursuant to the provisions
hereof, such indemnifying party shall not settle or otherwise compromise the
applicable claim unless (1) such settlement or compromise contains a full and
unconditional release of the indemnified party or (2) the indemnified party
otherwise consents in writing. An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim.
3.7.4 Each party hereto agrees that, if for any reason the indemnification
provisions contemplated by Section 3.7.1 or Section 3.7.2 are unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages, liabilities, or expenses (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
liabilities, or expenses (or actions in respect thereof) in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and the
indemnified party in connection with the actions which resulted in the losses,
claims, damages, liabilities or expenses as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by such
indemnifying party or indemnified party, and the parties, relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 3.7.4 were determined by pro
rata allocation (even if the Holders or any underwriters or all of them were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in this
Section 3.7.4. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities, or expenses (or actions in respect
thereof) referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such indemnified party in connection with
investigating or, except as provided in Section 3.7.3, defending any such action
or claim. Notwithstanding the provisions of this Section 3.7.4, no Holder shall
be required to contribute an amount greater than the dollar amount by which the
proceeds received by such Holder with respect to the sale of any Registrable
Shares exceeds the amount of damages which such Holder has otherwise been
required to pay by reason of such statement or omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. The Holders' obligations in this
Section 3.7.4 to contribute shall be several in proportion to the amount of
Registrable Shares registered by them and not joint.
If indemnification is available under this Section 3.7, the indemnifying
parties shall indemnify each indemnified party to the full extent provided in
Section 3.7.1 and Section 3.7.2 without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable consideration
provided for in this Section 3.7.4.
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3.7.5 The indemnification and contribution provided for under this
Agreement will remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified party or any officer, director, or
controlling Person of such indemnified party and will survive the transfer of
securities.
3.8 Other Registration Rights. If compliance by the Company with any
provision of this Agreement would cause the Company to breach any provisions of
the Amended and Restated Registration Rights Agreement dated as of December 8,
1994 by and among the Company, Kenneth H. Lambert and Frederick K. Campbell (the
"Lambert Agreement") or the Stock Purchase Warrant to Purchase Shares of Common
Stock of COHO ENERGY, INC. issued to Amoco Corporation on December 18, 1997 (the
"Amoco Warrant"), then the provisions set forth in the Lambert Agreement or the
Amoco Warrant, as applicable, shall control, and the Company, in such case,
shall not be deemed to be in breach of this Agreement due to the Company's
compliance with such provision in the Lambert Agreement or the Amoco Warrant, as
applicable, and the Company's failure to comply with the applicable provisions
of this Agreement. Except for as set forth in the Lambert Agreement or the Amoco
Warrant, as applicable, no holder of Other Registrable Shares has priority
rights for inclusion in a Demand Registration that are inconsistent with the
terms of this Agreement. The Company shall not grant or amend any registration
rights after the date of this Agreement that would in any way diminish the
rights of the Holders hereunder, and any such registration rights shall be
granted or amended only if such rights are subordinate to or pari passu with the
rights of the Holders hereunder.
ARTICLE 4
TERMINATION
The provisions of this Agreement, unless earlier terminated pursuant to
their terms, shall terminate on the twentieth anniversary of the date of this
Agreement.
ARTICLE 5
LIMITATIONS ON CERTAIN TRANSACTIONS
SECTION 5.1 Limitations on Certain Transactions. Each Holder, severally
and not jointly, covenants and agrees with the Company that, for the period
commencing on the date hereof and terminating on May 11, 2000, it will not,
directly or indirectly, except as specifically permitted by this Article 5 or
unless specifically requested or permitted in writing by the Company's Board of
Directors:
(a) deposit any shares of Common Stock in a voting trust or grant any
proxy with respect to any shares of Common Stock to any Person not
designated by the Company (other than a Holder or any Affiliate or partner
of a Holder) or subject any shares of Common Stock to any arrangement or
agreement with respect to the voting of such shares of Common Stock; or
(b) act with one or more Persons (other than another Holder or any
Affiliate or partner of a Holder) as a partnership, limited partnership,
syndicate or "group" (as such term is used in Section 13(d)(3) of the
Exchange Act) for the purpose of acquiring, holding, voting or disposing of
shares of Common Stock.
No Holder shall, prior to May 12, 2000, directly or indirectly, (i) sell or
transfer, or offer to sell or transfer, shares of Common Stock that represent
more than 10% of the fully diluted common equity of the Company to any single
Person or Affiliated Group or (ii) sell or transfer, or offer to sell or
transfer, to any holder of 10% of the outstanding shares of Common Stock, shares
of Common Stock that represent more than 5% of the outstanding Common Stock of
the Company; provided, that the foregoing prohibition shall not apply to sales
or transfers (i) to any investment banking firm acting as an underwriter
pursuant to a public offering conducted in accordance with Article 3, (ii)
pursuant to a tender or exchange offer by any Person with respect to which the
Board of Directors of the Company shall have recommended acceptance or shall
have taken no position, (iii) pursuant to a merger or other business combination
involving the Company or (iv) to a Holder or any Affiliate or Partner of a
Holder.
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SECTION 5.2 Restrictive Legends.
(a) Each certificate representing restricted securities (as defined in Rule
144 promulgated under the Securities Act) shall be stamped with the following
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
CONVEYED EXCEPT IN COMPLIANCE THEREWITH.
(b) Each certificate representing shares of Common Stock shall also be
stamped with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF AN AGREEMENT BETWEEN CERTAIN SHAREHOLDERS AND THE
CORPORATION WHICH INCLUDES RESTRICTIONS ON CERTAIN SALES OF THE SECURITIES.
COPIES OF THE AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION.
(c) Each Holder consents to the Company's making a notation on its records
and giving instructions to any transfer agent of the shares of Common Stock to
implement the restrictions on transfers established in this Agreement.
(d) In the event that any shares referred to in Section 5.2(a) shall cease
to be restricted securities, the Company shall, upon the written request of the
holder thereof, issue to such holder a new certificate evidencing such shares
without the first paragraph of the legend required by Section 5.2(a) endorsed
thereon. In the event that any shares referred to in Section 5.2(a) shall cease
to be subject to the restrictions on transfer set forth in this Agreement, the
Company shall, upon the written request of the holder thereof, issue to such
holder a new certificate evidencing such shares without the second paragraph of
the legend required by Section 5.2(a).
SECTION 5.3 Rule 144. The Company shall take all commercially reasonable
actions necessary to enable a Holder of Registrable Shares to sell such
securities without registration under the Securities Act pursuant to the
provisions of Rule 144. Upon the request of any Holder of Registrable Shares,
the Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
ARTICLE 6
RESOLUTION OF DISPUTES
SECTION 6.1 Resolution of Disputes between the Parties.
(a) Negotiation. The parties shall attempt in good faith to resolve any
dispute arising out of or relating to this Agreement promptly by negotiations
between executives who have authority to settle the controversy. Any party may
give the other party written notice of any dispute not resolved in the normal
course of business. Within five days after the effective date of such notice,
executives of the parties shall agree upon a mutually acceptable time and place
to meet and shall meet at such time and place, and thereafter as often as they
reasonably deem necessary, to exchange relevant information and to attempt to
resolve the dispute. The first of such meetings shall take place within 7 days
of the effective date of the disputing party's notice. If the matter has not
been resolved within 60 days of the disputing party's notice, or if the parties
fail to agree on a time and place for an initial meeting within five days of
such notice, either party may initiate mediation of the controversy or claim as
provided hereinafter. If a negotiator intends to be accompanied at a meeting by
an attorney, the other negotiator shall be given at least three business days'
notice of such intention and may also be accompanied by an attorney. All
negotiations pursuant to this Section 6.1 shall be treated as compromise and
settlement negotiations for the purposes of federal and state rules of evidence
and procedure.
(b) Mediation. If the dispute has not been resolved by negotiation as
provided herein, the parties may endeavor to settle the dispute by mediation
under the then current CPR Model Procedure for Mediation of
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Business Disputes. The neutral third party shall be selected by the parties from
the CPR Panels of Neutrals. If the parties encounter difficulty in agreeing upon
a neutral third party, they shall seek the assistance of CPR in the selection
process.
(c) Arbitration. Any dispute arising out of or relating to this Agreement
or the breach, termination or validity hereof or thereof, which has not been
resolved by non-binding procedures as provided in Sections 6.1(a) or 6.1(b)
hereof within 60 days of the initiation of either or both of such procedures,
shall be finally settled by arbitration conducted expeditiously in accordance
with the CPR Rules for Non-Administered Arbitration of Business Disputes;
provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. The
arbitration shall be conducted by three independent and impartial arbitrators.
Each party shall appoint one arbitrator and a third arbitrator not appointed by
the parties shall be appointed from the CPR Panels of Neutrals. The arbitration
shall be governed by the United States Arbitration Act and any judgment upon the
award decided upon by the arbitrators may be entered by any court having
jurisdiction thereof. The arbitrators are not empowered to award damages in
excess of compensatory damages and each party hereby irrevocably waives any
damages in excess of compensatory damages. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement. Any
arbitration conducted pursuant to this Section 6.1(c) shall be held at a
mutually acceptable location in Dallas, Texas, the United States of America.
6.2 Consent to Jurisdiction and Venue. Each of the parties hereby (a)
irrevocably submits to the exclusive jurisdiction of the United States Federal
District Court for the Northern District of Texas, sitting in Dallas County,
Texas, the United States of America, for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement, (b) waives, and agrees
not to assert in any such suit, action or proceeding, any claim that (i) it is
not personally subject to the jurisdiction of such court or of any other court
to which proceedings in such court may be appealed, (ii) such suit, action or
proceeding is brought in an inconvenient forum or (iii) the venue of such suit,
action or proceeding is improper and (c) expressly waives any requirement for
the posting of a bond by the party bringing such suit, action or proceeding.
Each of the parties consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices hereunder, and agrees that such services shall constitute good and
sufficient service of process and notice thereof. Nothing in this Section 6.2
shall affect or limit any right to serve process in any other manner permitted
by law.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Notices. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows (or at such
other address as may be substituted by notice given as herein provided):
If to the Company:
Coho Energy, Inc.
14785 Preston Road, Suite 860
Dallas, Texas 75240
Attention: President
If to any Holder, at its address listed on the signature pages hereof.
Any notice or communication hereunder shall be deemed to have been given or
made as of the date so delivered if personally delivered; when answered back, if
telexed; when receipt is acknowledged, if telecopied; and five calendar days
after mailing if sent by registered or certified mail (except that a notice of
change of address shall not be deemed to have been given until actually received
by the addressee).
15
<PAGE> 111
Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
SECTION 7.2 Governing Law; Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
SECTION 7.3 Successors and Assigns. Whether or not an express assignment
has been made pursuant to the provisions of this Agreement, provisions of this
Agreement that are for the Holders' benefit as the holders of any securities are
also for the benefit of, and enforceable by, all subsequent holders of
securities and such subsequent holders shall be deemed to be Holders and to have
become parties to this Agreement, except as otherwise expressly provided herein.
This Agreement shall be binding upon the Company, each Holder, and their
respective successors and assigns; provided, however, any transferee of a Holder
may elect in writing, at the time of the transfer, to not be a Holder hereunder,
in which case such transferee shall not be entitled to any benefits of, nor
subject to any obligations under, this Agreement. A Holder shall notify the
Company in writing of the number of shares of Common Stock transferred and the
name, address and telephone and facsimile numbers of any transferror in advance
of such transfer.
SECTION 7.4 Duplicate Originals. All parties may sign any number of copies
of this Agreement. Each signed copy shall be an original, but all of them
together shall represent the same agreement.
SECTION 7.5 Severability. In case any provision in this Agreement shall be
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 7.6 Specific Performance. The Company and the Holder or Holders
recognize that if the Company refuses to perform under the provisions of this
Agreement, monetary damages alone will not be adequate to compensate the Holder
or Holders for its or their injury. The Holder or Holders shall therefore be
entitled, in addition to any other remedies that may be available, to obtain
specific performance of the terms of this Agreement.
SECTION 7.7 No Waivers; Amendments.
7.7.1 No failure or delay on the part of the Company or any Holder in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Company or
any Holder at law or in equity or otherwise.
7.7.2 Any provision of this Agreement may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the Company and
the Holders holding a majority of the Registrable Shares.
SECTION 7.8 No Affiliate Liability. The partners, officers, directors,
shareholders and Affiliates of a Holder shall not have any personal liability or
obligation to any Person arising under this Agreement; provided that this
sentence shall not relieve any designee of a Holder pursuant to Section 2.1.1 of
any liability that may result from a breach of a director's fiduciary duty to
the Company's shareholders.
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16
<PAGE> 112
SIGNATURES TO SHAREHOLDER AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the date first written above.
COHO ENERGY, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ENERGY INVESTMENT PARTNERSHIP NO. 1
By:
---------------------------------
Name:
-------------------------------
Title: Co-Managing Partner
------------------------------
Address:
200 Crescent Court
Suite 1600
Dallas, Texas 75201
HM 4 COHO, L.P.
By: Hicks, Muse Fund IV LLC,
its general partners
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Address:
200 Crescent Court
Suite 1600
Dallas, Texas 75201
<PAGE> 113
EXHIBIT B
FORM OF OPINION OF
SELLER'S COUNSEL
All capitalized terms used in this opinion and not otherwise defined shall
have the respective meanings set forth in the Amended and Restated Stock
Purchase Agreement, effective as of October 21, 1998, between Coho Energy, Inc.
and HM 4 Coho, L.P. (the "Purchase Agreement").
The opinion shall be substantially to the following effect:
1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas. Each Significant
Subsidiary of the Company has been duly organized and is a validly existing
entity under the laws of its jurisdiction of formation or incorporation.
Each of the Company and the Significant Subsidiaries has all corporate
requisite power and authority to own, lease and license its respective
properties and conduct its business as now being conducted.
2. The Company has the corporate power and authority to execute and
deliver the Purchase Agreement, the Amended and Restated Financial Advisory
Agreement, the Monitoring Agreement, the Shareholders Agreement and the
Indemnification Agreement (collectively, the "Transaction Documents") and
to perform the obligations contemplated thereby. The execution and delivery
by the Company of each of the Transaction Documents has been duly
authorized by all necessary corporate action on the part of the Company.
Each of the Transaction Documents has been duly executed and delivered by
the Company and constitutes the valid and binding obligation of the Company
and is enforceable in accordance with its terms.
3. Neither the execution and delivery by the Company of the
Transaction Documents, nor the performance by the Company of its
obligations thereunder, violates or conflicts with, results in a breach of,
or constitutes a default under (i) the Company's Articles of Incorporation
or Bylaws or similar organizational documents of any Subsidiary of the
Company, (ii) any provision of statutory law or regulations, (iii) any
judgment, decree or order known to us of any court or any other agency of
government that is applicable to the Company or the Company's property, or
(iv) any agreement known to us to which the Company is a party or by which
the Company's property is bound and that is required to be filed as an
exhibit to the Company SEC Documents.
4. No approvals or authorizations by, or filings or qualifications
with, any Governmental Entity are required in connection with the execution
and delivery of the Transaction Documents or any other agreements or
documents executed and delivered pursuant thereto by the Company, except
such as have been duly obtained or made.
5. To our knowledge, there is no action, suit, investigation or
proceeding that is pending or threatened against or affecting the Company
or any of its Subsidiaries in any court or before any Governmental Entity,
arbitration board or tribunal that involves any of the transactions
contemplated by the Transaction Documents.
6. To our knowledge, there is no litigation, governmental or other
action, suit, proceeding or investigation before any Governmental Entity
pending or threatened against the Company or any of its Subsidiaries which
is of a character required to be disclosed in the Company SEC Documents
that has not already been disclosed therein.
7. All the shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid, nonassessable and not
subject to any preemptive or similar rights.
8. The Shares to be delivered by the Company on the Closing Date, as
the case may be, have been duly and validly authorized, and, when delivered
against payment therefor in accordance with the Purchase Agreement, will be
duly and validly issued, fully paid and nonassessable and to our knowledge,
will not have been issued in violation of or subject to any preemptive or
similar rights.
<PAGE> 114
9. The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in Section 3.1(c)(i) of the
Purchase Agreement.
10. The Shares have been approved for listing on The Nasdaq Stock
Market -- National Market System.
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<PAGE> 115
EXHIBIT C
AMENDED AND RESTATED
FINANCIAL ADVISORY AGREEMENT
THIS AMENDED AND RESTATED FINANCIAL ADVISORY AGREEMENT, is made and entered
into October , 1998 to be effective as of August 21, 1998 (this "Agreement"),
is made and entered into between Coho Energy, Inc., a Texas corporation (the
"Company"), and Hicks, Muse & Co. Partners, L.P., a Texas limited partnership
(together with its successors, "HMCo").
WHEREAS, an affiliate of HMCo, HM 4 Coho, L.P., a Texas partnership
("Purchaser"), previously entered into an agreement, which agreement is being
amended and restated concurrently herewith (the "Purchase Agreement"), with the
Company to purchase a portion of the capital stock of the Company (the
"Transaction");
WHEREAS, the Company requested that HMCo render, and HMCo has rendered,
financial advisory services to the Company and its subsidiaries in connection
with the negotiation of the Transaction;
WHEREAS, the Company has requested that HMCo render financial advisory,
investment banking, and other similar services to the Company and its
subsidiaries with respect to any future proposals for (a) the acquisition by any
person or group of beneficial ownership of (i) a majority of the combined voting
power of the then outstanding securities of the Company entitled to vote
generally in the election of directors, or (ii) a majority of the Company's
outstanding capital stock, (b) a reorganization, recapitalization, merger,
consolidation or similar business combination or transaction or sale or other
disposition (whether in a single transaction or series of related transactions)
of all or substantially all of the assets of the Company and its subsidiaries
taken as a whole (unless the holders of the outstanding securities of the
Company entitled to vote generally in the election of directors prior to such
transaction continue to own at least a majority of the securities entitled to
vote generally in the election of directors of the entity resulting from such
transaction upon the completion of such transaction), (c) the sale of oil and
gas properties of the Company or its subsidiaries involving consideration of
$100 million or more, (d) any acquisition by the Company or its subsidiaries
involving consideration of $100 million or more of (i) a majority of the voting
power of the then outstanding voting securities of any corporation entitled to
voting generally in the election of directors or (ii) a majority of the
ownership interests of an entity other than a corporation (whether by merger,
tender offer, exchange offer or similar extraordinary transaction), or (e) any
acquisition by the Company or its subsidiaries of oil and gas properties or
other assets involving consideration of $100 million or more (collectively,
"Additional Transactions"); and
WHEREAS, concurrently with the execution of the Purchase Agreement, on
August 21, 1998 the Company and HMCo entered into a Financial Advisory Agreement
(the "Original Agreement"), and the Company and HMCo now desire to amend and
restate the Original Agreement in its entirety as set forth below;
NOW, THEREFORE, in consideration of the services rendered and to be
rendered by HMCo to the Company and its subsidiaries and to evidence the
obligations of the Company to HMCo and the mutual covenants herein contained,
the Company and HMCo hereby agree as follows:
1. Retention.
(a) The Company hereby acknowledges that it has retained HMCo for the
benefit of the Company and its subsidiaries, and HMCo acknowledges that it has
acted, as financial advisor to the Company and its subsidiaries in connection
with the Transaction.
(b) The Company acknowledges that, effective as of the Closing (as defined
in the Purchase Agreement), it has retained HMCo as the exclusive financial
advisor in connection with any Additional Transactions that may be consummated
during the term of this Agreement, and that the Company will not, and will cause
its subsidiaries not to, retain any other person or entity to provide such
services in connection with any such Additional Transaction, unless the Chief
Executive Officer of the Company (the "CEO") and HMCo mutually agree that the
retention by the Company of a second financial advisor in addition to HMCo
<PAGE> 116
would be appropriate with respect to a given Additional Transaction; and
provided, that the Company, at the discretion of the CEO, may elect not to
retain a financial advisor with respect to a particular Additional Transaction
and in such event HMCo shall not be entitled to receive the fee set forth in
Section 3(b) below. HMCo agrees that it shall provide such financial advisory,
investment banking, and other similar services in connection with any such
Additional Transaction as may be requested from time to time by the board of
directors of the Company.
2. Term. The term of this Agreement shall continue until the earlier to
occur of (a) the tenth anniversary of the date hereof or (b) the date on which
Purchaser and its affiliates cease to own beneficially, directly or indirectly,
at least five percent of the outstanding equity securities of the Company or its
successors; provided that no termination of this Agreement shall eliminate the
obligations of the Company under Section 3(a) hereof.
3. Compensation. (a) As compensation for HMCo's services as a financial
advisor to the Company and its subsidiaries in connection with the Transaction,
the Company paid HMCo a cash fee of $1,250,000 by wire transfer of immediately
available funds concurrently with the execution of the Original Agreement and
hereby irrevocably agrees to pay HMCo:
(i) if the shareholders of the Company shall have approved the
transactions contemplated by the Purchase Agreement on or before December
31, 1998, a cash fee of $8,750,000 by wire transfer of immediately
available funds on the Closing Date (as defined in the Purchase Agreement);
and
(ii) if the shareholders of the Company shall not have approved the
transactions contemplated by the Purchase Agreement on or before December
31, 1998, a fee of $8,750,000 by wire transfer of immediately available
funds on December 31, 1998; provided however, that the Company may elect to
satisfy such obligation through the payment of $3,750,000 by wire transfer
of immediately available funds and the issuance to HMCo of 1,000,000 shares
of common stock, par value $.01 per share, of the Company; and provided
further that such shares shall have been approved for listing on The Nasdaq
Stock Market National Market System and that the Company shall have
received all other required consents and approvals to the issuance of such
shares.
(b) As compensation for HMCo's financial advisory, investment banking, and
other similar services rendered in connection with any Additional Transaction
pursuant to Section 1(b) hereof, the Company shall pay to HMCo, at the closing
of any such Additional Transaction, a fee payable in cash in an amount equal to
the amount of fees then charged by first tier investment banking firms for
similar advisory services rendered in connection with transactions similar to
such Additional Transaction; provided, however, that (c) such fee shall be
divided equally between HMCo and any additional financial advisor retained by
the Company as provided in the first sentence of Section 1(b) and (d) HMCo shall
not be entitled to a fee with respect to any Additional Transaction for which
the CEO elects not to retain a financial advisor.
4. Reimbursement of Expenses. In addition to the compensation to be paid
pursuant to Section 3 hereof, the Company agrees to reimburse HMCo, promptly
following demand therefor, together with invoices or reasonably detailed
descriptions thereof, for all reasonable disbursements and out-of-pocket
expenses (including fees and disbursements of counsel) incurred by HMCo (a) as
financial advisor to the Company or any of its subsidiaries in connection with
the Transaction or (b) in connection with the performance by it of the services
contemplated by Section 1(b) hereof.
5. Indemnification. The Company shall indemnify and hold harmless each of
HMCo, its affiliates, and their respective directors, officers, partners,
members, controlling persons (within the meaning of Section 15 of the Securities
Act of 1933 or Section 20(a) of the Securities Exchange Act of 1934), if any,
agents and employees (HMCo, its affiliates, and such other specified persons
being collectively referred to as "Indemnified Persons" and individually as an
"Indemnified Person") from and against any and all claims, liabilities, losses,
damages and expenses incurred by any Indemnified Person (including those
resulting from the negligence of the Indemnified Person and fees and
disbursements of the respective Indemnified Person's counsel) which (a) are
related to or arise out of (i) actions taken or omitted to be taken (including
any untrue statements made or any statements omitted to be made) by the Company
or any of its subsidiaries or
2
<PAGE> 117
(ii) actions taken or omitted to be taken by an Indemnified Person with the
Company's or any of its subsidiaries' consent or in conformity with the
Company's or any such subsidiaries' instructions or the Company's or any such
subsidiaries' actions or omissions or (b) are otherwise related to or arise out
of HMCo's engagement, and will reimburse each Indemnified Person for all costs
and expenses, including fees of any Indemnified Person's counsel, as they are
incurred, in connection with investigating, preparing for, defending, or
appealing any action, formal or informal claim, investigation, inquiry or other
proceeding, whether or not in connection with pending or threatened litigation,
caused by or arising out of or in connection with HMCo's acting pursuant to the
engagement, whether or not any Indemnified Person is named as a party thereto
and whether or not any liability results therefrom. The Company will not
however, be responsible for any claims, liabilities, losses, damages, or
expenses pursuant to clause (b) of the preceding sentence that have resulted
primarily from HMCo's bad faith, gross negligence or willful misconduct. The
Company also agrees that neither HMCo nor any other Indemnified Person shall
have any liability to the Company or any of its subsidiaries for or in
connection with such engagement except for any claims, liabilities, losses,
damages, or expenses incurred by the Company or any such subsidiary to the
extent the same have resulted from HMCo's bad faith, gross negligence or willful
misconduct. The Company further agrees that it will not, and the Company will
cause its subsidiaries to not, without the prior written consent of HMCo, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not any Indemnified Person is an actual or
potential party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of HMCo and
each other Indemnified Person hereunder from all liability arising out of such
claim, action, suit or proceeding. THE COMPANY HEREBY ACKNOWLEDGES THAT THE
FOREGOING INDEMNITY SHALL BE APPLICABLE TO ANY CLAIMS, LIABILITIES, LOSSES,
DAMAGES, OR EXPENSES THAT HAVE RESULTED FROM OR ARE ALLEGED TO HAVE RESULTED
FROM THE ACTIVE OR PASSIVE OR THE SOLE, JOINT OR CONCURRENT ORDINARY NEGLIGENCE
OF HMCO OR ANY OTHER INDEMNIFIED PERSON.
The foregoing right to indemnity shall be in addition to any rights that
HMCo and/or any other Indemnified Person may have at common law or otherwise and
shall remain in full force and effect following the completion or any
termination of the engagement. The Company hereby consents, and shall cause its
subsidiaries to consent, to personal jurisdiction and to service and venue in
any court in which any claim which is subject to this agreement is brought
against HMCo or any other Indemnified Person.
It is understood that, in connection with HMCo's engagement, HMCo may also
be engaged to act for the Company or any of its subsidiaries in one or more
additional capacities, and that the terms of this engagement or any such
additional engagement may be embodied in one or more separate written
agreements. This indemnification shall apply to the engagement specified in the
first paragraph hereof as well as to any such additional engagement(s) (whether
written or oral) and any modification of said engagement or such additional
engagement(s) and shall remain in full force and effect following the completion
or termination of said engagement or such additional engagements.
The Company further understands that if HMCo is asked to furnish the
Company or any of its subsidiaries a financial opinion letter or to act for the
Company or any such subsidiary in any other formal capacity, such further action
may be subject to a separate agreement containing provisions and terms to be
mutually agreed upon.
6. Confidential Information. In connection with the performance of the
services hereunder, HMCo agrees not to divulge any confidential information,
secret processes or trade secrets disclosed by the Company or any of its
subsidiaries to HMCo solely in its capacity as a financial advisor, unless the
Company consents to the divulging thereof or such information, secret processes,
or trade secrets are publicly available or otherwise available to HMCo without
restriction or breach of any confidentiality agreement or unless required by any
governmental authority or in response to any valid legal process.
7. Governing Law. This Agreement shall be construed, interpreted, and
enforced in accordance with the laws of the State of Texas, excluding any
choice-of-law provisions thereof.
8. Assignment. This Agreement and all provisions contained herein shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, neither this
3
<PAGE> 118
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned (other than with respect to the rights and obligations of HMCo, which
may be assigned to any one or more of its principals or affiliates) by any of
the parties without the prior written consent of the other parties.
9. 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, and the signature of any
party to any counterpart shall be deemed a signature to, and may be appended to,
any other counterpart.
10. Other Understanding. All discussions, understandings, and agreements
theretofore made between any of the parties hereto with respect to the subject
matter hereof are merged in this Agreement, which alone fully and completely
expresses the agreement of the parties hereto.
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4
<PAGE> 119
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written to be effective as of
August 21, 1998.
COHO ENERGY, INC.
By:
---------------------------------
Jeffrey Clarke
Chief Executive Officer
HICKS, MUSE & CO. PARTNERS, L.P.
By: HM PARTNERS INC.,
its General Partner
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
5
<PAGE> 120
EXHIBIT D
FORM OF
MONITORING AND OVERSIGHT AGREEMENT
THIS MONITORING AND OVERSIGHT AGREEMENT (this "Agreement") is made and
entered into effective as of , 1998, between Coho Energy, Inc., a
Texas corporation (the "Company"), and Hicks, Muse & Co. Partners, L.P., a Texas
limited partnership (together with its successors, "HMCo").
1. Retention. The Company hereby acknowledges that they have retained HMCo,
and HMCo acknowledges that, subject to reasonable advance notice in order to
accommodate scheduling, HMCo will provide financial oversight and monitoring
services to the Company as requested by the Company during the term of this
Agreement.
2. Term. The term of this Agreement shall continue until the earlier of (i)
the tenth anniversary of the date hereof or (ii) the date on which HM 4 Coho,
L.P. and its affiliates cease to own beneficially, directly or indirectly, at
least five percent of the outstanding equity securities of the Company, its
successors or affiliates.
3. Compensation.
(a) As compensation for HMCo's services under this Agreement, the Company
shall pay to HMCo an annual fee of $250,000 (the "Monitoring Fee").
(b) The Monitoring Fee shall be payable in quarterly installments on the
fifteenth (15th) day of each January, April, July and October during the term of
this Agreement (each a "Payment Date"), beginning with the first Payment Date
following the date hereof. The amount of each such quarterly installment shall
be the Monitoring Fee divided by 4 (the "Quarterly Fee Amount") prorated on a
daily basis for any partial calendar quarter during the term of this Agreement.
(c) All past due payments in respect of the Monitoring Fee shall bear
interest at the lesser of the highest rate of interest which may be charged
under applicable law or the prime commercial lending rate per annum of Chase
Manhattan Bank, N.A. or its successors (which rate is a reference rate and is
not necessarily its lowest or best rate of interest actually charged to any
customer) (the "Prime Rate") as in effect from time to time, plus 5%, from the
due date of such payment to and including the date on which payment is made to
HMCo in full, including such interest accrued thereon.
4. Reimbursement of Expenses. In addition to the compensation to be paid
pursuant to Section 3 hereof, the Company agrees to pay or reimburse HMCo for
all "Reimbursable Expenses", which shall consist of all reasonable disbursements
and out-of-pocket expenses (including without limitation costs of travel,
postage, deliveries, communications, etc.) incurred by HMCo or its affiliates
for the account of the Company or in connection with the performance by HMCo of
the services contemplated by Section 1 hereof. Promptly (but not more than 10
days) after request by or notice from HMCo, the Company shall pay HMCo, by wire
transfer of immediately available funds to the account described on Exhibit A
hereto (or such other account as HMCo may hereafter designate in writing), the
Reimbursable Expenses for which HMCo has provided the Company invoices or
reasonably detailed descriptions. All past due payments in respect of the
Reimbursable Expenses shall bear interest at the lesser of the highest rate of
interest which may be charged under applicable law or the Prime Rate plus 5%
from the Payment Date to and including the date on which such Reimbursable
Expenses plus accrued interest thereon, are fully paid to HMCo.
5. Indemnification. The Company shall indemnify and hold harmless each of
HMCo, its affiliates, and their respective directors, officers, partners,
members, controlling persons (within the meaning of Section 15 of the Securities
Act of 1933 or Section 20(a) of the Securities Exchange Act of 1934), if any,
agents and employees (HMCo, its affiliates, and such other specified persons
being collectively referred to as "Indemnified Persons" and individually as an
"Indemnified Person") from and against any and all claims, liabilities, losses,
damages and expenses incurred by any Indemnified Person (including those
resulting from the negligence of the Indemnified Person and fees and
disbursements of the respective Indemnified Person's counsel) which (A) are
related to or arise out of (i) actions taken or omitted to be taken (including
any untrue statements made or any statements omitted to be made) by the Company
or any of its subsidiaries or
<PAGE> 121
(ii) actions taken or omitted to be taken by an Indemnified Person with the
Company's or any of its subsidiaries' consent or in conformity with the
Company's or any such subsidiaries' instructions or the Company's or any such
subsidiaries' actions or omissions or (B) are otherwise related to or arise out
of HMCo's engagement, and will reimburse each Indemnified Person for all costs
and expenses, including fees of any Indemnified Person's counsel, as they are
incurred, in connection with investigating, preparing for, defending, or
appealing any action, formal or informal claim, investigation, inquiry or other
proceeding, whether or not in connection with pending or threatened litigation,
caused by or arising out of or in connection with HMCo's acting pursuant to the
engagement, whether or not any Indemnified Person is named as a party thereto
and whether or not any liability results therefrom. The Company will not
however, be responsible for any claims, liabilities, losses, damages, or
expenses pursuant to clause (B) of the preceding sentence that have resulted
primarily from HMCo's bad faith, gross negligence or willful misconduct. The
Company also agrees that neither HMCo nor any other Indemnified Person shall
have any liability to the Company or any of its subsidiaries for or in
connection with such engagement except for any claims, liabilities, losses,
damages, or expenses incurred by the Company or any such subsidiary to the
extent the same have resulted from HMCo's bad faith, gross negligence or willful
misconduct. The Company further agrees that it will not, and the Company will
cause its subsidiaries to not, without the prior written consent of HMCo, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not any Indemnified Person is an actual or
potential party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of HMCo and
each other Indemnified Person hereunder from all liability arising out of such
claim, action, suit or proceeding. THE COMPANY HEREBY ACKNOWLEDGES THAT THE
FOREGOING INDEMNITY SHALL BE APPLICABLE TO ANY CLAIMS, LIABILITIES, LOSSES,
DAMAGES, OR EXPENSES THAT HAVE RESULTED FROM OR ARE ALLEGED TO HAVE RESULTED
FROM THE ACTIVE OR PASSIVE OR THE SOLE, JOINT OR CONCURRENT ORDINARY NEGLIGENCE
OF HMCO OR ANY OTHER INDEMNIFIED PERSON.
The foregoing right to indemnity shall be in addition to any rights that
HMCo and/or any other Indemnified Person may have at common law or otherwise and
shall remain in full force and effect following the completion or any
termination of the engagement. The Company hereby consents, and shall cause its
subsidiaries to consent, to personal jurisdiction and to service and venue in
any court in which any claim which is subject to this agreement is brought
against HMCo or any other Indemnified Person.
It is understood that, in connection with HMCo's engagement, HMCo may also
be engaged to act for the Company or any of its subsidiaries in one or more
additional capacities, and that the terms of this engagement or any such
additional engagement may be embodied in one or more separate written
agreements. This indemnification shall apply to the engagement specified in the
first paragraph hereof as well as to any such additional engagement(s) (whether
written or oral) and any modification of said engagement or such additional
engagement(s) and shall remain in full force and effect following the completion
or termination of said engagement or such additional engagements.
The Company further understands that if HMCo is asked to furnish the
Company or any of its subsidiaries a financial opinion letter or to act for the
Company or any such subsidiary in any other formal capacity, such further action
may be subject to a separate agreement containing provisions and terms to be
mutually agreed upon.
6. Confidential Information. In connection with the performance of the
services hereunder, HMCo agrees not to divulge any confidential information,
secret processes or trade secrets disclosed by the Company to HMCo solely in its
capacity as a financial advisor, unless the Company consents to the divulging
thereof or such information, secret processes, or trade secrets are publicly
available or otherwise available to HMCo without restriction or breach of any
confidentiality agreement or unless required by any governmental authority or in
response to any valid legal process.
7. Governing Law. This Agreement shall be construed, interpreted, and
enforced in accordance with the laws of the State of Texas, excluding any
choice-of-law provisions thereof.
8. Assignment. This Agreement and all provisions contained herein shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, neither this
2
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Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned (other than with respect to the rights and obligations of HMCo, which
may be assigned to any one or more of its principals or affiliates) by any of
the parties without the prior written consent of the other parties.
9. 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, and the signature of any
party to any counterpart shall be deemed a signature to, and may be appended to,
any other counterpart.
10. Other Understandings. All discussions, understandings, and agreements
heretofore made between any of the parties hereto with respect to the subject
matter hereof are merged in this Agreement, which alone fully and completely
expresses the Agreement of the parties hereto. All calculations of the
Reimbursable Expenses shall be made by HMCo and, in the absence of mathematical
error, shall be final and conclusive.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
COHO ENERGY, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
HICKS, MUSE & CO. PARTNERS, L.P.
By: HM PARTNERS INC.,
its General Partner
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 124
EXHIBIT A
Wire Transfer Instructions
Chase Bank of Texas
ABA #: 113000609
Account #: 08805113824
Credit: Hicks, Muse & Co. Partners, L.P.
Reference: Payment of Monitoring Fees or Expenses
by Coho Energy, Inc.
A-1
<PAGE> 125
EXHIBIT E
FORM
OF
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT (the "Agreement") is made and entered into
as of , 199 , by and between Coho Energy, Inc., a Texas corporation
(including any successors thereto, the "Company"), and ("Indemnitee").
RECITALS:
A. Competent and experienced persons are reluctant to serve or to continue
to serve corporations as directors, officers or in other capacities unless they
are provided with adequate protection through insurance or indemnification (or
both) against claims and actions against them arising out of their service to
and activities on behalf of those corporations.
B. The current uncertainties relating to the availability of adequate
insurance for directors and officers have increased the difficulty for
corporations to attract and retain competent and experienced persons.
C. The Board of Directors of the Company (the "Board") has determined that
the continuation of present trends in litigation will make it more difficult to
attract and retain competent and experienced persons, that this situation is
detrimental to the best interests of the Company's stockholders, and that the
Company should act to assure its directors and officers that there will be
increased certainty of adequate protection in the future.
D. It is reasonable, prudent and necessary for the Company to obligate
itself contractually to indemnify its directors and officers to the fullest
extent permitted by applicable law in order to induce them to serve or continue
to serve the Company.
E. Indemnitee is willing to serve and continue to serve the Company on the
condition that he be indemnified to the fullest extent permitted by law.
F. Concurrently with the execution of this Agreement, Indemnitee is
agreeing to serve or to continue to serve as a director or officer of the
Company.
AGREEMENTS:
NOW, THEREFORE, in consideration of the foregoing premises, Indemnitee's
agreement to serve or continue to serve as a director or officer of the Company,
and the covenants contained in this Agreement, the Company and Indemnitee hereby
covenant and agree as follows:
1. Certain Definitions:
For purposes of this Agreement:
(a) Affiliate: shall mean any Person that directly, or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with the Person specified.
(b) Change of Control: shall mean the occurrence of any of the
following events:
(i) The acquisition after the date of this Agreement by any
individual, entity, or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more
of either (x) the then outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (y) the combined voting
power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
paragraph (i), the following acquisitions shall not constitute a Change
of
<PAGE> 126
Control: (A) any acquisition directly from the Company or any Subsidiary
thereof, (B) any acquisition by the Company or any Subsidiary thereof,
(C) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any Subsidiary of the Company,
(D) any acquisition by one or more Affiliates of Hicks, Muse, Tate &
Furst Incorporated (the "HMC Group"), or (E) any acquisition by any
entity or its security holders pursuant to a transaction which complies
with clauses (A), (B), and (C) of paragraph (iii) below; or
(ii) Individuals who, as of the date of this Agreement, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date of this Agreement (A) who is
a member of the HMC Group, or (B) whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board,
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(iii) Consummation of a reorganization, merger, or consolidation or
sale or other disposition of all or substantially all of the assets of
the Company or an acquisition of assets of another entity (a "Business
Combination"), other than a Business Combination with one or more
members of the HMC Group, in each case, unless, immediately following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock or other equity interests and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors (or similar governing
body), as the case may be, of the entity resulting from such Business
Combination (including, without limitation, an entity which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more Subsidiaries) in
proportions not materially different from their ownership, immediately
prior to such Business Combination, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (B)
no Person (excluding any entity resulting from such Business Combination
or any employee benefit plan (or related trust) of the Company or such
entity resulting from such Business Combination or any Subsidiary of
either of them) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding shares of common stock of the
entity resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such entity except to
the extent that such ownership existed prior to the Business
Combination, and (C) at least a majority of the members of the board of
directors (or similar governing body) of the entity resulting from such
Business Combination were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Claim: shall mean any threatened, pending, or completed action,
suit or proceeding (including, without limitation, securities laws actions,
suits and proceedings and also any cross claim or counterclaim in any
action, suit or proceeding), whether civil, criminal, arbitral,
administrative or investigative in nature, or any inquiry or investigation
(including discovery), whether conducted by the Company or any other
Person, that Indemnitee in good faith believes might lead to the
institution of any action, suit or proceeding.
(d) Expenses: shall mean all costs, expenses (including attorneys' and
expert witnesses' fees), and obligations paid or incurred in connection
with investigating, defending (including affirmative defenses
2
<PAGE> 127
and counterclaims), being a witness in, or participating in (including on
appeal), or preparing to defend, be a witness in, or participate in, any
Claim relating to any Indemnifiable Event.
(e) Indemnifiable Event: shall mean any actual or alleged act,
omission, statement, misstatement, event or occurrence related to the fact
that Indemnitee is or was a director, officer, agent or fiduciary of the
Company, or is or was serving at the request of the Company as a director,
officer, trustee, agent or fiduciary of another corporation, partnership,
joint venture, employee benefit plan, trust, or other enterprise, or by
reason of any actual or alleged thing done or not done by Indemnitee in any
such capacity. For purposes of this Agreement, the Company agrees that
Indemnitee's service on behalf of or with respect to any Subsidiary or
employee benefits plan of the Company or any Subsidiary of the Company
shall be deemed to be at the request of the Company.
(f) Indemnifiable Liabilities: shall mean all Expenses and all other
liabilities, damages (including, without limitation, punitive, exemplary,
and the multiplied portion of any damages), judgments, payments, fines,
penalties, amounts paid in settlement, and awards paid or incurred that
arise out of, or in any way relate to, any Indemnifiable Event.
(g) Reviewing Party: shall mean (i) a member or members of the Board
who are not parties to the particular Claim for which Indemnitee is seeking
indemnification or (ii) if a Change of Control has occurred and Indemnitee
so requests, or if the members of the Board so elect, or if all of the
members of the Board are parties to such Claim, Special Counsel.
(h) Special Counsel: shall mean special, independent legal counsel
selected by Indemnitee and approved by the Company (which approval shall
not be unreasonably withheld), and who has not otherwise performed material
services for the Company or for Indemnitee within the last three years
(other than as Special Counsel under this Agreement or similar agreements).
(i) Subsidiary: shall mean, with respect to any Person, any
corporation or other entity of which a majority of the voting power of the
voting equity securities or equity interest is owned, directly or
indirectly, by that Person.
2. Indemnification and Expense Advancement.
(a) The Company shall indemnify Indemnitee and hold Indemnitee harmless to
the fullest extent permitted by law, as soon as practicable but in any event no
later than 30 days after written demand is presented to the Company, from and
against any and all Indemnifiable Liabilities. Any such demand shall include an
affirmation by Indemnitee of Indemnitee's good faith belief that such
indemnification is permitted under this Agreement and an undertaking by or on
behalf of Indemnitee to repay to the Company the amount of any Indemnified
Liabilities paid to Indemnitee if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified against such Indemnified
Liabilities. Such undertaking need not be secured, and shall be accepted without
reference to financial ability to make repayment. Notwithstanding the foregoing,
the obligations of the Company under Section 2(a) shall be subject to the
condition that the Reviewing Party shall not have determined (in a written
opinion, in any case in which Special Counsel is involved) that Indemnitee is
not permitted to be indemnified under applicable law. Nothing contained in this
Agreement shall require any determination under this Section 2(a) to be made by
the Reviewing Party prior to the disposition or conclusion of the Claim against
the Indemnitee.
(b) If so requested by Indemnitee, the Company shall advance to Indemnitee
all reasonable Expenses incurred by Indemnitee to the fullest extent permitted
by law (or, if applicable, reimburse Indemnitee for any and all reasonable
Expenses incurred by Indemnitee and previously paid by Indemnitee) within ten
business days after such request (an "Expense Advance"). The Company shall be
obligated from time to time at the request of Indemnitee to make or pay an
Expense Advance in advance of the final disposition or conclusion of any Claim.
In connection with any request for an Expense Advance, if requested by the
Company, Indemnitee or Indemnitee's counsel shall submit an affidavit stating
that the Expenses to which the Expense Advances relate are reasonable. Any
dispute as to the reasonableness of any Expense shall not delay an Expense
Advance by the Company. If, when, and to the extent that the Reviewing Party
determines that (i) Indemnitee would not be permitted to be indemnified with
respect to a Claim under applicable law or
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<PAGE> 128
(ii) the amount of the Expense Advance was not reasonable, the Company shall be
entitled to be reimbursed by Indemnitee and Indemnitee hereby agrees to
reimburse the Company without interest (which agreement shall be an unsecured
obligation of Indemnitee) for (x) all related Expense Advances theretofore made
or paid by the Company in the event that it is determined that indemnification
would not be permitted or (y) the excessive portion of any Expense Advances in
the event that it is determined that such Expenses Advances were unreasonable,
in either case, if and to the extent such reimbursement is required by
applicable law; provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee could be indemnified under applicable law, or that the Expense
Advances were reasonable, any determination made by the Reviewing Party that
Indemnitee would not be permitted to be indemnified under applicable law or that
the Expense Advances were unreasonable shall not be binding, and the Company
shall be obligated to continue to make Expense Advances, until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed), which determination shall be
conclusive and binding. If there has been a Change of Control, the Reviewing
Party shall be Special Counsel, if Indemnitee so requests. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively is not permitted to be indemnified in whole or part
under applicable law or that any Expense Advances were unreasonable, Indemnitee
shall have the right to commence litigation in any court in the states of Texas
or New York having subject matter jurisdiction thereof and in which venue is
proper seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
(c) Nothing in this Agreement, however, shall require the Company to
indemnify Indemnitee with respect to any Claim initiated by Indemnitee, other
than a Claim solely seeking enforcement of the Company's indemnification
obligations to Indemnitee or a Claim authorized by the Board.
3. Change of Control. The Company agrees that, if there is a Change of
Control and if Indemnitee requests in writing that Special Counsel be the
Reviewing Party, then Special Counsel shall be the Reviewing Party. In such a
case, the Company agrees not to request or seek reimbursement from Indemnitee of
any indemnification payment or Expense Advances unless Special Counsel has
rendered its written opinion to the Company and Indemnitee that the Company was
not or is not permitted under applicable law to indemnify Indemnitee or that
such Expense Advances were unreasonable. However, if Indemnitee has commenced
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee could be indemnified under applicable law or that the Expense
Advances were reasonable, any determination made by Special Counsel that
Indemnitee would not be permitted to be indemnified under applicable law or that
the Expense Advances were unreasonable shall not be binding, and the Company
shall be obligated to continue to make Expense Advances, until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefore have been exhausted or lapsed), which determination shall be
conclusive and binding. The Company agrees to pay the reasonable fees of Special
Counsel and to indemnify Special Counsel against any and all expenses (including
attorneys' fees), claims, liabilities, and damages arising out of or relating to
this Agreement or Special Counsel's engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall indemnify
Indemnitee against any and all costs and expenses (including attorneys' and
expert witnesses' fees) and, if requested by Indemnitee, shall (within two
business days of that request) advance those costs and expenses to Indemnitee
that are incurred by Indemnitee if Indemnitee, whether by formal proceedings or
through demand and negotiation without formal proceedings: (a) seeks to enforce
Indemnitee's rights under this Agreement, (b) seeks to enforce Indemnitee's
rights to expense advancement or indemnification under any other agreement or
provision of the Company's Articles of Incorporation, as amended to date (the
"Articles of Incorporation"), or Bylaws (the "Bylaws") now or hereafter in
effect relating to Claims for Indemnifiable Events, or (c) seeks recovery under
any directors' and officers' liability insurance policies maintained by the
Company, in each case regardless of whether Indemnitee ultimately prevails;
provided that a court of competent jurisdiction has not found Indemnitee's claim
for indemnification or expense advancements under the foregoing clauses (a), (b)
or (c) to be frivolous, presented for an improper purpose, without evidentiary
support, or otherwise sanctionable
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under Federal Rule of Civil Procedure No. 11 or an analogous rule or law, and
provided further, that if a court makes such a finding, Indemnitee shall
reimburse the Company for all amounts previously advanced to Indemnitee pursuant
to this Section 4. Subject to the provisos contained in the preceding sentence,
to the fullest extent permitted by law, the Company waives any and all rights
that it may have to recover its costs and expenses paid pursuant to this
paragraph 4 from Indemnitee.
5. Partial Indemnity. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some, but not all, of
Indemnitee's Indemnifiable Liabilities, the Company shall indemnify Indemnitee
for the portion thereof to which Indemnitee is entitled.
6. Contribution.
(a) Contribution Payment. To the extent the indemnification provided for
under any provision of this Agreement is determined (in the manner hereinabove
provided) not to be permitted under applicable law, the Company, in lieu of
indemnifying Indemnitee, shall, to the extent permitted by law, contribute to
the amount of any and all Indemnifiable Liabilities incurred or paid by
Indemnitee for which such indemnification is not permitted. The amount the
Company contributes shall be in such proportion as is appropriate to reflect the
relative fault of Indemnitee, on the one hand, and of the Company and any and
all other parties (including officers and directors of the Company other than
Indemnitee) who may be at fault (collectively, including the Company, the "Third
Parties"), on the other hand.
(b) Relative Fault. The relative fault of the Third Parties and the
Indemnitee shall be determined (i) by reference to the relative fault of
Indemnitee as determined by the court or other governmental agency or (ii) to
the extent such court or other governmental agency does not apportion relative
fault, by the Reviewing Party after giving effect to, among other things, the
relative intent, knowledge, access to information, and opportunity to prevent or
correct the relevant events, of each party, and other relevant equitable
considerations. The Company and Indemnitee agree that it would not be just and
equitable if contribution were determined by pro rata allocation or by any other
method of allocation that does take account of the equitable considerations
referred to in this Section 6(b).
7. Burden of Proof. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified under
any provision of this Agreement or to receive contribution pursuant to Section 6
of this Agreement, to the extent permitted by law the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
8. No Presumption. For purposes of this Agreement, the termination of any
Claim by judgment, order, settlement (whether with or without court approval),
or conviction, or upon a plea of nolo contendere, or its equivalent, or an entry
of an order of probation prior to judgment shall not create a presumption (other
than any presumption arising as a matter of law that the parties may not
contractually agree to disregard) that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law.
9. Non-exclusivity. The rights of Indemnitee hereunder shall be in addition
to any other rights Indemnitee may have under the Bylaws or Articles of
Incorporation or the Texas Business Corporation Act or otherwise. To the extent
that a change in the Texas Business Corporation Act (whether by statute or
judicial decision) permits greater indemnification by agreement than would be
afforded currently under this Agreement, it is the intent of the parties hereto
that Indemnitee shall enjoy by this Agreement the greater benefits so afforded
by that change. Indemnitee's rights under this Agreement shall not be diminished
by any amendment to the Articles of Incorporation or Bylaws, or of any other
agreement or instrument to which Indemnitee is not a party, and shall not
diminish any other rights that Indemnitee now or in the future has against the
Company.
10. Liability Insurance. Except as otherwise agreed to by the Company and
Indemnitee in a written agreement, to the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by that policy or those policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
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11. Period of Limitations. No action, lawsuit, or proceeding may be brought
against Indemnitee or Indemnitee's spouse, heirs, executors, or personal or
legal representatives, nor may any cause of action be asserted in any such
action, lawsuit or proceeding, by or on behalf of the Company, after the
expiration of two years after the statute of limitations commences with respect
to Indemnitee's act or omission that gave rise to the action, lawsuit,
proceeding or cause of action; provided, however, that, if any shorter period of
limitations is otherwise applicable to any such action, lawsuit, proceeding or
cause of action, the shorter period shall govern.
12. Amendments. No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by both of the parties hereto. No
waiver of any provision of this Agreement shall be effective unless in a writing
signed by the party granting the waiver. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall that waiver constitute a
continuing waiver.
13. Other Sources. Indemnitee shall not be required to exercise any rights
that Indemnitee may have against any other Person (for example, under an
insurance policy) before Indemnitee enforces his rights under this Agreement.
However, to the extent the Company actually indemnifies Indemnitee or advances
him Expenses, the Company shall be subrogated to the rights of Indemnitee and
shall be entitled to enforce any such rights which Indemnitee may have against
third parties. Indemnitee shall assist the Company in enforcing those rights if
it pays his costs and expenses of doing so. If Indemnitee is actually
indemnified or advanced Expenses by any third party, then, for so long as
Indemnitee is not required to disgorge the amounts so received, to that extent
the Company shall be relieved of its obligation to indemnify Indemnitee or
advance Indemnitee Expenses.
14. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors, assigns (including any direct or indirect successor by merger or
consolidation), spouses, heirs and personal and legal representatives. This
Agreement shall continue in effect regardless of whether Indemnitee continues to
serve as an officer or director of the Company or another enterprise at the
Company's request.
15. Severability. If any provision of this Agreement is held to be illegal,
invalid, or unenforceable under present or future laws effective during the term
hereof, that provision shall be fully severable; this Agreement shall be
construed and enforced as if that illegal, invalid, or unenforceable provision
had never comprised a part hereof; and the remaining provisions shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement. Furthermore, in
lieu of that illegal, invalid, or unenforceable provision, there shall be added
automatically as a part of this Agreement a provision as similar in terms to the
illegal, invalid, or unenforceable provision as may be possible and be legal,
valid, and enforceable.
16. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Texas applicable to
contracts made and to be performed in that state without giving effect to the
principles of conflicts of laws.
17. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
18. Notices. Whenever this Agreement requires or permits notice to be given
by one party to the other, such notice must be in writing to be effective and
shall be deemed delivered and received by the party to whom it is sent upon
actual receipt (by any means) of such notice. Receipt of a notice by the
Secretary of the Company shall be deemed receipt of such notice by the Company.
19. Complete Agreement. This Agreement constitutes the complete
understanding and agreement among the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof, other than any
indemnification rights that Indemnitee may enjoy under the Articles of
Incorporation, the Bylaws or the Texas Business Corporation Act.
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20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but in making proof
hereof it shall not be necessary to produce or account for more than one such
counterpart.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]
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EXECUTED as of the date first written above.
COHO ENERGY, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
INDEMNITEE
------------------------------------
------------------------------------
S-1
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ANNEX B
Jefferies & Company, Inc.
Two Houston Center
909 Fannin Street, Suite 3100
Houston, Texas 77010
Telephone (713) 658-1100
CORPORATE FINANCE Facsimile (713) 650-8730 (713) 651-3841
August 20, 1998
The Board of Directors
Coho Energy, Inc.
14785 Preston Road, Suite 860
Dallas, TX 75240
Members of the Board:
You have advised us that Coho Energy, Inc. ("Coho" or the "Company")
proposes to sell 41,666,666 shares (the "shares") of its common stock, par value
$0.01 per share (the "Common Stock"), to HM4 Coho, L.P. ("HM4"), an affiliate of
Hicks, Muse, Tate & Furst Incorporated, at a per share price of $6.00 (the
"Transaction") which represents approximately 62%, on a fully diluted basis, of
the Company's outstanding common stock. In addition, you have advised us that
HM4 will receive a cash fee in exchange for advisory and financial services in
connection with the Transaction of $10.0 million. You have requested our Opinion
(the "Opinion") as to whether the Transaction is fair, from a financial point of
view, to the holders of the Company's Common Stock.
Jefferies & Company, Inc. ("Jefferies") will receive a cash fee of $500,000
payable upon delivery of this Opinion. In the ordinary course of Jefferies'
business, it actively trades the securities of the Company for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities. Jefferies has rendered investment
banking services to the Company in the past.
In conducting our review and analysis and in arriving at the Opinion, we
have, with the Company's permission, assumed and relied upon, without
independent verification, the accuracy and completeness of all of the historical
and projected financial and other information provided to us by the Company.
With respect to the above noted historical and projected financial information,
the management of the Company has advised us that such information has been
reasonably prepared and reflects such management's best currently available
estimates and judgments, including the impact of the Transaction on the
Company's projections, and you have instructed us to rely on such information in
rendering the Opinion. We have not conducted a physical inspection of any of the
properties or facilities of the Company, nor have we made or considered any
independent evaluations or appraisals of any of such properties or facilities.
In conducting our analysis and rendering the Opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances, including: (i) the terms of the Transaction
as set forth in the agreements describing the Transaction; (ii) the historical
and current financial condition and results of operations of the Company,
including certain public filings of the Company; (iii) certain non-public
financial and non-financial information prepared by the Company; (iv) published
information regarding the financial performance and operating characteristics of
a selected group of companies that we deemed comparable to the Company; (v) the
business prospects of the Company considering its current capital structure and
after giving effect to the Transaction; (vi) the historical and current market
price of the Company's common stock; (vii) publicly available industry data we
considered relevant to our inquiry; (viii) the terms, to the extent publicly
available, of recent oil and gas independent producer transactions that we
believe to be comparable to the Transaction including other transactions
involving sales of private equity
<PAGE> 134
Coho Energy, Inc.
August 20, 1998
Page 2
resulting in a change of control; (ix) the value of certain intangible benefits
that may accrue to the Company as a result of the Transaction; (x) the financing
alternatives (other than the Transaction) currently available to the Company and
its current liquidity; and (xi) such other factors as we deemed relevant to the
Opinion. In addition, we have taken into account general economic, monetary,
political and market conditions as well as our experience with similar
transactions and the valuation of similar securities. The Opinion is based on
the aforementioned conditions as they exist currently and can be evaluated on
the date hereof. Existing conditions are subject to rapid and unpredictable
change and any such change could impact the Opinion.
Based upon and subject to the foregoing, we are of the Opinion, as
investment bankers, that, as of the date hereof, the Transaction, taken as a
whole, is fair, from a financial point of view, to the holders of the Company's
Common Stock.
This letter is solely for the information of the Board of Directors of the
Company and may not be relied upon by any other person. This letter does not
constitute a recommendation to any holder of the Company's Common Stock. The
Opinion, and any supporting analysis or other material prepared by Jefferies,
may not be quoted or referred to, in whole or in part, in any public filing or
in any written document, or used for any other purpose, without our prior
written consent; provided, however, that this letter may be included in its
entirety and described in any proxy statement to be distributed to the holders
of the Company's Common Stock in connection with the Transaction.
Very truly yours,
/s/ JEFFERIES & COMPANY, INC.
Jefferies & Company, Inc.
<PAGE> 135
COHO ENERGY, INC.
PROXY -- SPECIAL MEETING OF SHAREHOLDERS -- DECEMBER 4, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jeffrey Clarke and Anne Marie O'Gorman, and
each of them, as proxies, with full power of substitution, to vote as designated
on the reverse side, all shares of common stock, $0.01 par value ("Common
Stock"), of Coho Energy, Inc. (the "Company") that the undersigned would be
entitled to vote if personally present at the Special Meeting of Shareholders of
the Company to be held at 2:00 p.m., Dallas, Texas time, on December 4, 1998 at
the Westin Hotel Galleria, Collin Room, 13340 Dallas Parkway, Dallas, Texas, or
at any adjournment or postponement thereof.
With respect to all matters, the holders of common stock will have one vote
per share.
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
The shares represented hereby will be voted as specified below. WHERE NO
SPECIFICATIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2 Please
mark your votes as indicated in this example [X]
1. Proposal to amend the Articles of Incorporation, as amended, of the Company
to increase the number of authorized shares of Common Stock from 50,000,000
to 100,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to approve the sale by the Company of 41,666,666 shares of its
Common Stock to HM4 Coho L.P. pursuant to an Amended and Restated Stock
Purchase Agreement dated effective August 21, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote on such other matters
as may properly come before the meeting or any adjournment or postponement
thereof.
All of the above matters are more particularly described in the accompanying
Proxy Statement dated November 10, 1998, receipt of which is hereby
acknowledged.
Date:
-------------------------------- ,
1998
--------------------------------
Signature of Shareholder
--------------------------------
Signature of Shareholder
Please sign your name exactly as
it appears hereon. Joint owners
should each sign. When signing
as an attorney, administrator,
executor, guardian or trustee,
please add your title as such.
If executed by a corporation,
the proxy should be signed by a
duly authorized officer.
PLEASE DATE, SIGN, AND MAIL THIS PROXY IN THE ENCLOSED ENVELOPE; NO POSTAGE IS
NECESSARY IF MAILED IN THE UNITED STATES.
