<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
REGISTRATION NO. 333-41851
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
To
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
SONAT INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4922 63-0647939
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
---------------------
1900 FIFTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
(205) 325-3800
FACSIMILE: (205) 325-7444
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
<TABLE>
<C> <C>
WILLIAM A. SMITH JOSEPH J. ROMANO
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT AND
SONAT INC. CHIEF FINANCIAL OFFICER
1900 FIFTH AVENUE NORTH ZILKHA ENERGY COMPANY
BIRMINGHAM, ALABAMA 35203 1201 LOUISIANA STREET, SUITE 3200
(205) 325-3800 HOUSTON, TEXAS 77002
FACSIMILE: (205) 325-7444 (713) 655-5900
FACSIMILE: (713) 655-5963
</TABLE>
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
---------------------
Copies to:
<TABLE>
<C> <C>
EDGAR J. MARSTON III WILLIAM N. FINNEGAN, IV
BRACEWELL & PATTERSON, L.L.P. ANDREWS & KURTH L.L.P.
711 LOUISIANA STREET, SUITE 2900 4200 TEXAS COMMERCE TOWER
HOUSTON, TEXAS 77002-2781 HOUSTON, TEXAS 77002-3090
(713) 223-2900 (713) 220-4200
FACSIMILE: (713) 221-1212 FACSIMILE: (713) 220-4285
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective and all other
conditions to the merger of a wholly owned subsidiary of Registrant with and
into Zilkha Energy Company pursuant to the Agreement and Plan of Merger, dated
as of November 22, 1997, described in the enclosed Proxy Statement/Prospectus
have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PRELIMINARY COPY -- SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1997
---------------------
[SONAT LOGO]
December , 1997
Dear Fellow Stockholder:
You are cordially invited to attend a special meeting (the "Special
Meeting") of the stockholders of Sonat Inc. ("Sonat"), to be held on Friday,
January 30, 1998, at 11:00 a.m., local time, at the Four Seasons Hotel Houston,
1300 Lamar Street, Houston, Texas 77010.
Sonat has entered into an Agreement and Plan of Merger, dated as of
November 22, 1997, ("Merger Agreement") with Zilkha Energy Company ("Zilkha"), a
privately-owned oil and gas company headquartered in Houston, Texas, pursuant to
which a wholly-owned subsidiary of Sonat will be merged (the "Merger") into
Zilkha in a share-for-share exchange. The terms of the Merger Agreement provide
for Sonat to issue an aggregate number of shares of its common stock, including
associated preference stock purchase rights, having a value of approximately
$1.04 billion based upon the average closing price of such shares on the New
York Stock Exchange for a specified period prior to the consummation of the
Merger ("Stock Issuance"); provided that for the purposes of such calculation,
the average closing price shall not be more than $51 per share nor, unless Sonat
otherwise agrees, less than $39 per share ("Merger Consideration"). Based on
Sonat's closing price of $ per share on December 26, 1997, Sonat would
issue approximately million shares in the Merger, representing
approximately % of its outstanding common stock after giving effect to the
Merger. In addition, Sonat will assume debt and other obligations of Zilkha
bringing the total consideration to approximately $1.3 billion.
Your Board of Directors believes that the Merger is in the best interests
of the Sonat stockholders because it will, among other things: (i) make Sonat
one of the leading independent oil and gas companies in the shallow water area
of the Gulf of Mexico with a large undeveloped acreage position for future
exploratory drilling; (ii) provide Sonat with a greater strategic balance
between its onshore and its offshore exploration and production properties; and
(iii) increase Sonat's opportunities in its exploration and production business
segment which Sonat believes will enhance long-term growth for its stockholders.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT
AND HAS CONCLUDED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. ACCORDINGLY, YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE STOCK ISSUANCE.
Your Board of Directors has retained as financial advisor Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), which has delivered its
written opinion dated as of November 22, 1997, to the effect that the Merger
Consideration is fair to Sonat from a financial point of view. A copy of the
Merrill Lynch opinion letter, which sets forth the assumptions made, matters
considered and the scope of review undertaken in connection therewith, is set
forth as Appendix B to the accompanying Proxy Statement/ Prospectus and should
be read carefully in its entirety.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement/Prospectus relating to the actions to
be taken by stockholders at the Special Meeting and a proxy card. The Proxy
Statement/Prospectus more fully describes the proposed Merger and includes
information about Sonat and Zilkha and the reasons for the Merger.
Your vote is important, regardless of the number of shares you own.
Approval of the Stock Issuance requires an affirmative vote of holders of a
majority of the shares of common stock of Sonat present and entitled to vote at
the Special Meeting. I RESPECTFULLY URGE YOU TO COMPLETE, DATE AND
<PAGE> 3
SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. This will not prevent you from attending the Special
Meeting or voting in person, but will ensure that your vote is counted if you
are unable to attend the Special Meeting.
On behalf of your Board of Directors, I thank you for your support and urge
you to vote FOR approval of the Stock Issuance.
Sincerely,
RONALD L. KUEHN, JR.
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 4
PRELIMINARY COPY -- SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1997
[SONAT LOGO]
P.O. BOX 2563
BIRMINGHAM, ALABAMA 35202
(205) 325-3800
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 30, 1998
To Our Stockholders:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
the stockholders of Sonat Inc., a Delaware corporation ("Sonat"), will be held
at the Four Seasons Hotel Houston, 1300 Lamar Street, Houston, Texas 77010, on
Friday, January 30, 1998, at 11:00 a.m., local time, for the following purposes:
1. To approve the issuance (the "Stock Issuance") of shares of Sonat
common stock, par value $1.00 per share ("Sonat Common Stock"), pursuant to
the merger (the "Merger") of Sonat Acquisition Corporation, a wholly owned
subsidiary of Sonat, with and into Zilkha Energy Company ("Zilkha"), in
accordance with the Agreement and Plan of Merger, dated as of November 22,
1997, between Sonat and Zilkha (the "Merger Agreement"); and
2. To transact any other business which may be properly brought before
the Special Meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on December 26, 1997
are entitled to notice of, and to vote at, the Special Meeting and at any and
all adjournments or postponements thereof. Please refer to the attached Proxy
Statement/Prospectus for a more complete description of the Merger, the Merger
Agreement and the transactions contemplated in connection therewith.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE STOCK
ISSUANCE. THE MERGER AND THE MERGER AGREEMENT ARE DESCRIBED IN DETAIL IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF SONAT
COMMON STOCK PRESENT AND ENTITLED TO VOTE IS REQUIRED TO APPROVE THE STOCK
ISSUANCE. YOU ARE URGED TO SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON, IF YOU WISH,
AND REVOKE ANY PREVIOUSLY SUBMITTED PROXY CARD.
YOUR VOTE IS IMPORTANT.
Stockholders are cordially invited to attend the Special Meeting. It is
important that your shares of Sonat Common Stock be represented and voted at the
Special Meeting, regardless of the number of shares you hold. If you wish to
vote in accordance with the recommendation of the Sonat Board of Directors, all
you need to do is date and sign the proxy card and mail it in the enclosed
envelope. If you receive more than one proxy card, it is an indication that your
shares are registered in more than one account. Please return promptly all proxy
cards received by you to ensure that all your shares are voted.
By order of the Board of Directors,
BEVERLEY T. KRANNICH
Secretary
Birmingham, Alabama
December , 1997
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY COPY -- SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1997
[SONAT LOGO]
---------------------
SONAT INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 30, 1998
---------------------
SONAT INC.
PROSPECTUS
---------------------
This Proxy Statement/Prospectus constitutes the proxy statement of Sonat
Inc., a Delaware corporation ("Sonat"), relating to the solicitation of proxies
for use at the special meeting of stockholders of Sonat scheduled to be held on
January 30, 1998, and at any adjournments or postponements thereof (the "Special
Meeting"). This Proxy Statement/Prospectus relates to the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of November 22, 1997, between Sonat
and Zilkha Energy Company, a Delaware corporation ("Zilkha"), pursuant to which
Sonat Acquisition Corporation, a wholly-owned subsidiary of Sonat ("Newco"),
will merge (the "Merger") with and into Zilkha which will promptly change its
name to Sonat Exploration GOM Inc. (such combined company after the Merger is
referred to herein as "Sonat GOM"). In the Merger, the shares of common stock,
$1.00 par value, and the shares of 11% cumulative preferred stock, no par value,
of Zilkha (collectively, the "Zilkha Stock") outstanding immediately prior to
the effective time of the Merger will be converted into the right to receive an
aggregate number of shares of Common Stock, $1.00 par value, of Sonat ("Sonat
Common Stock"), together with the associated preference stock purchase rights
under the Rights Plan (the "Sonat Rights Plan") dated as of January 8, 1996, as
amended, between Sonat and ChaseMellon Shareholder Services, L.L.C., as rights
agent ("Sonat Rights"), equal to the quotient of (i) $1,044,850,000 divided by
(ii) the average closing price of the Sonat Common Stock on the New York Stock
Exchange, Inc. ("NYSE") for the 15 consecutive trading days ending on and
including the third trading day prior to the effective time of the Merger;
provided that, for purposes of the foregoing determination, in no event shall
the average closing price be more than $51 per share nor, unless Sonat shall
agree, less than $39 per share. Cash will be paid in lieu of any fractional
share of Sonat Common Stock.
The consummation of the Merger is subject to, among other things, the
approval of the issuance of shares of Sonat Common Stock (the "Stock Issuance")
pursuant to the Merger by the affirmative vote of the holders of a majority of
the shares of Sonat Common Stock present and entitled to vote at the Special
Meeting. The Merger has already been approved by the unanimous written consent
of all three stockholders of Zilkha. A copy of the Merger Agreement is attached
hereto as Appendix A.
This Proxy Statement/Prospectus also constitutes the prospectus of Sonat
with respect to the Sonat Common Stock to be issued to Zilkha stockholders
pursuant to the Merger. A registration statement on Form S-4 (the "Registration
Statement") has been filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of Sonat Common Stock to be so issued in the
Merger. At average closing prices of $51, $39 and $ per share (the closing
price of the Sonat Common Stock on the NYSE on December 26, 1997), Sonat would
issue approximately 20.5 million, 26.8 million and million shares,
respectively, of Sonat Common Stock in the aggregate to the Zilkha stockholders
in the Merger, representing approximately 19.3%, 23.8% and %, respectively,
of the Sonat Common Stock outstanding after giving effect to the Merger.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Sonat on or about December 30, 1997.
---------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Proxy Statement/Prospectus is December , 1997.
<PAGE> 6
INTERIOR OF FOLD-OUT INSIDE COVER PAGE
[Five color map of Sonat and Zilkha Lease and
Seismic Position Offshore Gulf of Mexico.]
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................... 2
Incorporation of Documents by Reference..................... 3
Summary..................................................... 4
The Transaction........................................... 4
The Companies............................................. 4
The Special Meeting....................................... 5
The Merger and the Merger Agreement....................... 6
Cautionary Statement Concerning Forward-looking
Statements.............................................. 9
Market Price and Dividend Information..................... 10
Comparative Per Share Data................................ 11
Summary Selected Historical Consolidated Financial Data of
Sonat................................................... 12
Summary Selected Historical Consolidated Financial Data of
Zilkha.................................................. 13
Summary Unaudited Pro Forma Combined Financial Data....... 14
The Special Meeting......................................... 15
General................................................... 15
Purpose of Special Meeting................................ 15
Record Date; Shares Entitled to Vote...................... 15
Quorum; Vote Required; Security Ownership of Management... 15
Proxies................................................... 15
The Companies............................................... 17
Sonat..................................................... 17
Zilkha.................................................... 17
Newco..................................................... 18
The Merger.................................................. 18
General................................................... 18
Background of the Merger.................................. 18
Reasons for the Merger; Recommendations of the Sonat
Board................................................... 19
Opinion of Merrill Lynch.................................. 21
Map of Offshore Gulf of Mexico............................ 26
Combined Operations After the Merger...................... 26
Accounting Treatment...................................... 26
U.S. Federal Income Tax Consequences...................... 26
Sonat GOM Board and Management Following the Merger....... 26
Board of Directors of Sonat Following the Merger.......... 27
Ownership of Sonat Following the Merger................... 27
Governmental and Regulatory Approvals..................... 27
Absence of Appraisal Rights............................... 28
Stock Exchange Listing.................................... 28
Treatment of Stock Certificates........................... 28
Selected Historical Consolidated Financial Data of Sonat
Inc....................................................... 29
Selected Historical Consolidated Financial Data of Zilkha
Energy Company............................................ 30
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Zilkha Energy Company........ 31
Overview.................................................. 31
Results of Operations..................................... 32
September 30, 1997 Compared to September 30, 1996......... 32
1996 Compared to 1995..................................... 33
1995 Compared to 1994..................................... 34
Liquidity and Capital Resources........................... 35
Market and Financial Risk Management...................... 35
Inflation and the Effect of Changing Energy Prices........ 36
Environmental Issues...................................... 36
Recent Accounting Pronouncements.......................... 36
Description of Zilkha....................................... 37
General................................................... 37
Oil and Gas Reserves...................................... 38
Exploration and Development Activity...................... 39
Net Production, Unit Prices and Production Costs.......... 40
Development, Exploration and Acquisition Expenditures..... 41
Acreage................................................... 41
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Oil and Gas Marketing..................................... 41
Hedging................................................... 41
Competition............................................... 42
Employees................................................. 42
Facilities................................................ 42
Title to Properties....................................... 42
Operating Hazards and Uninsured Risks..................... 42
Governmental Regulation................................... 43
Environmental Matters..................................... 43
Legal Proceedings......................................... 43
Employee Benefit Plans.................................... 43
The Merger Agreement........................................ 45
General................................................... 45
Consideration to Be Received in the Merger................ 45
Effective Time of the Merger.............................. 45
Corporate Organization and Governance..................... 45
Stockholders' Approvals................................... 46
Representations and Warranties............................ 46
Conduct of Business Pending the Merger.................... 47
Additional Agreements..................................... 48
Employee Matters.......................................... 49
Conditions Precedent...................................... 49
Termination and Amendment................................. 50
Registration Rights Agreement............................. 51
Fees and Expenses......................................... 51
Certain U.S. Federal Income Tax Consequences of the
Merger.................................................... 52
General................................................... 52
Tax Consequences to Sonat and Zilkha...................... 52
Tax Consequences to Holders of Zilkha Stock............... 52
Backup Withholding........................................ 52
Comparison of the Rights of Holders of Sonat Common Stock
and Zilkha Stock.......................................... 53
Directors................................................. 53
Annual and Special Meetings............................... 53
Limitation on Transactions with Related Parties........... 54
By-law Amendments......................................... 54
Certain Charter Amendments................................ 54
Market Price and Dividend Information....................... 55
Experts..................................................... 56
Legal Matters............................................... 56
Stockholder Proposals....................................... 56
Glossary of Certain Oil and Natural Gas Terms............... 57
Index to Financial Statements............................... F-1
Merger Agreement....................................... Appendix A
Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................Appendix B
</TABLE>
<PAGE> 9
AVAILABLE INFORMATION
Sonat is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following Regional Offices of the Commission: Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material may also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549, at prescribed rates. The Commission also
maintains a World Wide Web site that contains reports, proxy and information
statements, and other information regarding registrants (including Sonat) that
file electronically with the Commission (at http://www.sec.gov). The Sonat
Common Stock is listed on the NYSE and The Pacific Stock Exchange, Incorporated
("PSE") and reports, proxy statements and other information relating to Sonat
can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement filed with the Commission by Sonat, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to the Registration Statement and the exhibits
thereto for further information. Exhibits to the Registration Statement that are
omitted from this Proxy Statement/Prospectus may also be obtained at the
Commission's World Wide Web site described above. Statements contained or
incorporated by reference herein concerning the provisions of any agreement or
other document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission are not necessarily complete, and readers are referred
to the copy so filed for more detailed information, each such statement being
qualified in its entirety by such reference.
Each of Sonat and Zilkha has supplied all information contained or
incorporated by reference in this Proxy Statement/Prospectus relating to Sonat
and Zilkha, respectively.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER
THAN EXHIBITS THERETO WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER OF SHARES OF SONAT COMMON STOCK TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
SENT, UPON WRITTEN OR ORAL REQUEST, TO BEVERLEY T. KRANNICH, SECRETARY, SONAT
INC., 1900 FIFTH AVENUE NORTH, BIRMINGHAM, ALABAMA 35203, TELEPHONE (205)
325-7105. IN ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE SPECIAL MEETING,
ANY SUCH REQUEST SHOULD BE MADE NOT LATER THAN JANUARY 23, 1998.
---------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
BY THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SONAT.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE
OF THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
2
<PAGE> 10
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents heretofore filed by Sonat with the Commission
pursuant to the Exchange Act (File No. 001-07179) are incorporated herein by
reference and shall be deemed a part hereof:
(i) the Sonat Proxy Statement on Schedule 14A dated March 19, 1997;
(ii) the Sonat Annual Report on Form 10-K for the year ended
December 31, 1996;
(iii) the Sonat Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(iv) the Sonat Current Reports on Form 8-K filed on September 30,
1997 and November 24, 1997; and
(v) the Sonat Registration Statements on Form 8-A filed with respect
to the Sonat Common Stock and the Sonat Rights, in each case as
amended to date.
All reports and other documents filed by Sonat pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
dates of filing of such reports and documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein, or in any
other subsequently filed document that also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes the earlier statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement/Prospectus.
3
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
or incorporated by reference in this Proxy Statement/Prospectus and in the
appendices hereto including, but not limited to, the Merger Agreement set forth
as Appendix A hereto. Unless otherwise defined, capitalized terms used in this
summary have the respective meanings ascribed to them elsewhere in this Proxy
Statement/Prospectus. Stockholders of Sonat are urged to read carefully this
Proxy Statement/Prospectus, the appendices hereto, and the documents
incorporated by reference herein, in their entirety. Unless the context
otherwise requires, as used herein the term "Sonat" refers to Sonat Inc. and its
subsidiaries and the term "Zilkha" refers to Zilkha Energy Company and its
subsidiary. For the convenience of the reader, a "Glossary of Certain Oil and
Natural Gas Terms" appears on page 57.
THE TRANSACTION
The merger of Zilkha with a wholly owned subsidiary of Sonat will result in
Zilkha's three stockholders receiving in a tax-free transaction an aggregate
number of shares of Sonat Common Stock and associated Sonat Rights (the "Merger
Consideration") equal to the quotient of (i) $1,044,850,000 (the "Purchase
Price") divided by (ii) the average closing price of the Sonat Common Stock on
the NYSE for the 15 consecutive trading days ending on and including the third
trading day prior to the effective time of the Merger (the "Closing Price");
provided that, for purposes of the foregoing determination, in no event shall
the Closing Price be more than $51 per share nor, unless Sonat otherwise agrees,
less than $39 per share. In the Merger, Zilkha will become a wholly owned
subsidiary of Sonat.
The Merger will: (i) make Sonat one of the leading independent oil and gas
companies in the shallow water area of the Gulf of Mexico with a large
undeveloped acreage position for future exploratory drilling; (ii) provide Sonat
with a greater strategic balance between its onshore and its offshore
exploration and production properties; and (iii) increase Sonat's opportunities
in its exploration and production business segment which Sonat believes will
enhance long-term growth for its stockholders.
THE COMPANIES
SONAT
Sonat is a diversified energy holding company. It is engaged through Sonat
Exploration Company in domestic oil and natural gas exploration and production,
through Southern Natural Gas Company and Citrus Corp. in the transmission and
storage of natural gas, and through Sonat Energy Services Company in natural gas
and electric power marketing. Sonat has interests in oil and gas producing
properties in Louisiana, Texas, Oklahoma, Arkansas, Alabama, New Mexico, Kansas
and the Gulf of Mexico. At December 31, 1996, its total proved equivalent
reserves were approximately 2 Tcfe.
Sonat's principal executive offices are located at 1900 Fifth Avenue North,
Birmingham, Alabama 35203, and its telephone number at that address is (205)
325-3800.
ZILKHA
Zilkha is a private oil and gas exploration, development and production
company operating primarily offshore in the Gulf of Mexico. It holds the
industry's largest net leasehold position in the shallow water area (less than
600 feet) of the Gulf of Mexico. Zilkha has an ownership interest in
approximately 390 state and federal lease blocks, of which approximately 340
lease blocks (covering approximately 1.4 million net acres) are undeveloped.
Zilkha has a contractual interest (with rights to drill to earn) in
approximately 200,000 additional undeveloped acres. It also has licensed or
contracted to license 3-D seismic data covering approximately 6,100 lease blocks
in both shallow and deep water areas of the Gulf of Mexico. Zilkha's total
proved reserves at July 1, 1997 were 415 Bcfe.
4
<PAGE> 12
Zilkha's principal executive offices are located at 1201 Louisiana Street,
Suite 3200, Houston, Texas 77002, and its telephone number at that address is
(713) 655-5900.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on Friday, January 30, 1998, at the Four
Seasons Hotel Houston, 1300 Lamar Street, Houston, Texas, 77010, commencing at
11:00 a.m. local time. See "The Special Meeting -- General."
PURPOSE OF THE SPECIAL MEETING
The purpose of the Special Meeting is to: (i) consider and vote upon a
proposal (the "Proposal") to approve the Stock Issuance in accordance with the
Merger Agreement; and (ii) transact such other business as may properly come
before the Special Meeting. See "The Special Meeting -- Purpose of the Special
Meeting."
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of shares of Sonat Common Stock at the close of
business on December 26, 1997 (the "Record Date") are entitled to notice of and
to vote at the Special Meeting. On the Record Date, there were shares of
Sonat Common Stock outstanding. Each share of Sonat Common Stock will be
entitled to one vote on each matter to be acted upon at the Special Meeting. See
"The Special Meeting -- Record Date; Shares Entitled to Vote."
QUORUM VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
Quorum. The By-laws of Sonat (the "Sonat By-laws") require the holders of a
majority of the outstanding shares of Sonat Common Stock to be present in person
or by proxy for any action to be taken with respect to the Proposal. For
purposes of determining whether this quorum requirement is met, abstentions and
broker non-votes received in connection with properly signed and returned
proxies will be counted as shares present.
Vote Required. The affirmative vote of the holders of a majority of the
shares of Sonat Common Stock present in person or by proxy and entitled to vote
is required to approve the Stock Issuance, provided that the total number of
votes cast (excluding abstentions and broker non-votes) on the Stock Issuance
represents more than 50% of the outstanding shares of Sonat Common Stock
entitled to vote thereon at the Special Meeting, as required by applicable NYSE
rules. An abstention with respect to the Stock Issuance will have the effect of
a vote cast against the Proposal. Brokers who hold shares of Sonat Common Stock
as nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners thereof. Assuming that a
quorum is present at the Special Meeting, any shares which are not voted by such
brokers at the Special Meeting will have no effect upon the outcome of the vote
with respect to the Stock Issuance. See "The Special Meeting -- Record Date;
Shares Entitled to Vote" and "-- Proxies."
Security Ownership of Management. As of the Record Date, the directors and
executive officers of Sonat owned approximately 0.5% of the outstanding shares
of Sonat Common Stock entitled to vote at the Special Meeting. Each of the
directors and executive officers of Sonat has advised Sonat that he or she plans
to vote or to direct the vote of all shares of Sonat Common Stock owned by him
or her and entitled to vote in favor of the Stock Issuance.
5
<PAGE> 13
THE MERGER AND THE MERGER AGREEMENT
GENERAL
The Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference.
In the Merger, Newco will be merged with and into Zilkha, with Zilkha
surviving the Merger as a wholly-owned subsidiary of Sonat. The Merger will
become effective at the time (the "Effective Time") that a Certificate of Merger
(the "Certificate of Merger") is filed with the Secretary of State of Delaware,
which is currently expected to occur once requisite regulatory and stockholder
approval of the Stock Issuance is secured and the other conditions set forth in
the Merger Agreement are satisfied. See "The Merger-Agreement-- Conditions
Precedent."
MERGER CONSIDERATION
In the Merger, the shares of Zilkha Stock issued and outstanding
immediately prior to the Effective Time, without any action on the part of the
holders thereof, will be converted into the right to receive, without interest,
the Merger Consideration. Cash will be paid in lieu of any fractional share of
Sonat Common Stock. See "The Merger Agreement -- Consideration to be Received in
the Merger" for information regarding the circumstances under which the Purchase
Price will be reduced in the event that the estimated future net cash flow,
discounted at 10%, from fields comprising Zilkha's estimated proved reserves at
July 1, 1997 decline by more than $50 million.
BACKGROUND AND REASONS FOR THE MERGER; RECOMMENDATION OF THE SONAT BOARD
The Board of Directors of Sonat (the "Sonat Board") believes that the
Merger is fair to, and in the best interests of, the Sonat stockholders because,
among other things, it will: (i) make Sonat one of the leading independent oil
and gas companies in the shallow water area of the Gulf of Mexico with a large
undeveloped acreage position for future exploratory drilling; (ii) provide Sonat
with a greater strategic balance between its onshore and its offshore
exploration and production properties; and (iii) increase Sonat's opportunities
in its exploration and production business segment which Sonat believes will
enhance long-term growth for its stockholders.
The Sonat Board unanimously recommends that the holders of Sonat Common
Stock vote FOR approval of the Stock Issuance. For a more detailed discussion of
the factors considered by the Sonat Board in reaching its decision and the
background and reasons for the Merger, see "The Merger -- Background of the
Merger" and "-- Reasons for the Merger; Recommendations of the Sonat Board."
OPINION OF MERRILL LYNCH
The authority of the officers of Sonat to enter into the Merger Agreement
was conditioned by the Sonat Board upon the receipt by Sonat of a fairness
opinion ("Fairness Opinion") from its financial advisor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), to the effect that, as of the
date of the Merger Agreement, the Merger Consideration was fair from a financial
point of view to Sonat. The Fairness Opinion is attached as Appendix B to this
Proxy Statement/Prospectus. Stockholders are encouraged to read this opinion.
See "The Merger -- Opinion of Merrill Lynch."
MAP OF OFFSHORE GULF OF MEXICO
The map on the inside cover page of this Proxy Statement/Prospectus shows
the location of the offshore lease blocks in the Gulf of Mexico in which either
Sonat or Zilkha owns an interest and the portions of the Gulf of Mexico covered
by the 3-D seismic data that Zilkha is licensed to use and reprocess or has
contracted to license.
6
<PAGE> 14
COMBINED OPERATIONS AFTER THE MERGER
Following the Merger, Sonat intends to fold its offshore Gulf of Mexico
exploration and development operations into the more extensive Zilkha unit.
Sonat has successfully concluded negotiations with the senior managers of Zilkha
(other than Michael Zilkha who will become a member of the Sonat Board) to
employ them to oversee Sonat's combined Gulf of Mexico operations after the
Merger. Promptly following the Merger, Sonat intends to change the name of
Zilkha to Sonat Exploration GOM Inc.
ACCOUNTING TREATMENT
The Merger is intended to qualify for "pooling of interests" accounting
treatment under generally accepted accounting principles. Pooling of interests
accounting treatment is a condition to the consummation of the Merger. See "The
Merger -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon, among other things, receipt
by Zilkha of an opinion of its tax counsel, Andrews & Kurth L.L.P., and by Sonat
of an opinion of its tax counsel, Bracewell & Patterson, L.L.P., that the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). Hence, a holder of
Zilkha Stock will not recognize gain or loss on the exchange of Zilkha Stock for
Sonat Common Stock pursuant to the Merger, except to the extent that such holder
receives cash in lieu of fractional shares of Sonat Common Stock. See "Certain
U.S. Federal Income Tax Consequences of the Merger." There will be no tax
consequences to the other stockholders of Sonat immediately prior to the
Effective Time.
SONAT GOM BOARD AND MANAGEMENT FOLLOWING THE MERGER
If the proposed Merger is approved and consummated, holders of Zilkha Stock
will become stockholders of Sonat. Sonat will remain under the direction of the
Sonat Board and management of Sonat. The officers and directors of Newco
immediately prior to the Effective Time will be the officers and directors of
Sonat GOM, in each case until their respective successors are duly elected and
qualified.
BOARD OF DIRECTORS OF SONAT FOLLOWING THE MERGER
Immediately following the Effective Time, the Sonat Board will consist of
14 members. Two members of the Sonat Board will be Selim K. Zilkha, the sole
director of Zilkha, and his son, Michael Zilkha. The remainder of the Sonat
Board will be Sonat's current directors. See "The Merger -- Board of Directors
of Sonat Following the Merger."
Mr. Selim K. Zilkha is the sole director and Chief Executive Officer of
Zilkha. He has served as such since March 1984. Prior to such time, Mr. Selim K.
Zilkha was a banker with Zilkha & Sons in the United States and Europe from 1947
to 1955 and in London from 1955 to 1960. In 1960, he founded Mothercare, PLC, a
retail chain, catering to mothers-to-be, babies and small children in Great
Britain, Europe and the United States. In January 1982, Mr. Selim K. Zilkha sold
his interest in Mothercare, PLC. Mr. Selim K. Zilkha has a BA in Philosophy from
Williams College. Upon consummation of the Merger, Mr. Selim K. Zilkha will be
appointed to the Sonat Board and to its Strategic Planning Committee.
Mr. Michael Zilkha currently serves as Executive Vice President of Zilkha
and has been with Zilkha since July 1986. He was an editor at Atlantic Monthly
Press from 1985 to 1986, and from 1978 to 1985, he was President of ZE Records,
an independent record production company in New York. He has an MA in French and
Philosophy from Oxford University. Upon consummation of the Merger, Mr. Michael
Zilkha will be appointed to the Sonat Board and to its Strategic Planning
Committee. See "The Merger Agreement -- Employee Matters" for information
regarding a cash payment that Mr. Michael Zilkha will receive upon consummation
of the Merger as one of the four participants in a long-term incentive
compensation plan (the "Executive Compensation Plan") for senior managers of
Zilkha.
7
<PAGE> 15
OWNERSHIP OF SONAT FOLLOWING THE MERGER
At Closing Prices of $51, $39 and $ per share (the closing price of the
Sonat Common Stock on the NYSE on December 26, 1997), Sonat would issue
approximately 20.5 million, 26.8 million and million shares, respectively,
of Sonat Common Stock in the Merger, representing approximately 19.3%, 23.8% and
%, respectively, of the Sonat Common Stock outstanding after giving effect
to the Merger. Michael Zilkha, the Selim K. Zilkha Trust and the Selim K. Zilkha
(1996) Annuity Trust will acquire approximately %, % and %,
respectively, of the shares of Sonat Common Stock issued in the Merger. These
percentages are based on a Closing Price of $ and the amount of accrued and
unpaid dividends on the Zilkha preferred stock as of December 26, 1997. Messrs.
Michael Zilkha, Selim K. Zilkha and Ezra Zilkha, as trustee, have sole voting
and dispositive power over the shares of Sonat Common Stock issuable in the
Merger to Michael Zilkha, the Selim K. Zilkha Trust and the Selim K. Zilkha
(1996) Annuity Trust, respectively.
REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), prohibits consummation of the Merger until Premerger Notification
and Report Forms have been submitted and certain information has been furnished
to the United States Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the specified waiting period requirements of the HSR Act have expired or
been terminated. The required waiting period under the HSR Act with respect to
the Merger was terminated on December 19, 1997.
ABSENCE OF APPRAISAL RIGHTS
Under the General Corporation Law of the State of Delaware (the "DGCL"),
the stockholders of Sonat are not entitled to appraisal rights with respect to
the Stock Issuance. All the stockholders of Zilkha have approved the Merger, the
Merger Agreement and the transactions contemplated thereby.
CONDITIONS PRECEDENT TO THE MERGER
The obligations of Sonat and Zilkha to effect the Merger are subject, among
other things, to the fulfillment of certain conditions, including without
limitation: (i) the approval of the Stock Issuance by the requisite vote of the
stockholders of Sonat; (ii) the expiration or termination of any waiting period
applicable to the consummation of the Merger under the HSR Act; (iii) the
effectiveness of the Registration Statement and the absence of any stop order
suspending such effectiveness or any proceedings for such purpose or, in the
case of Sonat, the Sonat Common Stock being exempt from the registration
requirements of the Securities Act; (iv) the absence of any applicable law or
regulation or any judgment, injunction, order or decree prohibiting the
consummation of the Merger; (v) the approval for listing on the NYSE, subject
only to official notice of issuance, of the shares of Sonat Common Stock to be
issued pursuant to the Stock Issuance; (vi) the delivery by Ernst & Young LLP,
Sonat's independent auditors, of a letter addressed to Sonat that the Merger
qualifies for pooling of interests accounting treatment in accordance with
generally accepted accounting principles and the rules, regulations and
interpretations of the Commission ("Pooling Transaction"); (vii) the delivery by
KPMG Peat Marwick LLP, Zilkha's independent certified public accountants, of a
letter addressed to Zilkha that Zilkha has met the requirements of a Pooling
Transaction; (viii) a Closing Price of not less than $39 per share, unless Sonat
otherwise agrees or Zilkha agrees to fix such Closing Price at $39 per share;
and (ix) the receipt by Zilkha of an opinion of Andrews & Kurth L.L.P. and the
receipt by Sonat of an opinion of Bracewell & Patterson, L.L.P., in each case
that the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code.
The obligation of Zilkha to effect the Merger is also subject to the
satisfaction of certain additional conditions, including the absence of any
breach or breaches of the representations and warranties of Sonat that would,
individually or in the aggregate, have a material adverse effect, the
performance in all material respects of the obligations and covenants of Sonat
under the Merger Agreement and the receipt of a certificate from Sonat to such
effect.
8
<PAGE> 16
The obligation of Sonat to effect the Merger is also subject to the
satisfaction of certain additional conditions, including the absence of any
breach or breaches of the representations and warranties of Zilkha that would,
individually or in the aggregate, have a material adverse effect, the
performance in all material respects of the obligations and covenants of Zilkha
under the Merger Agreement and the receipt of a certificate from Zilkha to such
effect.
Either party to the Merger Agreement may, by an instrument in writing,
waive compliance by the other party with any term or provision of the Merger
Agreement on the part of such other party to be performed or complied with. See
"The Merger Agreement -- Termination and Amendment."
TERMINATION OF THE MERGER
The Merger Agreement may be terminated by either Sonat or Zilkha and the
Merger abandoned under certain circumstances, including, but not limited to, the
following: (i) the Merger has not been consummated by May 31, 1998, provided
that the terminating party has not breached any covenant, agreement or other
contractual obligation in the Merger Agreement in any manner that results in the
failure of the Merger to be consummated; (ii) any law or regulation makes
consummation of the Merger illegal or otherwise prohibited or any judgment,
injunction, order or decree enjoining Sonat or Zilkha from consummating the
Merger has been entered and become final and non-appealable; or (iii) the Stock
Issuance was not approved by the Sonat stockholders after the matter has been
presented to them for a vote at the Special Meeting.
The Merger Agreement may also be terminated prior to the Effective Time,
before or after approval by the Sonat stockholders of the Stock Issuance, by the
mutual consent of Sonat and Zilkha.
If the Merger Agreement is terminated (i) by Sonat or Zilkha because the
Sonat stockholders do not approve the Stock Issuance after the matter shall have
been presented to them for a vote, (ii) by Sonat after May 31, 1998 and prior to
the approval of the Stock Issuance by its stockholders at the Special Meeting,
or (iii) by Sonat after May 31, 1998 and prior to the consummation of the Merger
because the Closing Price is less than $39 per share, Sonat will pay Zilkha $25
million in lieu of any other damages resulting from such termination. If the
Merger Agreement is terminated because the Sonat stockholders do not approve the
Stock Issuance after the Sonat Board has withdrawn or modified in a manner
adverse to Zilkha its favorable recommendation regarding the Stock Issuance,
Sonat will pay Zilkha $50 million in lieu of any other damages resulting from
such termination. See "The Merger Agreement -- Termination and Amendment."
COMPARATIVE RIGHTS OF HOLDERS OF SONAT COMMON STOCK AND ZILKHA STOCK
The rights of holders of Zilkha Stock are currently governed by Delaware
law, the Zilkha Certificate of Incorporation (the "Zilkha Charter") and the
Zilkha By-laws (the "Zilkha By-laws"). If the Merger is consummated and becomes
effective pursuant to the terms of the Merger Agreement, the rights of former
Zilkha stockholders will continue to be governed by Delaware law. However, the
terms of the Zilkha Charter and Zilkha By-laws differ in several respects from
Sonat's Restated Certificate of Incorporation (the "Sonat Charter") and the
Sonat By-laws. Hence, the rights of the Zilkha stockholders and the Sonat
stockholders are not identical. See "Comparison of the Rights of Holders of
Sonat Common Stock and Zilkha Stock" for a description of such differences.
ACTION BY ZILKHA STOCKHOLDERS
Effective as of November 22, 1997, the three Zilkha stockholders executed a
unanimous written consent approving the Merger, the Merger Agreement and the
transactions contemplated thereby as required by the DGCL. The Zilkha
stockholders have agreed not to rescind the foregoing approval unless Zilkha
terminates the Merger Agreement as permitted by the terms thereof. See "The
Merger Agreement -- Stockholders' Approvals -- Zilkha."
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains or incorporates by reference
forward-looking statements that are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or
9
<PAGE> 17
assumed future results of operations of Sonat and Zilkha such as statements of
estimated oil and gas production and reserves, drilling plans, future
exploratory and development drilling success, future earnings and cash flows,
anticipated capital expenditures and managements' strategies, plans and
objectives as set forth under "The Merger -- Background of the Merger,"
"-- Reasons for the Merger; Recommendations of the Sonat Board," "-- Opinion of
Merrill Lynch" and those preceded by, followed by or that include the words
"believes," "expects," "anticipates" or similar expressions. The following
important factors, in addition to those discussed elsewhere in this Proxy
Statement/Prospectus and in the documents which are incorporated herein by
reference, could affect the future results of the energy industry in general,
and Sonat and/or Zilkha in particular, and could cause those results to differ
materially from those expressed in such forward-looking statements: risks
incident to the drilling and operation of oil and gas wells; future production
and development costs; the effect of existing and future laws and regulatory
actions; the political and economic climate in the United States and elsewhere
in the world; the effect of changes in commodity prices, hedging activities and
conditions in the capital markets; a significant delay in the expected closing
of the Merger; and competition from others in the energy industry. For
additional information with respect to these and other factors, see Sonat's
Annual Report on Form 10-K for the year ended December 31, 1996 and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 that are
incorporated by reference herein.
MARKET PRICE AND DIVIDEND INFORMATION
The Sonat Common Stock is listed and traded on the NYSE and the PSE, and
the Zilkha Stock is privately held. The following table sets forth the high and
low trading prices per share of the Sonat Common Stock on the NYSE for the
periods indicated as reported in published financial sources and the dividends
declared per share for such periods:
<TABLE>
<CAPTION>
SONAT COMMON SONAT
STOCK PRICES DIVIDENDS
------------ DECLARED
HIGH LOW PER SHARE
---- ---- ---------
<S> <C> <C> <C>
1995
First Quarter............................................ $ 303/8 $ 26 $0.27
Second Quarter........................................... 33 293/4 0.27
Third Quarter............................................ 331/2 291/4 0.27
Fourth Quarter........................................... 361/4 273/4 0.27
1996
First Quarter............................................ 371/4 311/8 0.27
Second Quarter........................................... 453/8 361/8 0.27
Third Quarter............................................ 471/2 41 0.27
Fourth Quarter........................................... 543/4 441/8 0.27
1997
First Quarter............................................ 57 451/2 0.27
Second Quarter........................................... 591/8 505/8 0.27
Third Quarter............................................ 541/4 453/8 0.27
Fourth Quarter (through December 26, 1997)............... 515/16 421/4 0.27
</TABLE>
On November 21, 1997, the last full trading day prior to the first public
announcement of the execution of the Merger Agreement, the reported high and low
sale prices per share and closing price per share of Sonat Common Stock on the
NYSE were $46 5/16, $45 9/16 and $45 5/8, respectively. On December 26, 1997,
the last full trading day prior to the date of this Proxy Statement/Prospectus,
the reported high and low sale prices per share and closing price per share of
Sonat Common Stock on the NYSE were $ , $ and $ , respectively.
Stockholders are urged to obtain current market quotations for shares of
Sonat Common Stock.
10
<PAGE> 18
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data for Sonat
and Zilkha and unaudited pro forma and combined per share data after giving
effect to the proposed Merger on a pooling of interests basis at the closing
price of the Sonat Common Stock on the NYSE on December 8, 1997 of $44 9/16 per
share. Historical Earnings and Cash Dividends per Common Share are presented for
the nine months ended September 30, 1997 and for each of the years in the
three-year period ended December 31, 1996. Pro Forma Book Value per Common Share
is presented as of September 30, 1997 and December 31, 1996. The data should be
read in conjunction with the historical consolidated financial statements and
the notes thereto, the selected historical consolidated financial data and the
unaudited pro forma combined financial statements included in this Proxy
Statement/Prospectus and the separate historical consolidated financial
statements of Sonat and the notes thereto incorporated by reference in this
Proxy Statement/Prospectus. The unaudited pro forma combined financial data are
not necessarily indicative of the operating results or financial position that
would have occurred had the Merger been consummated at the beginning of the
earliest period presented and should not be construed as indicative of future
operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------
1997 1996 1995 1994
------------- --------- ------- --------
<S> <C> <C> <C> <C>
HISTORICAL -- SONAT
Earnings per Common Share(a)...................... $ 1.35 $ 2.33 $ 2.24 $ 1.62
Cash Dividends per Common Share................... .81 1.08 1.08 1.08
Book Value per Common Share(b).................... 18.65 18.34 17.21 16.11
HISTORICAL -- ZILKHA
Earnings (Loss) per Common Share(a)............... $(484.74) $ 459.26 $121.97 $(119.95)
Cash Dividends per Common Share................... -- -- -- --
Book Value per Common Share(b).................... 449.39 992.49 456.53 294.57
PRO FORMA PER COMMON SHARE DATA
Earnings per Common Share(c)...................... $ .74 $ 2.17 $ 1.86 $ 1.22
Cash Dividends per Common Share(d)................ .81 1.08 1.08 1.08
Book Value per Common Share at End of Period...... 14.51 15.10
</TABLE>
- ---------------
(a) The Historical Earnings per Common Share is based upon the weighted average
number of common shares of Sonat and Zilkha outstanding for each period.
(b) The Historical Book Value per Common Share is computed by dividing
stockholders' equity by the number of shares of Common Stock outstanding at
the end of each period.
(c) The Pro Forma Earnings per Common Share is based upon the weighted average
number of common shares outstanding for each period after giving effect to
the proposed Merger on a pooling of interests basis at the closing price of
the Sonat Common Stock on the NYSE on December 8, 1997 of $44 9/16 per share
(approximately 23.4 million shares).
(d) The Pro Forma Cash Dividends per Common Share is based upon the historical
cash dividends per Common Share paid by Sonat.
11
<PAGE> 19
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SONAT
The following selected financial data for the five years ended December 31,
1996 are derived from the audited consolidated financial statements of Sonat.
The financial data for the nine-month periods ended September 30, 1997 and 1996,
are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which Sonat Inc. considers necessary for a fair presentation of the financial
position and the results of operations for those periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1997. The
data should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included and incorporated by
reference herein. See "Available Information" and "Incorporation of Documents by
Reference."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues....................... $ 2,911 $ 2,077 $ 3,395 $ 1,990 $ 1,736 $ 1,741 $ 1,484
Operating Income............... 201 233 341 189 169 233 211
Income from Continuing
Operations.................. 116 134 201 193 141 265 101
Income from Continuing
Operations per Common
Share....................... 1.35 1.56 2.33 2.24 1.62 3.05 1.17
BALANCE SHEET DATA (AT END OF
PERIOD)
Total Assets................... $ 4,185 $ 3,488 $ 3,775 $ 3,511 $ 3,531 $ 3,214 $ 3,165
Debt Maturing Within One
Year........................ 243 182 212 238 219 233 20
Long-term Debt................. 1,161 868 872 770 963 741 1,176
Stockholders' Equity........... 1,599 1,537 1,584 1,483 1,392 1,363 1,172
Common Shares Outstanding (in
thousands).................. 85,746 86,174 86,402 86,167 86,381 87,158 86,077
Cash Dividends Declared per
Common Share................ 0.81 0.81 1.08 1.08 1.08 1.04 1.00
CASH FLOW DATA
Net Cash Provided by Operating
Activities.................. $ 424 $ 425 $ 501 $ 184 $ 511 $ 454 $ 361
Net Cash Provided by (Used in)
Investing Activities........ (565) (403) (482) 92 (601) (189) (30)
Net Cash Provided by (Used in)
Financing Activities........ 209 (39) (26) (248) 89 (312) (296)
</TABLE>
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<PAGE> 20
SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ZILKHA
The following selected financial data for the three years ended December
31, 1996 are derived from the audited consolidated financial statements of
Zilkha. The financial data for the nine-month periods ended September 30, 1997
and 1996 and the two years ended December 31, 1993, are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which Zilkha considers
necessary for a fair presentation of the financial position and the results of
operations for those periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997. The data should be read
in conjunction with the consolidated financial statements, related notes, and
other financial information included herein. See "Index to Financial
Statements -- Zilkha Energy Company."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................... $ 142 $ 121 $ 165 $ 148 $ 75 $ 34 $ 33
Operating Income
(Loss)(1)............... (43) (6) (1) 19 (9) (23) (4)
Net Income (Loss)(2)....... (35) 35 37 11 (7) (7) (2)
Income (Loss) per Common
Share................... $(484.74) $443.22 $459.26 $121.97 $(119.95) $(117.00) $(54.19)
BALANCE SHEET DATA (AT END OF
PERIOD)
Total Assets............... $ 301 $ 207 $ 252 $ 215 $ 175 $ 111 $ 54
Debt Maturing Within One
Year.................... 4 4 4 4 6 4 --
Long-term Debt............. 190 85 109 36 31 24 --
Stockholders' Equity....... 34 69 74 34 22 30 14
Common Shares Outstanding
(in thousands).......... 75 75 75 75 75 75 75
Cash Dividends Declared
per Common Share........ -- -- -- -- -- -- --
CASH FLOW DATA
Net Cash Provided by
Operating Activities.... $ 107 $ 89 $ 120 $ 117 $ 107 $ 16 $ 13
Net Cash Used in Investing
Activities.............. (184) (49) (102) (113) (101) (38) (6)
Net Cash Provided by (Used
in) Financing
Activities.............. 82 (37) (13) 3 (6) 23 (5)
</TABLE>
- ---------------
(1) Operating loss for the nine months ended September 30, 1997 and the year
ended December 31, 1996 included impairments of oil and gas properties of
$13 million and $4 million, respectively.
(2) Net income for the nine months ended September 30, 1996 and the year ended
December 31, 1996 included a pre-tax gain of $65.1 million recognized on the
sales of oil and gas properties.
13
<PAGE> 21
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary unaudited pro forma combined
financial data which are presented to give effect to the Merger under the
pooling of interests method of accounting. The income statement data for each of
the three years in the period ended December 31, 1996 and the nine months ended
September 30, 1997, assume that the Merger had been consummated at the beginning
of the earliest period presented. The balance sheet data assume that the Merger
had been consummated on September 30, 1997. The unaudited pro forma combined
financial data do not reflect any cost savings and other synergies anticipated
by Sonat management as a result of the Merger and are not necessarily indicative
of the results of operations or the financial position which would have occurred
had the Merger been consummated at the beginning of the earliest period
presented, nor are they necessarily indicative of future results of operations
or financial position. The unaudited pro forma combined financial data should be
read in conjunction with the historical consolidated financial statements of
Sonat and Zilkha, including the notes thereto, included or incorporated by
reference in this Proxy Statement/Prospectus and the unaudited pro forma
combined financial statements contained elsewhere herein. See "Available
Information," "Incorporation of Documents by Reference," "Index to Financial
Statements -- Zilkha Energy Company" and "Index to Financial Statements -- Sonat
Inc. and Zilkha Energy Company."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------
1997 1996 1995 1994
------------- -------- -------- --------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues............................. $ 3,053 $ 3,560 $ 2,138 $ 1,811
Operating Income(1).................. 158 340 208 159
Earnings............................. 81 238 204 134
Income per Common Share.............. .74 2.17 $ 1.86 $ 1.22
Weighted Average Number of Common
Shares Outstanding (in
thousands)........................ 109,453 109,658 109,717 110,566
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and Cash Equivalents............ $ 120
Investments.......................... 526
Total Assets......................... 4,465
Long-term Debt....................... 1,351
Stockholders' Equity................. 1,584
Common Shares Outstanding (in
thousands)........................ 109,193
</TABLE>
- ---------------
(1) Pro forma operating income does not include estimated costs to complete the
combination of Sonat and Zilkha under pooling of interests accounting. These
costs, which primarily relate to compensation, seismic use and transfer fees
and other transaction costs, are currently estimated to be approximately
$49.2 million, net of a tax benefit of $25.7 million. Such costs will be
charged to operations when incurred. It is expected that a substantial
portion of the expenses will be recorded in the fourth quarter of 1997 and
the balance in the first quarter of 1998.
14
<PAGE> 22
THE SPECIAL MEETING
GENERAL
The Special Meeting will be held at 11:00 a.m., local time, on Friday,
January 30, 1998, at the Four Seasons Hotel Houston, 1300 Lamar Street, Houston,
Texas 77010 for the purpose set forth in the Notice of Special Meeting and as
described below. This Proxy Statement/Prospectus is furnished in connection with
the solicitation by the Sonat Board of proxies to be used at the Special
Meeting. Any person executing a proxy card may revoke it prior to its exercise
by filing with the Secretary of Sonat prior to or at the Special Meeting, at the
address specified under the caption "Available Information" in this Proxy
Statement/Prospectus, either an instrument revoking the proxy or a duly executed
proxy card bearing a later date.
PURPOSE OF THE SPECIAL MEETING
The purpose of the Special Meeting is to: (i) consider and vote upon the
Proposal to approve the Stock Issuance in accordance with the Merger Agreement;
and (ii) transact such other business as may properly come before the Special
Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of shares of Sonat Common Stock at the close of
business on December 26, 1997, the Record Date, are entitled to notice of and to
vote at the Special Meeting. On the Record Date, there were shares of
Sonat Common Stock outstanding. Each share of Sonat Common Stock will be
entitled to one vote on each matter to be acted upon at the Special Meeting.
QUORUM; VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
Quorum. The Sonat By-laws require the holders of a majority of the
outstanding shares of Sonat Common Stock to be present in person or by proxy for
any action to be taken with respect to the Proposal. For purposes of determining
whether this quorum requirement is met, abstentions and broker non-votes
received in connection with properly signed and returned proxies will be counted
as shares present.
Vote Required. The affirmative vote of the holders of a majority of the
shares of Sonat Common Stock present in person or by proxy and entitled to vote
is required to approve the Stock Issuance, provided that the total number of
votes cast (excluding abstentions and broker non-votes) on the Stock Issuance
represents more than 50% of the outstanding shares of Sonat Common Stock
entitled to vote thereon at the Special Meeting, as required by applicable NYSE
rules. An abstention with respect to the Stock Issuance will have the effect of
a vote cast against the Proposal. Brokers who hold shares of Sonat Common Stock
as nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners thereof. Assuming that a
quorum is present at the Special Meeting, any shares which are not voted by such
brokers at the Special Meeting will have no effect upon the outcome of the vote
with respect to the Stock Issuance.
Security Ownership of Management. As of the Record Date, the directors and
executive officers of Sonat owned approximately 0.5% of the outstanding shares
of Sonat Common Stock entitled to vote at the Special Meeting. Each of the
directors and executive officers of Sonat has advised Sonat that he or she plans
to vote or to direct the vote of all shares of Sonat Common Stock owned by him
or her and entitled to vote in favor of the Stock Issuance.
PROXIES
All shares of Sonat Common Stock represented by properly executed proxies
received prior to or at the Special Meeting, and not duly and timely revoked,
will be voted in accordance with the instructions indicated on such proxies. If
no instructions are indicated on a properly executed returned proxy, such
proxies will be voted FOR the approval of the Proposal. A properly executed
proxy marked "ABSTAIN," although counted for purposes of determining whether
there is a quorum and for purposes of determining the aggregate voting
15
<PAGE> 23
power and number of shares represented and entitled to vote at the Special
Meeting, will not be voted. Accordingly, since the affirmative vote of a
majority of shares present and entitled to vote is required for approval of the
Proposal, a proxy marked "ABSTAIN" will have the effect of a vote against the
Proposal. Shares represented by "broker non-votes" (i.e., shares held by brokers
or nominees which are represented at a meeting but with respect to which the
broker or nominee is not empowered to vote) will be counted for purposes of
determining whether there is a quorum at the Special Meeting. In accordance with
NYSE rules, brokers and nominees are precluded from exercising their voting
discretion with respect to the approval and adoption of the Proposal and thus,
absent specific instructions from the beneficial owner of such shares, are not
empowered to vote such shares with respect to the approval and adoption of such
proposal. Since the affirmative vote of a majority of the Sonat Common Stock
present and entitled to vote is required to approve the Proposal (provided that
the number of votes cast represents more than 50% of the outstanding shares of
Sonat Common Stock), a "broker non-vote" or the failure to be present in person
or by proxy at the Special Meeting will have no effect upon the outcome of the
vote with respect to the Proposal.
The Sonat Board is not currently aware of any business to be acted upon at
the Special Meeting other than as described herein. If, however, other matters
are properly brought before the Special Meeting, the persons appointed as
proxies will have discretion to vote or act thereon according to their judgment.
Such adjournments may be for the purpose of soliciting additional proxies. Sonat
does not currently intend to seek an adjournment of the Special Meeting.
Any proxy given pursuant to this solicitation may be revoked at any time
before such proxy is voted. Attendance at the Special Meeting will not in and of
itself constitute a revocation of a proxy.
The cost of soliciting proxies will be borne by Sonat. In addition to the
use of the mail, arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxy material to beneficial
owners, and Sonat will, upon request, reimburse them for their reasonable
expenses. Sonat has retained D.F. King & Co., Inc. to aid in the solicitation of
proxies and to verify certain records related to the solicitation at a maximum
fee of $10,000 plus expenses. To the extent necessary in order to ensure
sufficient representation at its Special Meeting, Sonat may request by
telephone, telegram or in person the return of proxy cards. The extent to which
this will be necessary depends entirely upon how promptly proxy cards are
returned. Stockholders are urged to send in their proxies without delay.
THE COMPANIES
SONAT
Sonat is a diversified energy holding company. It is engaged through Sonat
Exploration Company in domestic oil and natural gas exploration and production,
through Southern Natural Gas Company and Citrus Corp. in the transmission and
storage of natural gas, and through Sonat Energy Services Company in natural gas
and electric power marketing. Sonat has interests in oil and gas producing
properties in Louisiana, Texas, Oklahoma, Arkansas, Alabama, New Mexico, Kansas
and the Gulf of Mexico. At December 31, 1996, its total proved equivalent
reserves were approximately 2 Tcfe.
ZILKHA
Zilkha is a private oil and gas exploration, development and production
company operating primarily offshore in the Gulf of Mexico. It holds the
industry's largest net leasehold position in the shallow water area of the Gulf
of Mexico. Zilkha has an ownership interest in approximately 390 state and
federal lease blocks, of which approximately 340 lease blocks (covering
approximately 1.4 million net acres) are undeveloped. Zilkha has a contractual
interest (with rights to drill to earn) in approximately 200,000 additional
undeveloped acres. It also has licensed or contracted to license 3-D seismic
data covering approximately 6,100 lease blocks in both shallow and deep water
areas of the Gulf of Mexico. Zilkha's total proved reserves at July 1, 1997 were
415 Bcfe.
16
<PAGE> 24
NEWCO
Newco is a wholly owned subsidiary of Sonat, incorporated in Delaware on
December 4, 1997, for the purpose of effectuating the Merger and the other
transactions contemplated by the Merger Agreement. Prior to the consummation of
the Merger, Newco will not engage in any activity other than activities related
to the transactions contemplated by the Merger Agreement. Newco's principal
executive offices are located at 4 Greenway Plaza, Houston, Texas 77046.
THE MERGER
GENERAL
At the Effective Time of the Merger, Newco will be merged with and into
Zilkha, with Zilkha surviving the Merger as a wholly-owned subsidiary of Sonat.
In the Merger, the shares of Zilkha Stock issued and outstanding immediately
before the Effective Time, without any action on the part of the holders
thereof, will be converted into the right to receive, without interest, an
aggregate number of shares of Sonat Common Stock equal to the quotient of: (i)
$1,044,850,000 divided by (ii) the Closing Price; provided that, for purposes of
the foregoing determination, in no event shall the Closing Price be more than
$51 per share nor, unless Sonat otherwise agrees, less than $39 per share. Each
share of Sonat Common Stock issued to holders of Zilkha Stock in the Merger will
be issued together with one associated Sonat Right under the Sonat Rights Plan.
Cash will be paid in lieu of fractional shares of Sonat Common Stock. The Merger
will become effective at the time the Certificate of Merger is filed with the
Secretary of State of the State of Delaware with respect to the Merger, which is
currently expected to occur after receipt of requisite regulatory and
stockholder approvals and the satisfaction of the other conditions set forth in
the Merger Agreement.
At Closing Prices of $51, $39 and $ per share (the closing price of the
Sonat Common Stock on the NYSE on December 26, 1997), Sonat would issue to the
Zilkha stockholders approximately 20.5 million, 26.8 million and million
shares, respectively, of Sonat Common Stock in the Merger, representing
approximately 19.3%, 23.8% and %, respectively, of the Sonat Common Stock
outstanding after giving effect to the Merger.
BACKGROUND OF THE MERGER
Pursuant to a letter dated August 12, 1997, Zilkha engaged the investment
banking firm of Goldman, Sachs & Co. ("Goldman Sachs") as financial advisor in
connection with the possible sale of all or a portion of Zilkha. In early
September 1997, Goldman Sachs contacted Sonat to determine whether Sonat had any
interest in acquiring Zilkha. On September 12, 1997, Sonat signed a
confidentiality agreement and subsequently received a copy of a descriptive
memorandum covering various aspects of Zilkha's business. At about the same
time, Sonat retained Merrill Lynch to assist it in its evaluation and possible
acquisition of Zilkha. On October 6, 1997, Sonat submitted a non-binding
indication of interest to acquire Zilkha for shares of Sonat common stock in a
transaction that qualified for pooling of interests accounting treatment. Sonat
and its advisors were invited to visit Zilkha's data room on October 13 and 14,
1997, and confer with Zilkha's management. Representatives of Sonat revisited
Zilkha's data room on November 3 and 11, 1997. On October 24, 1997, the Sonat
Board authorized management to submit a proposal for the acquisition of Zilkha
and, if such proposal was accepted, negotiate a definitive agreement relating to
the acquisition of Zilkha within specified economic parameters and subject to
certain conditions, including the receipt of an opinion from Merrill Lynch that
the final terms of the definitive agreement were fair to Sonat from a financial
point of view. By letter dated October 29, 1997, Sonat was invited to submit a
definitive proposal for the acquisition of Zilkha no later than noon, Houston
time, on November 17, 1997. On November 6, 1997, Ronald L. Kuehn, Jr., Donald G.
Russell and William A. Smith, senior officers of Sonat, made a presentation and
responded to questions from Messrs. Selim and Michael Zilkha, Zilkha's
management and their advisors regarding Sonat. On November 12, 1997,
representatives of Zilkha's legal and financial advisors reviewed the bidding
process and a draft form of merger agreement that had been prepared by Zilkha's
legal counsel with representatives of Sonat and its legal and financial
advisors.
17
<PAGE> 25
On November 17, 1997, Sonat submitted a definitive proposal to acquire
Zilkha in exchange for shares of Sonat Common Stock pursuant to a merger
transaction that qualified for pooling of interests accounting treatment.
Sonat's proposal was predicated on a total enterprise value for Zilkha of $1.325
billion, before deducting approximately $211.9 million in outstanding
liabilities at September 30, 1997 (net of current assets and other investments)
and paying approximately $68.3 million in other costs (primarily transaction
costs) that were not accrued at September 30, 1997. The proposal was accompanied
by suggested changes in a draft merger agreement that had been prepared by
Zilkha's counsel. Representatives of Goldman Sachs and Merrill Lynch exchanged
clarifying information on November 18 and 19, 1997. On Wednesday, November 19,
1997, Goldman Sachs notified Merrill Lynch that Zilkha was prepared to commence
negotiations with Sonat the next day with a view to developing a mutually
acceptable definitive merger agreement. Sonat, Zilkha and their respective
financial and legal advisors commenced negotiating the terms of the Merger
Agreement on November 20, 1997 and completed their negotiations on November 22,
1997. Concurrently with the negotiation of the Merger Agreement, representatives
of Zilkha and its legal and financial advisors completed a due diligence review
of Sonat. The Merger Agreement was signed on November 22, 1997. At that time
Merrill Lynch delivered the Fairness Opinion, and Sonat signed an amendment to
the Rights Agreement permitting the execution of the Merger Agreement and the
consummation of the Merger. See Exhibit G to the Merger Agreement. The execution
of the Merger Agreement was publicly announced on the afternoon of November 23,
1997.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SONAT BOARD
Sonat believes that its exploration and production business segment
enhances long-term growth for its stockholders. While Sonat has developed a
significant and successful presence in several onshore producing regions and has
grown its overall total proved equivalent reserves from approximately 1.2 Tcfe
at the end of 1992 to approximately 2 Tcfe at the end of 1996, it has not been
able to acquire and develop a suitable property inventory in the shallow water
area of the Gulf of Mexico, an historically prolific oil and gas producing area.
Sonat believes that advanced 3-D seismic technology will facilitate the
discovery and production of significant oil and gas reserves from the shallow
water of the Gulf of Mexico. In addition, Sonat believes that an active Gulf of
Mexico exploratory program will complement and enhance Sonat's existing and
future onshore exploratory programs, including its Cotton Valley Pinnacle Reef
and Austin Chalk exploratory drilling programs which it does not plan to curtail
because of the Zilkha acquisition. Because offshore reserves typically have a
higher production rate than onshore reserves, Sonat has also thought it
desirable to better balance its production by having a mix of offshore and
onshore reserves in its property portfolio. Accordingly, within the last year
Sonat has evaluated other oil and gas companies with operations in the Gulf of
Mexico with a view toward a possible acquisition and has also considered various
other strategies for increasing exposure to opportunities in the Gulf of Mexico,
such as joint ventures and a more active lease sale participation.
At a meeting of the Sonat Board on October 24, 1997, Donald G. Russell, the
Chairman and Chief Executive Officer of Sonat's oil and gas subsidiary and a
director of Sonat, and two of his associates made a presentation in support of
Sonat's acquisition of Zilkha. Following a discussion of strategic
considerations, Zilkha's management, reserve base, exploratory prospects and
financial results and other relevant matters, the Sonat Board unanimously
approved the submission by Sonat of a non-binding merger proposal to acquire all
the outstanding capital stock of Zilkha in exchange for shares of Sonat Common
Stock having a value not in excess of a specified sum in a transaction that
qualified for pooling of interests accounting treatment. In the event that
Zilkha accepted Sonat's proposal, the senior officers of Sonat were authorized
to negotiate, execute and deliver an agreement providing for the merger of a
newly-created subsidiary of Sonat into Zilkha and embodying such other terms as
the senior officer executing the agreement deemed appropriate; provided that
prior to the execution of such agreement, Merrill Lynch delivered an opinion to
Sonat that the terms of the definitive merger agreement were fair to Sonat from
a financial point of view. The Sonat Board unanimously authorized a merger
meeting the foregoing criteria and determined that any such merger would be fair
to, and in the best interests of, the Sonat stockholders.
18
<PAGE> 26
At a meeting held on December 5, 1997, the Sonat Board reviewed and
discussed the definitive Merger Agreement, the Fairness Opinion, a draft of this
Proxy Statement/Prospectus and an analytical report prepared by Merrill Lynch in
support of its Fairness Opinion. Based upon the foregoing, the Sonat Board
unanimously concluded that the terms of the Merger Agreement were consistent
with the authority granted to the senior officers of Sonat at its October 24,
1997 meeting and, accordingly, ratified the execution of the Merger Agreement
and confirmed the authority of Sonat and its officers to perform their
respective obligations thereunder. Since the Merger and the Merger Agreement
meet the criteria approved by the Sonat Board at its October 24, 1997 meeting,
the Sonat Board recommends that Sonat's stockholders vote "FOR" approval of the
Stock Issuance.
In reaching its determination at the October 24, 1997 meeting, the Sonat
Board consulted with Sonat's management and considered the following:
(i) Gulf of Mexico Strategy and Potential For Growth. The belief that
an acquisition of Zilkha would make Sonat one of the leading independent
oil and gas companies in the shallow water area of the Gulf of Mexico
thereby significantly increasing Sonat's growth opportunities in its
exploration and production business segment.
(ii) Zilkha's Prospect Inventory. (a) Zilkha's approximately 1.4
million net acres of undeveloped state and federal offshore lease acreage,
representing the largest such position in the shallow water area of the
Gulf of Mexico; (b) its three-year exploratory drilling inventory embodying
more than 70 identified prospects; and (c) the 3-D seismic data covering
approximately 6,100 lease blocks located in both the shallow and deep water
areas of the Gulf of Mexico that Zilkha has licensed or contracted to
license.
(iii) Zilkha's Five-Year Record. The record of Zilkha's professionals
and senior managers since 1992, including: (a) a 66% success rate on the 79
gross offshore exploratory wells drilled through September 1997; (b) a
weighted average finding cost of $.87 per Mcfe (calculated on a full cost
method of accounting); (c) a 68% annual compound growth rate in production
through the end of 1996 (excluding production associated with assets sold);
(d) a compound annual growth rate of 49% in proved reserves through the end
of 1996; and (e) a compound annual growth rate of 98% in discretionary cash
flow through the end of 1996 (excluding production associated with assets
sold).
(iv) Complementary Strategic Combination. The belief that the highly
complementary management and operating expertise, personnel, asset
portfolios and financial attributes of Sonat and Zilkha should provide the
combined company with substantial opportunities for growth by matching
Zilkha's inventory of exploratory prospects with Sonat's substantial
financial resources.
(v) Balanced Reserve Portfolio. The belief that the Zilkha acquisition
not only offers an opportunity for significant reserve additions and
production growth in the Gulf of Mexico but also affords a balance to
Sonat's existing onshore acreage which has been the backbone of Sonat's
exploration program over the last several years.
(vi) Transaction Terms. The terms of the Merger Agreement, including
pooling of interests accounting treatment.
(vii) Immediate Cash Flow and Earnings Per Share Accretion. The
expectation that the Merger will be accretive to Sonat's cash flow from
operations and earnings per share in 1998 and 1999.
(viii) Advice of Financial Advisor. The receipt of the opinion of
Sonat's financial advisor, Merrill Lynch, described below, as to the
fairness to Sonat from a financial point of view of the Merger
Consideration prior to the execution of the Merger Agreement by a senior
officer of Sonat. See "-- Opinion of Merrill Lynch."
(ix) Certain Risks. The potential risks associated with the Merger,
including the uncertainties inherent in any evaluation of exploratory
properties and proved reserves and the possibilities that the combined
company may not be able to retain and successfully integrate key personnel
of Sonat and Zilkha, that the combined company may not realize significant
operational or financial synergies, and that the Merger could be disruptive
to the businesses or operations of Sonat and Zilkha.
19
<PAGE> 27
The foregoing discussion sets forth the material information and factors
considered by the Sonat Board. In view of the variety of factors considered in
connection with its evaluation of the Merger, the Sonat Board did not find it
practicable or necessary to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the Sonat Board may have given different weights
to different factors.
OPINION OF MERRILL LYNCH
Sonat retained Merrill Lynch to act as its exclusive financial advisor in
connection with the Merger. On November 22, 1997, Merrill Lynch rendered its
oral opinion, later confirmed in writing (the "Fairness Opinion"), to Sonat
that, as of such date and based upon and subject to the factors and assumptions
set forth therein, the Merger Consideration was fair from a financial point of
view to Sonat.
THE FULL TEXT OF THE FAIRNESS OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED, AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY MERRILL LYNCH, IS ATTACHED AS APPENDIX B HERETO AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE FAIRNESS OPINION SET FORTH
IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION. STOCKHOLDERS OF SONAT ARE URGED TO READ SUCH
OPINION IN ITS ENTIRETY. THE FAIRNESS OPINION WAS PROVIDED TO THE SONAT BOARD
FOR ITS INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT
OF VIEW OF THE MERGER CONSIDERATION TO SONAT AND DOES NOT ADDRESS THE MERITS OF
THE UNDERLYING DECISION BY SONAT TO ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE
A RECOMMENDATION TO SONAT'S STOCKHOLDERS AS TO HOW SUCH STOCKHOLDERS SHOULD VOTE
ON THE APPROVAL OF THE STOCK ISSUANCE OR ANY MATTER RELATED THERETO.
The Merger Consideration was determined through negotiations between Zilkha
and Sonat and was authorized by the Sonat Board.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Fairness Opinion or the presentation made by
Merrill Lynch to the senior officer of Sonat who was prepared to execute the
definitive merger agreement on behalf of Sonat. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Merrill Lynch did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Merrill Lynch believes that its analyses must be considered
as a whole and that selecting portions of its analyses, without considering all
of its analyses, would create an incomplete view of the process underlying the
Fairness Opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, Zilkha or Sonat. Any estimates contained in the analyses performed by
Merrill Lynch are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. Additionally, estimates of the value of businesses or securities do
not purport to be appraisals or to reflect the prices at which such businesses
or securities might actually be sold. Accordingly, such analyses and estimates
are inherently subject to substantial uncertainty. In addition, the requirement
for the delivery of the Fairness Opinion was among several factors taken into
consideration by the Sonat Board in making its determination to authorize the
Merger Agreement. Consequently, the Merrill Lynch analyses described below
should not be viewed as determinative of the decision of the Sonat Board or
Sonat's management with respect to the fairness of the Merger Consideration.
In arriving at the Fairness Opinion, Merrill Lynch, among other things: (i)
reviewed certain publicly available business and financial information relating
to Sonat that Merrill Lynch deemed to be relevant, and with respect to Zilkha,
the information contained in the Zilkha Offering Memorandum dated September 1997
(the "Offering Memorandum"); (ii) reviewed certain information, including
financial forecasts, relating to the business, earnings, cash flow, assets,
liabilities and prospects of Zilkha and Sonat furnished to Merrill Lynch by
Sonat, and certain estimates of Zilkha's and Sonat's proved, probable and
possible reserves, the
20
<PAGE> 28
projected annual production of such reserves and predicted exploration successes
and related production of such reserves (the "Exploratory" reserves), as well as
a Reserve Report prepared by William M. Cobb & Associates, Inc. for Zilkha and
furnished to Merrill Lynch by Sonat (the "Projected Reserve Developments");
(iii) conducted discussions with members of senior management and
representatives of Sonat concerning the matters described in clauses (i) and
(ii) above, as well as the businesses and prospects of Zilkha and Sonat before
and after giving effect to the Merger; (iv) reviewed the market prices and
valuation multiples for the Sonat Common Stock and compared them with those of
certain publicly traded companies that Merrill Lynch deemed to be relevant; (v)
reviewed the results of operations of Zilkha and Sonat and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to be
relevant; (vi) compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that Merrill Lynch deemed to be
relevant; (vii) participated in certain discussions and negotiations among
representatives of Zilkha and Sonat and their financial and legal advisors;
(viii) reviewed the potential pro forma impact of the Merger; (ix) reviewed a
draft, dated November 21, 1997, of the Merger Agreement; and (x) reviewed such
other financial studies and analyses and took into account such other matters as
Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general
economic, market and monetary conditions.
In preparing the Fairness Opinion, Merrill Lynch assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch,
or publicly available, and Merrill Lynch did not assume any responsibility for
independently verifying such information, did not undertake an independent
evaluation or appraisal of any of the assets or liabilities of Zilkha or Sonat
and was not furnished with any such evaluation or appraisal. In addition,
Merrill Lynch did not assume any obligation to conduct, nor did Merrill Lynch
conduct, any physical inspection of the properties or facilities of Zilkha or
Sonat. With respect to the financial forecast information, (including the
estimates of the timing and expense associated with Zilkha's conversion from
full cost accounting to successful efforts accounting and other transaction
costs and expenses), Merrill Lynch assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgments of
Zilkha's or Sonat's management as to the expected future financial performance
of Zilkha or Sonat, as the case may be, and Merrill Lynch relied upon the
foregoing in preparing the Fairness Opinion. With respect to the reserves,
predicted production and related information, and estimates of predicted
exploration successes and related information of Zilkha and Sonat furnished to
Merrill Lynch by Sonat and discussed with Merrill Lynch by Sonat, Merrill Lynch
assumed that they have been reasonably prepared and reflect the best currently
available estimates and judgments of Zilkha's or Sonat's management as to the
reserves, predicted production and predicted exploration success and related
information of Zilkha or Sonat, as the case may be, and Merrill Lynch relied
upon the foregoing in preparing the Fairness Opinion. Merrill Lynch further
assumed that the Merger will be accounted for as a pooling of interests under
generally accepted accounting principles and that it will qualify as a tax-free
reorganization for U.S. federal income tax purposes. In addition, Merrill Lynch
assumed that Sonat will not deliver Sonat Common Stock in excess of the quotient
of (i) $1,044,850,000 divided by (ii) $39. Merrill Lynch also assumed that the
final form of the Merger Agreement will be substantially similar to the last
draft reviewed by Merrill Lynch.
For purposes of rendering the Fairness Opinion, Merrill Lynch assumed, in
all respects material to its analyses, that the representations and warranties
of each party to the Merger Agreement and all related documents and instruments
contained therein were true and correct, that each party to such documents will
perform all of the covenants and agreements required to be performed by such
party under such documents and that all conditions to the consummation of the
Merger will be satisfied without waiver thereof.
The Fairness Opinion is necessarily based upon market, economic and other
conditions as they existed and could be evaluated on, and on the information
made available to Merrill Lynch as of, the date of such opinion. Merrill Lynch
assumed that in the course of obtaining the necessary regulatory or other
consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger. Sonat did not impose any limitations on the
scope of Merrill Lynch's analyses.
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<PAGE> 29
The following is a brief summary of the material analyses performed by
Merrill Lynch in connection with its preparation of the Fairness Opinion.
Zilkha Discounted Cash Flow Analysis. Using a discounted cash flow
analysis, Merrill Lynch calculated the present value of the after-tax future
cash flows that Zilkha could be expected to generate after January 1, 1998 based
upon (i) the Projected Reserve Developments and (ii) oil and natural gas price
forecasts under the following two distinct pricing scenarios: (i) Flat Price and
(ii) Escalated Price (the "Pricing Scenarios").
The natural gas price forecasts were based on Henry Hub natural gas prices
and on a standard heating value of 1,000 British Thermal Units per cubic foot of
natural gas. Adjustments were made to the natural gas price forecasts to reflect
location and quality differentials. In the Flat Price scenario, the unadjusted
natural gas price per Mcf for the year 1998 was assumed to be $2.25 and was
assumed to remain at that price thereafter. In the Escalated Price scenario,
unadjusted natural gas prices per Mcf for the years 1998 to 2002 were assumed to
be $2.40, $2.28, $2.24, $2.33 and $2.43, respectively, and were assumed to
escalate at 4% per annum thereafter.
The oil price forecasts were based on West Texas Intermediate ("WTI") oil
prices. Adjustments were made to the oil price forecasts to reflect location and
quality differentials. In the Flat Price scenario, the unadjusted WTI oil price
per barrel for the year 1998 was assumed to be $20.00 and was assumed to remain
at that price thereafter. In the Escalated Price scenario, unadjusted WTI oil
prices per barrel for the years 1998 to 2002 were assumed to be $20.53, $19.57,
$19.41, $19.41, and $19.41, respectively, and were assumed to escalate at 4% per
annum thereafter.
Production forecasts and associated production costs were supplied by both
Sonat ("Sonat Base Case") and Zilkha ("Zilkha Management Case") for proved,
probable and possible reserves and by Sonat for Exploratory reserves. Operating
expenses and maintenance capital expenditures necessary to lift and produce the
proved, probable, possible and Exploratory reserves estimated in the Projected
Reserve Developments were assumed to not increase in the Flat Price scenario and
to increase at a rate of 4% per annum in the Escalated Price scenario. The
after-tax cash flows were discounted at rates ranging from 10% to 12% for proved
reserves and from 12% to 15% for probable, possible and Exploratory reserves.
Merrill Lynch estimated Zilkha's enterprise value by adding (i) the
discounted after-tax cash flows generated by Zilkha's proved, probable, possible
and Exploratory reserves as estimated by Sonat management plus (ii) other assets
(including seismic, systems and databases) less (iii) the present value,
discounted at 10% to 12%, of projected general and administrative expenses less
(iv) estimated net debt and certain other long term liabilities as of January 1,
1998. From this analysis Merrill Lynch arrived at a range of enterprise values
for Zilkha for each of the Pricing Scenarios for the Sonat Base Case and the
Zilkha Management Case. For the Sonat Base Case, Merrill Lynch calculated
enterprise value ranges of (i) $1,179.3 to $1,387.8 million for the Flat Price
scenario and (ii) $1,256.8 to $1,497.8 million for the Escalated Price scenario.
For the Zilkha Management Case, Merrill Lynch calculated enterprise value ranges
of (i) $1,209.7 to $1,418.9 million for the Flat Price scenario and (ii)
$1,287.0 to $1,528.3 million for the Escalated Price scenario. Additionally,
Merrill Lynch estimated the sensitivity of both the Sonat Base Case and Zilkha
Management Case to an increase in drilling rig dayrates. Specifically, current
dayrates were assumed to increase by $20,000 over present rates during 1998 to
2000 and to increase by $6,700 over present rates during 2001 to 2002 for each
of four drilling rigs assumed to be on contract throughout the analysis. Under
these assumptions, Zilkha's enterprise value would be reduced by $84.9 million
and $89.0 million using 15% and 12% discount rates, respectively.
Zilkha Comparable Company Trading Analysis. Merrill Lynch reviewed and
compared certain financial information, ratios and public market multiples
relating to Zilkha to corresponding financial information, ratios and public
market multiples for eight publicly traded corporations in the oil and gas
exploration, development and production industry: Enserch Exploration Inc.,
Forcenergy, Inc., Houston Exploration Company, Newfield Exploration Company,
Ocean Energy, Inc., Pogo Producing Company, Seagull Energy Corporation, and
United Meridian Corporation (collectively, the "Selected Companies"). The
Selected Companies were chosen because they are publicly traded companies with
financial and operating characteristics which Merrill Lynch deemed to be similar
to those of Zilkha. Merrill Lynch calculated various financial
22
<PAGE> 30
ratios for the Selected Companies and compared them to those of Zilkha. The
ratios for the Selected Companies were based on publicly available information,
including estimates provided by Merrill Lynch research and the Institutional
Brokers Estimate System ("IBES"). Merrill Lynch calculated the following
financial ratios: (i) equity market value multiples of (a) 1997 estimated
discretionary cash flow ("DCF") and (b) 1998 estimated DCF and (ii) market
capitalization (defined as market value of common equity plus book value of debt
less cash) multiples of (a) 1997 estimated earnings before interest, taxes,
depreciation, depletion, amortization and exploration expenses ("EBITDE"), (b)
1998 estimated EBITDE, (c) proved reserves as of December 31, 1996 and (d)
Pre-Tax SEC-10 at December 31, 1996.
For these eight companies, the highest, average and lowest equity market
value multiples of 1997 estimated DCF were 8.7x, 7.0x, and 6.0x, respectively,
and of 1998 estimated DCF were 8.7x, 6.0x, and 4.9x, respectively. The highest,
average and lowest market capitalization multiples of 1997 estimated EBITDE were
8.0x, 7.3x and 6.3x, respectively, of 1998 estimated EBITDE were 7.5x, 6.2x and
4.9x, respectively, of proved reserves per Mcf equivalent $3.09, $2.05 and
$0.98, respectively, and of Pre-Tax SEC-10 2.00x, 1.27x and 0.66x, respectively.
Merrill Lynch determined that, with respect to Zilkha, the appropriate
benchmarks for market capitalization multiples for 1997 estimated DCF, 1998
estimated DCF, 1997 estimated EBITDE, 1998 estimated EBITDE, proved reserves and
Pre-Tax SEC-10 were in the ranges of 6.0x to 7.0x, 5.0x to 6.5x, 6.5x to 7.5x,
5.5x to 7.0x, $2.00 to $3.00, and 1.25x to 1.75x, respectively. From the value
ranges implied by these multiples, Merrill Lynch determined a composite
enterprise value range for Zilkha under this method of $1.2 to $1.4 billion for
the Sonat Base Case and $1.2 to $1.5 billion for the Zilkha Management Case.
No company utilized in the above comparable companies analysis is identical
to either Zilkha or Sonat. Accordingly, an analysis of the results of the
foregoing is not purely mathematical. Rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the comparable companies and other factors that could affect the public
trading value of the comparable companies or company to which they are being
compared.
Zilkha Comparable Acquisition Analysis. Merrill Lynch analyzed the
financial terms, to the extent publicly available, of 16 selected change of
control transactions in the energy industry which were announced during the last
two years which, in Merrill Lynch's judgment, were generally comparable to the
transaction contemplated by the Merger ("Going Concern Approach"). Selected
transactions included Chauvco Resources Ltd./Pioneer Natural Resources Company,
Monterey Resources, Inc./Texaco Inc., Stampeder Exploration Ltd./Gulf Canada
Resources Ltd., The Louisiana Land and Exploration Company/Burlington Resources
Inc., Cairn Energy USA, Inc./The Meridian Resource Corporation, Edisto Resources
Corporation and Convest Energy Corporation/Forcenergy, Inc., American
Exploration Company/Louis Dreyfus Natural Gas Corp., McFarland Energy,
Inc./Monterey Resources, Inc., Ashland Exploration/Statoil, Greenhill
Petroleum/Mesa, Inc., Parker & Parsley Petroleum Company/Mesa, Inc., Belden &
Blake Energy Company/Texas Pacific Group, Energy Development Corporation/Noble
Affiliates, Inc., Global Natural Resources, Inc./Seagull Energy Corporation,
Tidewest/HS Resources, Inc. and Phoenix Resources/Apache Corporation. Merrill
Lynch reviewed the prices paid in such transactions in terms of (i) equity
market value as a multiple of latest twelve months ("LTM") DCF, (ii) market
capitalization as a multiple of LTM EBITDE and (iii) market capitalization as a
multiple of Pre-Tax SEC-10. Such analysis indicated that (i) equity value as a
multiple of LTM DCF ranged from 7.0x to 10.0x, (ii) market capitalization as a
multiple of LTM EBITDE ranged from 7.0x to 10.0x, and (iii) market
capitalization as a multiple of Pre-Tax SEC-10 ranged from 0.85x to 1.10x.
Merrill Lynch then applied these multiples to the corresponding Zilkha financial
measure and estimated future performance provided by Zilkha management in the
Offering Memorandum and derived a theoretical range of enterprise values for
Zilkha of $1.0 to $1.5 billion.
Merrill Lynch also considered a comparable acquisition analysis of Zilkha
based on recent sales of oil and gas properties located along the Gulf Coast and
in the Gulf of Mexico. While this analysis yielded a lower enterprise value
range for Zilkha as compared to the Going Concern Approach, Merrill Lynch
determined that the Going Concern Approach more accurately reflected the value
of Zilkha's proved reserves as well as its exploratory prospects, its
significant seismic and acreage position and its staff's ability to generate new
opportunities from such existing assets.
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<PAGE> 31
Merrill Lynch is of the view that no transaction reviewed was identical to
the Merger and that, accordingly, an analysis of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of Zilkha that could affect the
acquisition value of the companies to which it was being compared.
Sonat Comparable Company Trading Analysis. Merrill Lynch reviewed and
compared certain financial information, ratios and public market multiples
relating to Sonat to corresponding financial information, ratios and public
market multiples for nine publicly traded corporations in the natural gas
pipeline industry: The Coastal Corporation, The Columbia Gas System, Inc.,
Consolidated Natural Gas Company, El Paso Natural Gas Company, Enron Corp., K N
Energy, Inc., Questar Corporation, TransCanada Pipelines Limited and The
Williams Companies, Inc. (collectively, the "Comparable Companies"). The
Comparable Companies were chosen because they are publicly traded companies with
financial and operating characteristics which Merrill Lynch deemed to be similar
to those of Sonat. Merrill Lynch calculated various financial ratios for the
Comparable Companies and compared them to those of Sonat. The ratios for the
Comparable Companies were based on publicly available information, including
estimates provided by Merrill Lynch research and IBES. Merrill Lynch calculated
the following financial ratios: (i) equity market value multiples of (a) 1997
estimated earnings and (b) 1998 estimated earnings and (ii) market
capitalization multiples of (a) 1997 estimated earnings before interest, taxes,
depreciation and amortization ("EBITDA") and (b) 1998 estimated EBITDA.
For these nine companies, the highest, average and lowest equity market
value multiples of 1997 estimated earnings were 23.9x, 17.9x and 14.9x,
respectively, and of 1998 estimated earnings were 20.7x, 16.4x and 13.7x,
respectively. The highest, average and lowest market capitalization multiples of
1997 estimated EBITDA were 11.2x, 8.5x and 7.0x, respectively, and of 1998
estimated EBITDA were 13.1x, 8.7x and 6.7x, respectively. Sonat's equity market
value multiples of 1997 and 1998 estimated earnings were 18.8x and 16.3x,
respectively. Sonat's market capitalization multiples of 1997 and 1998 estimated
EBITDA were 7.3x and 6.6x, respectively. No company utilized in the above
comparable companies analysis is identical to Sonat.
Merger Consequences. For both the Sonat Base Case and Zilkha Management
Case (using both an Escalated Price scenario and Flat Price scenario), Merrill
Lynch analyzed the respective contributions of each of Sonat and Zilkha to the
estimated earnings, DCF and EBITDE of the resulting company giving effect to the
Merger for the years 1998 and 1999. In addition, Merrill Lynch analyzed the
respective contributions of each of Sonat and Zilkha to the proved reserves,
production and undeveloped acreage of the resulting company giving effect to the
Merger as though it had become effective on December 31, 1996. Merrill Lynch
compared the foregoing contributions to the relative ownership positions of the
existing Sonat stockholders and Zilkha stockholders after the Merger. Using the
Sonat Base Case based on Escalated Prices, the analysis indicated that the
acquisition of Zilkha would increase estimated (i) earnings per share by 4.3% in
1998 and 33.5% in 1999, (ii) DCF by 3.7% in 1998 and 15.8% in 1999 and (iii)
EBITDE by 28.3% in 1998 and 48.1% in 1999. Using the Sonat Base Case based on
Flat Prices, the analysis indicated that the acquisition of Zilkha would
increase estimated (i) earnings per share by 0.9% in 1998 and 33% in 1999, (ii)
DCF by 2.5% in 1998 and 15.7% in 1999 and (iii) EBITDE by 26.3% in 1998 and
47.9% in 1999. Using the Zilkha Management Case based on Escalated Prices, the
analysis indicated that the acquisition of Zilkha would increase estimated (i)
earnings per share by 7.5% in 1998 and 37.5% in 1999, (ii) DCF by 4.7% in 1998
and 17.1% in 1999 and (iii) EBITDE by 30.0% in 1998 and 50.3% in 1999. Using the
Zilkha Management Case based on Flat Prices, the analysis indicated that the
acquisition of Zilkha would increase estimated (i) earnings per share by 3.9% in
1998 and 37.1% in 1999, (ii) DCF by 3.5% in 1998 and 17.0% in 1999 and (iii)
EBITDE by 28.0% in 1998 and 50.0% in 1999. The analysis also indicated that the
acquisition of Zilkha would increase (i) 1996 year-end proved reserves by 20.1%,
(ii) 1996 average production by 27.6% and (iii) 1996 year end undeveloped
acreage by 136.8%.
Merrill Lynch Financial Advisor Fee. Pursuant to a letter agreement dated
September 10, 1997 between Sonat and Merrill Lynch (the "Letter Agreement"),
Sonat has agreed to pay Merrill Lynch a fee of $3,000,000, if, during the period
Merrill Lynch is retained by Sonat or within one year thereafter, (i) an
Acquisition Transaction (as defined in the Letter Agreement) is consummated with
Zilkha or, (ii) Sonat or a Sonat Affiliate (as defined in the Letter Agreement)
enters into an agreement with Zilkha which subsequently
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results in an Acquisition Transaction, payable in cash upon the closing of such
Acquisition Transaction, or in the case of a tender offer or exchange offer, as
the case may be. If Sonat (including a Sonat Affiliate) receives or becomes
entitled to receive a Break-up Fee (as defined in the Letter Agreement)
resulting from, or as a result of, the termination of any agreement entered into
by Sonat (including a Sonat Affiliate) and Zilkha the effect of which is to
effect an Acquisition Transaction, Sonat agreed to pay Merrill Lynch 25% of any
such Break-up Fee, subject to a maximum payment of $2,000,000, payable
immediately in cash following receipt by Sonat (including any Sonat Affiliate)
of any such Break-up Fee. Sonat has also agreed to reimburse Merrill Lynch for
its reasonable out-of-pocket expenses, including reasonable fees and
disbursements of its legal counsel. Additionally, Sonat agreed to indemnify
Merrill Lynch and certain related persons for certain liabilities related to or
arising out of its engagement, including liabilities under federal securities
laws.
Sonat retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking and
advisory firm. Merrill Lynch, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. Merrill Lynch has in the past
provided financial advisory and/or financing services to Sonat and may continue
to do so and has received, and may receive, fees for the rendering of such
services. In the ordinary course of its business, Merrill Lynch and its
affiliates may actively trade the debt and equity securities of Sonat (and
anticipate trading after the Merger in the securities of Sonat) for their own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
MAP OF OFFSHORE GULF OF MEXICO
The map on the inside cover page of this Proxy Statement/Prospectus shows
the location of the offshore lease blocks in the Gulf of Mexico in which either
Sonat or Zilkha owns an interest and the portions of the Gulf of Mexico covered
by the 3-D seismic data that Zilkha is licensed to use and reprocess or has
contracted to license.
COMBINED OPERATIONS AFTER THE MERGER
Following the Merger, Sonat intends to fold its offshore Gulf of Mexico
exploration and development operation into the more extensive Zilkha unit. Sonat
has successfully concluded negotiations with the senior managers of Zilkha
(other than Michael Zilkha who will become a member of the Sonat Board) to
employ them to oversee Sonat's combined Gulf of Mexico operations after the
Merger. Promptly following the Merger, Sonat intends to change the name of
Zilkha to Sonat Exploration GOM Inc.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" in
accordance with generally accepted accounting principles. Under this accounting
method, the historical financial information of Sonat and Zilkha will be
restated to reflect the combined financial position and operations of both
companies. The combined financial position, cash flows and operations will be
adjusted, if appropriate, to conform the accounting practices of the companies.
U.S. FEDERAL INCOME TAX CONSEQUENCES
See "Certain U.S. Federal Income Tax Consequences of the Merger."
SONAT GOM BOARD AND MANAGEMENT FOLLOWING THE MERGER
If the proposed Merger is approved and consummated, holders of Zilkha Stock
will become stockholders of Sonat. Sonat will remain under the direction of the
Board of Directors and management of Sonat. The officers and directors of Newco
immediately prior to the Effective Time will be the officers and directors of
Sonat GOM, in each case until their respective successors are duly elected and
qualified.
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BOARD OF DIRECTORS OF SONAT FOLLOWING THE MERGER
Immediately following the Effective Time, the Sonat Board will consist of
14 members. Two members of the Sonat Board will be Selim K. Zilkha, the sole
current director of Zilkha, and his son Michael Zilkha. The remainder of the
Sonat Board will be Sonat's current directors.
Mr. Selim K. Zilkha, age 70, will be appointed a Class III director of
Sonat with a term of office expiring in 1998, and Michael Zilkha, age 43, will
be appointed a Class I director with a term of office expiring in 1999. As long
as the Zilkhas and their affiliates own at least 8% of the outstanding Sonat
Common Stock, the Sonat Board has agreed to nominate and support the reelection
of the Zilkhas to the Sonat Board following the expiration of their respective
terms. The Zilkhas will also be appointed to the Strategic Planning Committee of
the Sonat Board.
Mr. Selim K. Zilkha is the sole director and Chief Executive Officer of
Zilkha. He has served as such since March 1984. Prior to such time, Mr. Selim K.
Zilkha was a banker with Zilkha & Sons in the United States and Europe from 1947
to 1955 and in London from 1955 to 1960. In 1960, he founded Mothercare, PLC, a
retail chain, catering to mothers-to-be, babies and small children in Great
Britain, Europe and the United States. In January 1982, Mr. Selim K. Zilkha sold
his interest in Mothercare, PLC. Mr. Selim K. Zilkha has a BA in Philosophy from
Williams College.
Mr. Michael Zilkha currently serves as Executive Vice President of Zilkha
and has been with Zilkha since July 1986. He was an editor at Atlantic Monthly
Press from 1985 to 1986, and from 1978 to 1985, he was President of ZE Records,
an independent record production company in New York. He has an MA in French and
Philosophy from Oxford University. See "The Merger Agreement -- Employee
Matters" for information regarding a cash payment that Mr. Michael Zilkha will
receive upon consummation of the Merger as one of the four participants in a
long-term incentive compensation plan for senior managers of Zilkha.
OWNERSHIP OF SONAT FOLLOWING THE MERGER
At Closing Prices of $51, $39 and $ per share (the closing price of the
Sonat Common Stock on the NYSE on December 26, 1997), Sonat would issue
approximately 20.5 million, 26.8 million and million shares, respectively,
of Sonat Common Stock in the Merger, representing approximately 19.3%, 23.8% and
%, respectively, of the Sonat Common Stock outstanding after giving effect
to the Merger. Michael Zilkha, the Selim K. Zilkha Trust and the Selim K. Zilkha
(1996) Annuity Trust will acquire approximately %, % and %,
respectively, of the shares of Sonat Common Stock issued in the Merger. These
percentages are based on a Closing Price of $ and the amount of accrued and
unpaid dividends on the Zilkha preferred stock as of December 26, 1997. Messrs.
Michael Zilkha, Selim K. Zilkha and Ezra Zilkha, as trustee, have sole voting
and dispositive power over the shares of Sonat Common Stock issuable in the
Merger to Michael Zilkha, the Selim K. Zilkha Trust and the Selim K. Zilkha
(1996) Annuity Trust, respectively.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until the following steps have been taken: (i)
Premerger Notification and Report Forms have been submitted and certain
information has been furnished to the FTC and the Antitrust Division; and (ii)
required waiting periods have expired or terminated.
Sonat and Zilkha have agreed, pursuant to the Merger Agreement, to use
their best efforts to file or cause to be filed with the FTC and the Antitrust
Division such notifications as are required to be filed under the HSR Act and
the rules and regulations promulgated thereunder, and to respond as promptly as
practicable to any requests for additional information made by either the FTC or
the Antitrust Division. Accordingly, Sonat and the Zilkhas each filed Premerger
Notification and Report Forms with the FTC and the Antitrust Division, on
December 5, 1997. The required waiting period under the HSR Act was terminated
on December 19, 1997.
At any time before or after the consummation of the Merger and
notwithstanding the termination of the HSR Act waiting period, any federal or
state antitrust authorities could take action under the antitrust laws as
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<PAGE> 34
they deem necessary or desirable in the public interest. Such action could
include seeking to enjoin the consummation of the Merger or seeking divestiture
of all or part of the assets of Sonat or Zilkha. Private parties may also seek
to take legal action under the antitrust laws, if circumstances permit.
If the Antitrust Division, or any other federal or state antitrust
authority, were to challenge the Merger, the consummation of the Merger could be
postponed beyond May 31, 1998, in which event, either Sonat or Zilkha may
terminate the Merger Agreement, pursuant to its terms, at any time after May 31,
1998. See "The Merger Agreement -- Termination and Amendment."
ABSENCE OF APPRAISAL RIGHTS
Under the DGCL, the stockholders of Sonat are not entitled to appraisal
rights with respect to the Stock Issuance. All the stockholders of Zilkha have
approved the Merger, the Merger Agreement and the transactions contemplated
thereby.
STOCK EXCHANGE LISTING
It is a condition to the Merger that, upon consummation of the Merger, the
shares of Sonat Common Stock constituting the Merger Consideration will be
authorized for listing on the NYSE, subject only to official notice of issuance.
TREATMENT OF STOCK CERTIFICATES
After the Effective Time, the certificates previously representing shares
of Zilkha Stock will automatically, with no further action by the holder
thereof, represent the right to receive the Merger Consideration.
THE SONAT BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
PROPOSAL.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SONAT INC.
The following selected financial data for the five years ended December 31,
1996 are derived from the audited consolidated financial statements of Sonat
Inc. The financial data for the nine-months period, ended September 30, 1997 and
1996, are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which Sonat Inc. considers necessary for a fair presentation of the financial
position and the results of operations for those periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1997. The
data should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included and incorporated by
reference herein. See "Available Information" and "Incorporation of Documents by
Reference."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues..................... $ 2,911 $ 2,077 $ 3,395 $ 1,990 $ 1,736 $ 1,741 $ 1,484
Operating Income............. 201 233 341 189 169 233 211
Income from Continuing
Operations................ 116 134 201 193 141 265 101
Income from Continuing
Operations per Common
Share..................... 1.35 1.56 2.33 2.24 1.62 3.05 1.17
BALANCE SHEET DATA (AT END OF
PERIOD)
Total Assets................. $ 4,185 $ 3,488 $ 3,775 $ 3,511 $ 3,531 $ 3,214 $ 3,165
Debt Maturing Within One
Year...................... 243 182 212 238 219 233 20
Long-term Debt............... 1,161 868 872 770 963 741 1,176
Stockholders' Equity......... 1,599 1,537 1,584 1,483 1,392 1,363 1,172
Common Shares Outstanding (in
thousands)................ 85,746 86,174 86,402 86,167 86,381 87,158 86,077
Cash Dividends Declared per
Common Share.............. 0.81 0.81 1.08 1.08 1.08 1.04 1.00
CASH FLOW DATA
Net Cash Provided by
Operating Activities...... $ 424 $ 425 $ 501 $ 184 $ 511 $ 454 $ 361
Net Cash Provided by (Used
in) Investing
Activities................ (565) (403) (482) 92 (601) (189) (30)
Net Cash Provided by (Used
in) Financing
Activities................ 209 (39) (26) (248) 89 (312) (296)
</TABLE>
29
<PAGE> 36
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
OF ZILKHA ENERGY COMPANY
The following selected financial data for the three years ended December
31, 1996 are derived from the audited consolidated financial statements of
Zilkha. The financial data for the nine-month periods ended September 30, 1997
and 1996 and the two years ended December 31, 1993, are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which Zilkha considers
necessary for a fair presentation of the financial position and the results of
operations for those periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997. The data should be read
in conjunction with the consolidated financial statements, related notes, and
other financial information included herein. See "Index to Financial
Statements -- Zilkha Energy Company."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues................... $ 142 $ 121 $ 165 $ 148 $ 75 $ 34 $ 33
Operating Income
(Loss)(1)............... (43) (6) (1) 19 (9) (23) (4)
Net Income (Loss)(2)....... (35) 35 37 11 (7) (7) (2)
Income (Loss) per Common
Share................... $(484.74) $443.22 $459.26 $121.97 $(119.95) $(117.00) $(54.19)
BALANCE SHEET DATA (AT END OF
PERIOD)
Total Assets............... $ 301 $ 207 $ 252 $ 215 $ 175 $ 111 $ 54
Debt Maturing Within One
Year.................... 4 4 4 4 6 4 --
Long-term Debt............. 190 85 109 36 31 24 --
Stockholders' Equity....... 34 69 74 34 22 30 14
Common Shares Outstanding
(in thousands).......... 75 75 75 75 75 75 75
Cash Dividends Declared
per Common Share........ -- -- -- -- -- -- --
CASH FLOW DATA
Net Cash Provided by
Operating Activities.... $ 107 $ 89 $ 120 $ 117 $ 107 $ 16 $ 13
Net Cash Used in Investing
Activities.............. (184) (49) (102) (113) (101) (38) (6)
Net Cash Provided by (Used
in) Financing
Activities.............. 82 (37) (13) 3 (6) 23 (5)
</TABLE>
- ---------------
(1) Operating loss for the nine months ended September 30, 1997 and the year
ended December 31, 1996 included impairments of oil and gas properties of
$13 million and $4 million, respectively.
(2) Net income for the nine months ended September 30, 1996 and the year ended
December 31, 1996 included a pre-tax gain of $65.1 million recognized on the
sales of oil and gas properties.
30
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF
ZILKHA ENERGY COMPANY
OVERVIEW
Zilkha is a private exploration, development and production company
operating offshore in the Gulf of Mexico. Headquartered in Houston, Texas,
Zilkha primarily focuses its drilling in the shallow water area of the Gulf of
Mexico (less than 600 feet of water) and is the largest holder of net acreage in
that portion of the Gulf of Mexico. Zilkha has consistently found oil and gas
through the drillbit, under a low operating cost structure.
Zilkha's historical consolidated financial statements have been restated
from the full cost method of accounting to the successful efforts method of
accounting for all years presented. Under the successful efforts method of
accounting, acquisition costs for proved and unproved properties are capitalized
when incurred. Exploration costs other than drilling costs for successful wells,
including geological and geophysical costs and costs of carrying and retaining
unproved properties, are charged to expense as incurred. The costs of drilling
exploratory wells are capitalized pending determination of whether each well
resulted in the discovery of proved reserves. If proved reserves are not
discovered, such drilling costs are charged to expense. Costs incurred to drill
and equip development wells, including unsuccessful development wells, are
capitalized. Internal costs related to the acquisition, development and
exploration of oil and gas properties are expensed as incurred. Interest is
capitalized on qualifying assets, primarily unproved and unevaluated properties.
Depletion of the cost of producing oil and gas properties is computed on
the unit-of-production method. Zilkha also accrues for platform abandonment
costs related to its offshore platform facilities on the unit-of-production
method. Unproved properties are assessed periodically, and any impairment in
value is recognized currently as impairment expense.
In conjunction with the restatement of the financial statements to the
successful efforts method of accounting, Zilkha adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," for its oil and
gas properties. Zilkha periodically reviews individual proved properties to
determine if the carrying value of such properties as reflected in its
accounting records exceeds the estimated undiscounted future net cash flow from
proved oil and gas reserves attributable to such properties. Based on this
review and the continuing evaluation of development plans, economics and other
factors, if appropriate, Zilkha records impairments pursuant to SFAS No. 121 to
the extent that the net book values of its properties exceed the expected
discounted future net cash flow therefrom. Such impairments constitute a charge
to earnings which does not impact Zilkha's cash flow from operating activities.
However, such writedowns impact the amount of Zilkha's stockholders' equity and,
therefore, the ratio of debt to equity. The risk that Zilkha will be required to
write down the carrying value of its oil and natural gas properties increases
when oil and natural gas prices are depressed. Zilkha recorded an impairment of
$4.3 million in 1996 and $13.3 million for the nine months ended September 30,
1997, and no assurance can be given that Zilkha will not experience impairments
in the future.
31
<PAGE> 38
RESULTS OF OPERATIONS
The following table sets forth certain income statement and operating
information with respect to the oil and gas operations of Zilkha.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------- -------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------ ------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Oil and gas revenues................................... $141.5 $120.8 $ 165.0 $148.1 $ 75.0
Costs and expenses:
Operating and maintenance............................ $ 9.8 $ 8.6 $ 12.4 $ 12.5 $ 6.8
General and administrative........................... $ 33.8 $ 17.6 $ 22.9 $ 17.1 $ 11.0
Depreciation, depletion, amortization and
impairments....................................... $ 60.9 $ 46.2 $ 65.9 $ 53.9 $ 29.5
Exploration expense.................................. $ 79.8 $ 54.0 $ 64.6 $ 45.2 $ 36.8
------ ------ ------- ------ ------
Operating income (loss)................................ $(42.8) $ (5.6) $ (0.8) $ 19.4 $ (9.1)
Production:
Oil and condensate (MBbls)........................... 1,307 1,451 1,672 2,507 862
Gas (MMcf)........................................... 48,221 48,971 63,502 55,246 31,931
Total Production (MMcfe)............................. 56,063 57,677 73,534 70,288 37,103
Average sales price:
Oil and condensate ($/Bbl)........................... $19.05 $18.93 $ 20.08 $17.00 $15.94
Gas ($/Mcf).......................................... $ 2.52 $ 2.51 $ 2.64 $ 1.72 $ 2.04
Gas price net of hedging activities ($/Mcf)(3)....... $ 2.41 $ 1.90 $ 2.06 $ 1.90 $ 1.91
Average cost per Mcfe:
Operations and maintenance........................... $ 0.18 $ 0.15 $ 0.17 $ 0.18 $ 0.18
Depreciation, depletion and amortization (1)......... $ 0.83 $ 0.78 $ 0.82 $ 0.75 $ 0.78
General and administrative(2)........................ $ 0.16 $ 0.15 $ 0.15 $ 0.12 $ 0.20
</TABLE>
- ---------------
(1) Does not include writedowns associated with SFAS No. 121 described below.
(2) Calculated net of expenses associated with the Long-Term Unit Value Plan III
agreements between Zilkha and its four senior managers (the "Executive
Compensation Plan").
(3) Hedging activities include the impact of derivative instruments and
volumetric production payments.
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
Oil and Gas Revenues
Oil and gas revenues for the nine months ended September 30, 1997 were
$141.5 million, or 17.1% higher than for the same period in 1996. Production and
oil and gas prices for the two periods were relatively flat. The impact of
hedging activities in 1996 decreased revenues by $29.7 million and the average
gas price received by $0.61 ($2.51 to $1.90 per Mcf). For the same nine-month
period during 1997, hedging activities for gas production decreased revenues by
$5.0 million and the average price received by $0.11 ($2.52 to $2.41 per Mcf).
Hedging activities for oil and condensate had no major impact on revenues for
either period.
In 1996, Zilkha sold seven producing offshore properties in two separate
transactions totaling $100 million, resulting in a gain of $65.1 million.
Proceeds from the sale were used to retire debt and to provide additional
working capital for Zilkha's active exploration and development program. At the
time of sale, these properties were producing approximately 68 MMcfe per day to
Zilkha's interest. Through its exploration activities, Zilkha was able to
replace this production with fourteen new fields from October 1996 to September
1997 with the majority of production attributable to West Cameron 91, Grand Isle
78 and South Timbalier 37.
32
<PAGE> 39
Operating and Maintenance Expense
Operating and maintenance expense for the nine months ended September 30,
1997 increased to $9.8 million from $8.6 million for the same period in 1996.
Operating and maintenance expense per Mcf increased from $0.15 in 1996 to $0.18
in 1997. This increase was attributable to the start-up of several oil fields in
1997, which generally have higher operating expenses than gas fields, and the
industry wide increase in costs in 1997.
Depreciation, Depletion, Amortization and Impairments
During the nine months ended September 30, 1997, depreciation, depletion
and amortization totaled $47.6 million, or 3% higher than DD&A of $46.2 million
in the same period in 1996. During the nine months ended September 30, 1997,
impairment of oil and gas properties totaled $13.3 million. This writedown was
taken on those properties where the capitalized costs were in excess of the
estimated undiscounted future net cash flow associated with those producing
properties. No such impairment was recorded for the comparable period in 1996.
General and Administrative Expense
General and administrative expense totaled $8.7 million and $8.6 million
(net of expenses under the Executive Compensation Plan) in the nine months ended
September 30, 1997 and 1996, respectively. The 1.2% increase was due primarily
to staff additions needed because of the increased activity of Zilkha. Expenses
under the Executive Compensation Plan totaled $25.1 million for 1997 and $9.0
million for 1996.
Exploration Expense
Exploration expense, which includes seismic, lease write-offs, dry hole
expense, and delay rentals, increased by 47.8% for the nine-month period ended
September 30, 1997 from the same period in 1996. The increase was primarily due
to a lower exploration success ratio of 50% for the first nine months of 1997 as
compared to Zilkha's 90% exploration success ratio for the same time period in
1996. Zilkha expensed approximately $32.8 million and $36.3 million in 1997 and
1996, respectively for 3-D seismic and reprocessing.
Other Expense
Other expense increased to $7.2 million in the nine months ended September
30, 1997, due to the incurrence of a break-up fee paid by Zilkha.
1996 COMPARED TO 1995
Oil and Gas Revenues
Oil and gas revenues increased by $16.9 million to $165.0 million in 1996
compared to $148.1 million in 1995, after taking into account hedging activities
which decreased the average realized natural gas price for 1996 by $.58 per Mcf
($2.64 to $2.06 per Mcf). Revenues for 1996 were reduced by $36.8 million due to
hedging activities. Revenues for 1995 were increased by $9.8 million as a result
of hedging activities. Total production, after two major property sales,
increased by 5%. Higher natural gas and oil prices in 1996 also contributed to
the increase in 1996 oil and gas revenues.
Operating and Maintenance Expense
Operating and maintenance expense was $12.4 million in 1996 and $12.5
million in 1995. During this time period, Zilkha lowered its lease operating
expense per Mcfe from $0.18 for 1995 to $0.17 for 1996. This decrease was offset
by increased production from additional fields brought on in 1996.
33
<PAGE> 40
Depreciation, Depletion, Amortization and Impairments
Depreciation, depletion and amortization expense increased to $61.6 million
in 1996 from $53.9 million in 1995. The increase was the result of an increased
depletion rate in 1996. The increased depletion rate is primarily attributable
to a change in production mix in 1996. Wells such as High Island 45, High Island
465 and South Pelto 5 representing a relatively higher depletion rate also
represented a larger percentage of production during 1996. Impairment of oil and
gas properties totaled $4.3 million in 1996. There was no such impairment
recorded during 1995.
General and Administrative Expense
General and administrative expense (net of expenses under the Executive
Compensation Plan) increased to $10.9 million in 1996 from $8.7 million in 1995.
A 24% increase in staff since the end of 1994 was the major reason for the
increase. Expenses under Zilkha's Executive Compensation Plan totaled $12.0
million and $8.5 million in 1996 and 1995, respectively.
Exploration Expense
Exploration expense for 1996 increased $19.4 million to $64.6 million from
$45.2 million for 1995. Zilkha increased its seismic expense from $19.7 million
in 1995 to $41.6 million in 1996. This increase was offset by lower dry hole
costs in 1996 due to a 90% exploratory drilling success ratio.
1995 COMPARED TO 1994
Oil and Gas Revenues
Oil and gas revenues for 1995 increased by $73.1 million or 97% to $148.1
million compared to $75.0 million in 1994. This increase was primarily the
result of wells drilled and placed on production during 1995 and the latter part
of 1994, including High Island 45, South Marsh Island 133, and East Cameron 280.
Revenues increased by $9.8 million during 1995 and decreased by $4.2 million
during 1994 as a result of hedging activities.
Operating and Maintenance Expense
Operating and maintenance expense for 1995 increased $5.7 million to $12.5
million from $6.8 million for 1994. The 84% increase in operating and
maintenance expense directly related to the 89% increase in oil and gas
production.
Depreciation, Depletion and Amortization
During 1995, depreciation, depletion and amortization expense in 1995
increased to $53.9 million from $29.5 million in 1994. The increase resulted
from higher production offset by a decrease in the depletion rate for 1995 to
$0.75 per Mcfe from $0.78 Mcfe in 1994.
General and Administrative Expense
General and administrative expense (net of expenses under the Executive
Compensation Plan) totaled $8.7 million and $7.5 million in 1995 and 1994,
respectively. The 16% increase was due to increased staffing in 1995. Expenses
under Zilkha's Executive Compensation Plan totaled $8.5 million and $3.6 million
in 1995 and 1994, respectively.
Exploration Expense
Exploration expense for 1995 increased by $8.4 million to $45.2 million
from $36.8 million in 1994. This increase was principally due to an increase in
seismic expense of $3.1 million and dry hole expense of $3.1 million during
1995.
34
<PAGE> 41
LIQUIDITY AND CAPITAL RESOURCES
A summary of cash flow information follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating activities..................... $ 107 $ 89 $ 120 $ 117 $ 107
Investing activities..................... (184) (49) (102) (113) (101)
Financing activities..................... 82 (37) (13) 3 (6)
</TABLE>
Cash flows from operations fluctuate primarily for the reasons described in
"-- Results of Operations." In addition, operating cash flow was significantly
reduced for the nine months ended September 30, 1996 and for the year ended
December 31, 1996 by the repurchase of a volumetric production payment described
in Note 9 to Zilkha's consolidated financial statements.
Investing activities consist primarily of capital expenditures for
exploration and development of oil and gas properties. Such expenditures were
$202 million, $121 million and $120 million for 1996, 1995 and 1994,
respectively, and $188 million and $150 million for the nine months ended
September 30, 1997 and 1996, respectively. The increased expenditures primarily
resulted from expanded exploration and development opportunities.
The available funds were primarily generated from operating cash flow,
proceeds from sales of properties and debt financing. Sales of oil and gas
properties generated proceeds of $100 million and $19 million in 1996 and 1994,
respectively.
Historically, Zilkha has funded its capital expenditures through a
combination of cash flows from operations, presales of oil and gas still in the
ground, sales of producing properties and borrowings. On November 30, 1994,
Zilkha entered into a Loan Agreement (the "Senior Revolving Credit Facility").
As of September 30, 1997, this facility had a borrowing base of $215 million,
which is reevaluated semiannually. Advances can be drawn on the Senior Revolving
Credit Facility up to the lesser of the maximum commitment of $250 million or
the borrowing base. At September 30, 1997, Zilkha had an outstanding balance of
$140 million under this facility. Principal payments are required when the
advances outstanding exceed the borrowing base, in amounts equal to the excess
over the borrowing base. The Senior Revolving Credit Facility matures on October
31, 1999. During July 1996, the Company sold $50 million of senior subordinated
notes to reduce senior indebtedness by $45 million and provide working capital;
such notes mature July 2001.
Zilkha believes that cash flow from operations and borrowings under its
existing credit facility provide Zilkha with the means to fund operations and
currently planned investment and capital expenditures.
As of September 30, 1997, the Company had a working capital deficit of
$28.8 million primarily due to $37 million accrued under the Executive
Compensation Plan, which will be payable in September 1998. The Company believes
cash flow from operations will enable them to meet this obligation. See "The
Merger Agreement -- Consideration to Be Received in the Merger" for information
regarding approximately $280.2 million of Zilkha's indebtedness and other
obligations (net of Zilkha's current assets and other investments) that Sonat
will, in effect, assume and pay in due course as a result of the Merger.
MARKET AND FINANCIAL RISK MANAGEMENT
Use of Derivatives. Zilkha uses derivative financial instruments to hedge
its exposure to changes in the market price of natural gas and crude oil, to
provide methods to fix the price for natural gas independently of the physical
purchase or sale and to manage interest rates. While commodity financial
instruments are intended to reduce the Company's exposure to declines in the
market price of natural gas and crude oil, the commodity financial instruments
may also limit Zilkha's gain from increases in the market price of natural gas
and crude oil. As a result, gains and losses on commodity financial instruments
are generally offset by similar changes in the realized price of natural gas and
crude oil. Gains and losses generally are recognized in revenues for the periods
to which the commodity financial instruments relate. Zilkha's commodity
financial instruments currently are comprised of swaps and options. See Notes 1
and 6 of the Notes to Consolidated Financial Statements of Zilkha Energy
Company.
35
<PAGE> 42
INFLATION AND THE EFFECT OF CHANGING ENERGY PRICES
The rate of inflation in the United States has been moderate over the past
several years and has not significantly affected the profitability of Zilkha. In
prior periods of high general inflation, oil and gas prices generally increased
at comparable rates; however, there is no assurance that this will be the case
in the current environment or in possible future periods of high inflation. The
results of operations for Zilkha will be affected by future changes in oil and
gas prices and the inter-relationship between oil, gas and other energy prices.
ENVIRONMENTAL ISSUES
Zilkha is subject to extensive federal environmental laws and regulations
that affect its operations. Governmental authorities may enforce these laws and
regulations with a variety of civil and criminal enforcement measures, including
monetary penalties, assessment and remediation requirements, and injunctions as
to future activities. Zilkha is not aware of any environmental issues that are
expected to be material to its financial position or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 128
Effective December 1997, Zilkha will be required to adopt Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 introduces the concept of basic earnings per share, which
represents net income divided by the weighted average common shares
outstanding -- without the dilutive effects of common stock equivalents
(options, warrants, etc.). Diluted earnings per share, giving effect for common
stock equivalents, will be reported when SFAS No. 128 is adopted in the quarter
ending December 31, 1997. The impact of adoption SFAS No. 128 is anticipated to
be immaterial.
Financial Accounting Standards Board Statement No. 129
Effective December 1997, Zilkha will be required to adopt Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("SFAS No. 129"). SFAS No. 129 requires that all entities disclose in
summary form within the financial statements the pertinent rights and privileges
of the various securities outstanding. An entity is to disclose within the
financial statements the number of shares issued upon conversion, exercise, or
satisfaction of required conditions during at least the most recent annual
fiscal period and any subsequent interim period presented. Other special
provisions apply to preferred and redeemable stock.
Financial Accounting Standards Board Statement No. 130
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and display
of comprehensive income and its components. The components of comprehensive
income refer to revenues, expenses, gains and losses that are excluded from net
income under current accounting standards, including unrecognized foreign
currency translation items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. SFAS No.
130 requires that all items that are recognized under accounting standards as
components of comprehensive income be reported in a financial statement
displayed in equal prominence with other financial statements; the total of
other comprehensive income for a period is required to be transferred to a
component of equity that is separately displayed in a statement of financial
position at the end of an accounting period. SFAS No. 130 is effective for both
interim and annual periods beginning after December 15, 1997, at which time the
Company will adopt the provisions.
Financial Accounting Standards Board Statement No. 131
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. SFAS No.
131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers, SFAS No. 131 is effective for
periods beginning after December 15, 1997, at which time Zilkha will adopt the
provisions.
36
<PAGE> 43
DESCRIPTION OF ZILKHA
GENERAL
Zilkha is a private oil and gas exploration, development and production
company operating primarily offshore in the Gulf of Mexico. Zilkha holds the
industry's largest net leasehold position in the shallow water area (less than
600 feet) of the Gulf of Mexico. Zilkha has an ownership interest in
approximately 390 state and federal lease blocks, of which 11 blocks are located
in deep water areas and approximately 340 lease blocks (covering approximately
1.4 million net acres) are undeveloped. Zilkha also has a contractual interest
(with rights to drill to earn) in approximately 200,000 additional undeveloped
acres. Zilkha has licensed or contracted to license 3-D seismic data covering
approximately 6,100 lease blocks in both shallow and deep water areas of the
Gulf of Mexico. At July 1, 1997, Zilkha's total proved reserves were estimated
to be approximately 415 Bcfe, consisting of 321 Bcf of natural gas and 15.8
MMBbls of crude oil and condensate. At the same date, the present value,
discounted at 10%, of estimated future net cash flow, before income taxes and
excluding the impact of oil and gas derivative instruments, from Zilkha's
estimated proved developed and undeveloped reserves was $576 million. Zilkha's
total daily production in 1996 averaged 174 MMcf of natural gas and 4.6 MBbls of
crude oil and condensate. Zilkha operated 71% of its fields and 85% of its
proved reserves at July 1, 1997.
Zilkha has expanded its reserve base and production principally through
exploration and associated development drilling. The Gulf of Mexico is a
well-established area of oil and gas production where Zilkha's management and
staff have both experience and expertise and where the application of advances
in 3-D and 2-D seismic and computer-aided exploration technology is particularly
well suited. From 1992 through the end of 1997, Zilkha will have spent
approximately $130 million on 3-D seismic and reprocessing. Currently, Zilkha
has approximately 4,100 lease blocks of 3-D seismic data coverage with
contractual commitments to purchase an additional 2,000 lease blocks of coverage
within the next three years. See "-- Exploration and Development Activity." With
the aid of seismic technology, Zilkha has achieved a 65% success rate with
respect to the 86 gross exploratory wells it has completed drilling between
January 1, 1992 and November 30, 1997. Exploration and development activities
are directed by an experienced technical team that makes use of extensive
in-house computer capabilities.
Zilkha identifies exploratory prospects by: (i) integrating 3-D and 2-D
seismic technology with information about surrounding geological features; and
(ii) high-grading prospects that exhibit "bright spot" seismic anomalies by
using extensive computer-aided geophysical modeling and amplitude versus offset
analysis.
Zilkha's producing properties are all located in the shallow water area of
the Gulf of Mexico, with most located in 30 to 150 feet of water. The fields are
typically one to three well fields with high flow rates per completion,
generally between 7 and 25 MMcfpd initial rates per zone. Most of Zilkha's
production is less than six years old, with operating costs generally under
$0.25/Mcfe. Based upon the reserve report, dated September 19, 1997 (the
"Reserve Report") prepared by William M. Cobb & Associates, Inc. ("Cobb"), at
July 1, 1997, approximately 274 Bcfe, or 66%, of Zilkha's proved reserves were
attributable to nine properties, which properties produce an average of 157 net
MMcfe per day, or approximately 72% of Zilkha's total average daily production.
The names of such properties, including the specific reserves and production
attributable to each property, are not set forth herein due to confidentiality
restrictions affecting such properties.
Historically, Zilkha has funded its capital expenditures through a
combination of cash flows from operations, presales of oil and gas still in the
ground, sales of producing properties and borrowings. Zilkha's strategy with
respect to the development of its proved reserves is to concentrate available
resources on those prospects with the greatest potential to add to Zilkha's cash
flows from operations while maintaining a diversity of development projects.
Zilkha drills most of its prospects with a 100% working interest, but due to
farm-in agreements or terms of exploration joint ventures, there are often
partners when the discoveries are placed on production. In addition, Zilkha has
entered into farm-out agreements with third party operators with respect to
leases that do not meet Zilkha's risk/reward criteria.
37
<PAGE> 44
OIL AND GAS RESERVES
The following table sets forth certain information on the total proved
reserves, estimated future net cash flow, before income taxes, from proved
reserves and the present value, discounted at 10%, of estimated future net cash
flow, before income taxes, from proved reserves for Zilkha as of July 1, 1997.
Information in the following table is based upon the Reserve Report in
accordance with the rules and regulations of the Commission. For purposes of
preparing such estimates, Cobb reviewed production data through August 31, 1997.
In order to calculate the proved reserve estimates as of July 1, 1997, Cobb
assumed that production for each of Zilkha's properties since the date of the
last production data reviewed was in accordance with the production decline
curve previously established for such property.
<TABLE>
<CAPTION>
FUTURE NET CASH FLOW
PRE-TAX
NET PROVED RESERVES ----------------------
----------------------------- DISCOUNTED
GAS OIL TOTAL TOTAL AT 10%
-------- ------- ------ -------- ----------
(MMCF) (MBBL) (BCFE) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Producing.................. 173,654 6,168 211 $377,582 $328,519
Non-Producing.............. 54,191 3,720 76 138,631 94,765
Undeveloped................ 93,196 5,883 128 221,299 152,926
-------- ------- ----- -------- --------
Total Proved.......... 321,041 15,771 415 $737,512 $576,210
-------- ------- ----- -------- --------
</TABLE>
Since July 1, 1997, Zilkha has not filed any estimates of proved oil and
gas reserves with any federal authority or agency.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of Zilkha. The
reserve data set forth herein represents only estimates. Reservoir engineering
is a subjective process of estimating underground accumulations of crude oil and
natural gas that cannot be measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
of different engineers often vary. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimate. Accordingly, reserve estimates are often different from the quantities
of crude oil and natural gas that are ultimately recovered. The meaningfulness
of such estimates is highly dependent upon the accuracy of the assumptions upon
which they were based. In general, the volume of production from oil and gas
properties owned by Zilkha declines as reserves are depleted. Except to the
extent Zilkha conducts successful exploration and development activities or
acquires additional properties containing proved reserves, or both, the proved
reserves of Zilkha will decline as reserves are produced.
In accordance with the Commission's guidelines, the estimates of Zilkha's
proved reserves, future net cash flow from proved reserves and the discounted
present value of future net cash flow from proved reserves are made using oil
and natural gas sales prices in effect as of the dates of such estimates and are
held constant throughout the life of the properties except where such guidelines
permit alternate treatment, including the use of fixed and determinable
contractual price escalations. The prices as of July 1, 1997 were $2.36 per Mcf
of natural gas and $17.00 per Bbl of crude oil. The foregoing prices exclude the
effect of net price hedging positions. Prices for natural gas and, to a lesser
extent, oil are subject to substantial seasonal fluctuations and prices for each
are subject to substantial fluctuations as a result of numerous other factors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Zilkha Energy Company" and "-- Oil and Gas Marketing." In
addition, in accordance with Commission guidelines, the estimates of Zilkha's
proved reserves, future net cash flow from proved reserves and the discounted
present value of future net cash flow from proved reserves are made using
current lease and well operating costs estimated by Zilkha. Lease operating
expenses for wells owned by Zilkha were estimated using a combination of fixed
and variable-by-volume costs consistent with Zilkha's experience in the areas of
such wells. For purposes of calculating estimated future net cash flow and the
discounted present value thereof, operating costs exclude accounting and
administrative overhead expenses attributable to Zilkha's working interest in
wells operated under joint operating agreements, but include administrative
costs associated with production offices. The discounted present value of
estimated future net cash flow from proved reserves set forth herein should not
be construed as the current market value of the estimated proved oil and gas
reserves attributable to Zilkha's properties.
38
<PAGE> 45
EXPLORATION AND DEVELOPMENT ACTIVITY
Zilkha drilled, or participated in the drilling of, the following numbers
of total offshore wells during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------- ------------ -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Gas......................................... 12.00 10.05 4.00 3.34 10.00 8.10
Oil......................................... 6.00 5.30 1.00 0.18 2.00 2.00
Dry......................................... 2.00 1.75 5.00 4.40 6.00 5.75
Total.................................. 20.00 17.10 10.00 7.92 18.00 15.85
Development Wells
Gas......................................... 1.00 1.00 0.00 0.00 2.00 1.40
Oil......................................... 4.00 0.70 1.00 1.00 0.00 0.00
Dry......................................... 0.00 0.00 0.00 0.00 1.00 1.00
Total.................................. 5.00 1.70 1.00 1.00 3.00 2.40
Total Wells
Gas......................................... 13.00 11.05 4.00 3.34 12.00 9.50
Oil......................................... 10.00 6.00 2.00 1.18 2.00 2.00
Dry......................................... 2.00 1.75 5.00 4.40 7.00 6.75
Total.................................. 25.00 18.80 11.00 8.92 21.00 18.25
</TABLE>
The information contained in the foregoing table should not be considered
indicative of future drilling performance, nor should it be assumed that there
is any necessary correlation between the number of productive wells drilled and
the amount of oil and gas that may ultimately be recovered from such wells.
Since 1992, Zilkha has drilled and completed 56 gross (48 net) productive
wells.
In the first 11 months of 1997, Zilkha completed the drilling of 23 gross
(20 net) exploration wells in the shallow water area of the Gulf of Mexico. Of
these wells, 12 gross (10 net) were successful in finding commercial quantities
of hydrocarbons and have been or will be completed for production.
Out of a total of approximately 390 state and federal lease blocks in which
Zilkha owns an interest, approximately 340 lease blocks (covering approximately
1.4 million acres) are undeveloped. Zilkha has an inventory of more than 70
identified prospects on acreage owned or controlled by Zilkha and is continually
working to generate new prospects on its 3-D database. Zilkha plans to drill
four additional prospects in the month of December 1997 and an another
approximately 25 to 30 prospects in 1998, four of which are located on farmed in
or joint venture acreage with the remainder being on acreage that is owned 100%
by Zilkha. While Zilkha currently intends to complete the drilling of these
prospects, the number, type and timing of the prospects drilled are subject to
continued revision as a result of many factors, including the number of new
prospects identified and secured through exploration and joint ventures with
others, the number of prospects identified and highgraded through ongoing
geologic evaluation or seismic reprocessing efforts, rig availability, the
availability of capital to fund such projects, initial test results, the price
of oil and gas, weather and other general and economic conditions. See
"Summary -- Cautionary Statement Concerning Forward-looking Statements."
The well costs associated with typical prospects range from $1.5 million to
$5 million. All of Zilkha's current prospects are based on 3-D seismic data,
with several resulting from reprocessing of licensed 3-D seismic. Most of the
prospects have amplitude anomalies or "bright spots" on the 3-D seismic which
often indicate the potential for oil or gas accumulations. This prospecting
strategy is very similar to the strategy Zilkha has used since 1992 which has
resulted in a cumulative exploratory success rate of 65% through
39
<PAGE> 46
November 30, 1997. Substantially all of the drilling Zilkha intends to conduct
in 1997 and 1998 is in the shallow water area of the Gulf of Mexico.
Zilkha is currently developing eight of its recent discoveries as shown on
the following table:
<TABLE>
<CAPTION>
WORKING DISCOVERY
FIELD NAME OPERATOR INTEREST TYPE
---------- -------- -------- ---------
<S> <C> <C> <C>
East Cameron 378...................................... Zilkha 50% Gas
Atchafalaya Bay....................................... Zilkha 75% Gas/Condensate
West Cameron 431...................................... Zilkha 100% Gas
West Cameron 509...................................... Zilkha 100% Gas
South Marsh Island 229................................ Zilkha 100% Gas/Condensate
Ship Shoal 151........................................ Zilkha 75% Oil
South Timbalier 30.................................... Chevron 27% Oil
Main Pass 280/281..................................... CNG 13.5% Oil/Gas
</TABLE>
Four of the discoveries referenced above were made subsequent to the
Reserve Report and have not been included in the reserves or cash flow
calculations. Five of these fields are expected to be on production by the end
of the first quarter of 1998, with the remainder of the fields expected to be on
line by year end 1998.
Zilkha owns no drilling rigs. All of Zilkha's drilling activities are
conducted by independent contractors on a daywork or turnkey basis under
standard drilling contracts. In addition, all of Zilkha's production operations
are performed by third party contract operators.
Zilkha currently has budgeted approximately $102 million of its $240
million capital expenditure budget for 1998 on exploratory drilling and $98
million for the development of its properties, including the drilling of
development wells. In addition, Zilkha intends to spend approximately $20
million to acquire 3-D seismic surveys and a like amount for lease acquisitions
and delay rentals. While Sonat has informed Zilkha's management that it
currently has no intention to alter Zilkha's existing exploration and
development plan for 1998 in any material respect, Sonat's management may do so
based upon a number of factors, including those mentioned above.
NET PRODUCTION, UNIT PRICES AND PRODUCTION COSTS
As of July 1, 1997, Zilkha had an ownership interest in 55 gross (38 net)
productive wells, including 37 gross (29 net) productive natural gas wells and
18 gross (9 net) productive oil wells.
The following table sets forth certain information regarding the net
production volumes, average sales prices received, and average production costs
associated with Zilkha's sales of oil and natural gas for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------- --------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Production:
Gas (Bcf)............................. 48.2 49.0 63.5 55.2 31.9
Oil (MMBbls).......................... 1.3 1.4 1.7 2.5 0.9
------ ------ ------ ------ ------
Total (Bcfe)..................... 56.1 57.7 73.5 70.3 37.1
Average Sales Price:
Gas ($/Mcf)(1)........................ $ 2.52 $ 2.51 $ 2.64 $ 1.72 $ 2.04
Oil ($/Bbl)........................... 19.05 18.93 20.08 17.00 15.94
Gas Price Net of Hedging Activities
($/Mcf)............................. 2.41 1.90 2.06 1.90 1.91
Average Production Cost:
($/Mcfe)(2)........................... $ 0.18 $ 0.15 $ 0.17 $ 0.18 $ 0.18
</TABLE>
- -------------------------
(1) Includes natural gas liquids.
(2) Includes direct lifting costs (labor, repairs and maintenance, materials and
supplies) and the administrative costs of production offices, insurance and
property and severance taxes.
40
<PAGE> 47
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
Zilkha's total capital expenditures on oil and gas properties in 1996 were
$202 million, with $39 million spent on development, $80 million spent on
exploratory drilling, $41 million spent on the acquisition and reprocessing of
seismic data and $41 million spent on leases and delay rentals. The following
table sets forth certain information regarding the costs incurred by Zilkha in
its development, exploration and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------- --------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Development Costs.......................... $ 49.9 $ 28.5 $ 38.8 $ 21.2 $ 34.6
Exploration Costs:
Lease Acquisitions and Delay
Rentals............................. 22.1 35.3 41.9 12.4 35.8
Seismic Acquisition and
Reprocessing........................ 32.8 36.2 41.6 19.7 16.7
Drilling.............................. 82.8 49.5 80.0 67.6 53.9
------ ------ ------ ------ ------
Total Capital Expenditures................. $187.6 $149.5 $202.3 $120.9 $141.0
====== ====== ====== ====== ======
</TABLE>
ACREAGE
As of December 1, 1997, Zilkha had an interest in approximately 1.6 million
gross (1.5 million net) acres, including approximately 153,000 gross (103,000
net) developed acres and approximately 1.45 million gross (1.4 million net)
undeveloped acres. Acreage in which Zilkha's interest is limited to royalty,
overriding royalty and similar interests is insignificant and, therefore,
excluded.
OIL AND GAS MARKETING
The revenues generated from Zilkha's oil and gas operations are highly
dependent upon the prices of and the demand for its oil and gas production. The
prices received by Zilkha for its oil and gas production depend upon numerous
factors beyond Zilkha's control. Future decreases in the prices of oil and gas
would have an adverse effect on Zilkha's proved reserves, revenues,
profitability and cash flow.
Generally, Zilkha's gas production is sold under short-term contracts with
index related pricing. Total sales of gas accounted for 79% and 70% of Zilkha's
revenues during 1996 and 1995, respectively. The weighted average prices of the
gas sold by Zilkha (excluding hedging transactions) under the various contracts
were $2.64 and $1.72 per Mcf of natural gas during 1996 and 1995, respectively.
Generally, Zilkha's oil production is sold to various purchasers under
short-term arrangements at prices no less than such purchasers' posted prices
for the respective areas less standard deductions. Total sales of oil accounted
for 21% and 30% of Zilkha's revenues during 1996 and 1995, respectively. The
weighted average prices of the oil sold by Zilkha under the various contracts
were $20.08 and $17.00 per Bbl during 1996 and 1995, respectively.
Affiliates of Enron Corp. were the only purchasers that accounted for more
than 10% of total revenues for the years ended December 31, 1996 and 1995.
Zilkha believes that the loss of a purchaser of its oil or natural gas would not
have a material adverse effect on its results of operations due to the
availability of other purchasers for its oil and natural gas.
HEDGING
Periodically, Zilkha utilizes various hedging strategies to hedge the price
of a portion of its future oil and gas production. Settlement of gains and
losses on price swap contracts are realized monthly, generally based upon the
difference between the contract price and the average closing price on the New
York Mercantile Exchange (the "NYMEX"). As of December 1, 1997, Zilkha was a
party to natural gas swap agreements
41
<PAGE> 48
covering approximately 16.8 MMBtu of natural gas through November 1998 for a
NYMEX natural gas average settlement price of approximately $2.34 per MMBtu.
Gains or losses on the crude oil and natural gas swaps are recognized as
price adjustments in the month of related production. Zilkha estimates that had
all of the crude oil and natural gas swap agreements terminated on December 1,
1997, based on the closing prices for NYMEX futures contracts as of that date,
Zilkha would have paid the counterparty approximately $1.1 million, which would
have represented the "fair value" at that date. These agreements were not
terminated.
Zilkha has only limited involvement with derivative financial instruments,
as defined in SFAS No. 119 "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments," and does not use them for trading
purposes. Zilkha's objective is to hedge a portion of its exposure to price
volatility from producing crude oil and natural gas. These arrangements expose
Zilkha to credit risk to its counterparties and to basis risk.
COMPETITION
The exploration for and production of oil and natural gas is highly
competitive. In seeking to obtain desirable properties, leases and exploration
prospects, Zilkha faces competition from both major and independent oil and
natural gas companies, as well as from numerous individuals and drilling
programs. Many of these competitors have financial and other resources
substantially in excess of those available to Zilkha and, accordingly, may be
better positioned to acquire and exploit prospects, hire personnel and market
production. In addition, many of Zilkha's larger competitors may be better able
to respond to factors that affect the demand for oil and natural gas production
such as changes in worldwide oil and natural gas prices and levels of
production, the cost and availability of alternative fuels and the application
of government regulations.
EMPLOYEES
As of September 30, 1997, Zilkha had 66 full-time employees, none of whom
is represented by any labor union. Zilkha considers its relations with its
employees to be good.
FACILITIES
Zilkha currently leases approximately 29,000 square feet of office space in
Houston, Texas, where its administrative offices are located, and approximately
3,200 square feet of office space in Lafayette, Louisiana, where Zilkha's field
personnel are located.
TITLE TO PROPERTIES
Zilkha believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. Zilkha's properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens
which Zilkha believes do not materially interfere with the use of or affect the
value of such properties. Substantially all of Zilkha's producing properties are
also subject to mortgages and security interests pursuant to its existing credit
facility.
OPERATING HAZARDS AND UNINSURED RISKS
Zilkha's operations are subject to hazards and risks inherent in drilling
for and producing and transporting oil and natural gas, such as fires, natural
disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures, and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury claims, and other
damage to properties of Zilkha and others. Additionally, Zilkha's oil and gas
operations are located in an area that is subject to tropical weather
disturbances, some of which can be severe enough to cause substantial damage to
facilities and possibly interrupt production. As protection against operating
hazards, Zilkha maintains insurance coverage against some, but not all,
potential losses. Zilkha believes that its insurance coverage is adequate and
customary for companies of a similar size engaged in operations similar to those
of Zilkha, but losses could occur for
42
<PAGE> 49
uninsurable or uninsured risks or in amounts in excess of existing insurance
coverage. The occurrence of an event that is not fully covered by insurance
could have an adverse impact on Zilkha's financial condition and results of
operations.
GOVERNMENTAL REGULATION
Zilkha's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases Zilkha's cost of doing business and affects its profitability. To
date, expenditures related to complying with these rules and regulations have
not been significant in relation to the results of operations of Zilkha.
However, because such rules and regulations are frequently amended or
reinterpreted, Zilkha is unable to predict the future cost or impact of
complying with such laws.
ENVIRONMENTAL MATTERS
Zilkha's operations and properties are subject to extensive and changing
federal, state and local laws and regulations relating to environmental
protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and regulations may require the acquisition of a permit or other
authorization before construction or drilling commences and for certain other
activities, limit or prohibit construction, drilling and other activities on
certain lands lying within wilderness or wetlands and other protected areas and
impose substantial liabilities for pollution resulting from Zilkha's operations.
The permits required for various of Zilkha's operations are subject to
revocation, modification and renewal by issuing authorities. Zilkha believes
that its operations currently are in substantial compliance with applicable
environmental regulations.
Governmental authorities have the power to enforce compliance with their
regulations, and violations are subject to fines or injunction, or both. Zilkha
does not expect environmental compliance matters to have a material adverse
effect on its financial position or results of operations. It is also not
anticipated that Zilkha will be required in the near future to expend amounts
that are material to the financial condition or operations of Zilkha by reason
of environmental laws and regulations, but because such laws and regulations are
frequently changed, and may impose increasingly stricter requirements, Zilkha is
unable to predict the ultimate cost of complying with such laws and regulations.
LEGAL PROCEEDINGS
Zilkha is not a party to any pending legal proceedings, except for ordinary
routine litigation incidental to its business that management believes will not
have a material adverse effect on its financial condition or results of
operations.
EMPLOYEE BENEFIT PLANS
In connection with the Merger, Sonat has agreed to maintain in place
certain employee benefit plans which Zilkha currently provides to its employees.
The Amended and Restated Incentive Pool Plan, dated effective as of November 1,
1992 (the "Old Incentive Pool Plan"), was established by Zilkha in order to
provide incentive compensation to certain company personnel based upon the
success of Zilkha's exploratory drilling activities. Under the Old Incentive
Pool Plan, participants designated by the plan administrator are entitled to
participate in net profits interests pools in certain oil and gas prospects
designated by the plan administrator. The participants' interests are, in
aggregate, 1% of Zilkha's net revenue interest before payout and 2% of Zilkha's
net revenue interest after payout, and are evidenced by assignments of net
profits interests from Zilkha. Revenues attributable to the various net profits
interest pools are distributed to the participants therein based upon their
respective participation shares, as determined by the plan administrator.
The Incentive Pool Plan, adopted effective July 1, 1997 (the "New Incentive
Pool Plan" and, together with the Old Incentive Pool Plan, the "Incentive Pool
Plans"), was adopted by Zilkha in order to simplify
43
<PAGE> 50
administration and accounting for the interests of the participants in the
Incentive Pool Plans. All participants under the Old Incentive Pool Plan were
offered the right to convert their net profits interests thereunder to
overriding royalty interests to be administered under the New Incentive Pool
Plan. All of such participants elected to so convert their net profits
interests. The Old Incentive Pool Plan still governs properties which Zilkha had
sold prior to adoption of the New Incentive Pool Plan and in which participants
were unable to convert their net profits interests to overriding royalty
interests. After July 1, 1997, all new prospects that are designated by the plan
administrator are governed by the New Incentive Pool Plan, pursuant to which
participants are entitled to an overriding royalty interest rather a net profits
interest in the designated prospects. These interests are, in aggregate, 0.90%
of Zilkha's net revenue interest before payout and 1.80% of Zilkha's net revenue
interest after payout, and are evidenced by assignments of overriding royalty
interests from Zilkha to the participants. The Incentive Pool Plans will remain
in effect for all prospects designated thereunder prior to the Effective Time.
In addition, Sonat has agreed to keep the New Incentive Pool Plan in place for a
period of three years following the Effective Time of the Merger, with respect
to properties owned by Zilkha at the Effective Time and with respect to
participants in the New Incentive Pool Plan as of November 22, 1997, the date
the Merger Agreement was executed.
In addition to the Incentive Pool Plans, Sonat has agreed to maintain in
place Zilkha's Severance Plan (the "Severance Plan"), which applies to
individuals ("Eligible Employees") who are employees of Zilkha immediately prior
to the time (the "Effective Date") at which Selim K. Zilkha ceases to own more
than 50% of the voting securities of Zilkha. If an Eligible Employee's
employment with Zilkha or its successor is terminated within one year after the
Effective Date other than for cause (as defined in the Severance Plan), death,
disability, voluntary termination, voluntary retirement, or failure to return
from an approved leave of absence, such employee is entitled to six weeks pay
for the first year or partial year of employment, plus an additional two week's
pay for each additional year or partial year of employment, subject to a minimum
of 26 week's pay for executives as defined in the Severance Plan. In addition,
such an employee would be entitled to have his or her COBRA premium waived for a
period calculated under the terms of the Severance Plan.
Each participant who is an employee at the Effective Time becomes
automatically 100% vested in such participant's accounts under Zilkha's
Retirement Savings Plan at the Effective Time.
As a result of the Merger, approximately $73.7 million will become payable
to four senior managers of Zilkha (including Mr. Michael Zilkha) pursuant to the
Executive Compensation Plan. The Executive Compensation Plan will terminate
following the payment of the required amounts thereunder. In addition,
approximately $4.6 million will be payable to employees of Zilkha under Zilkha's
Stay-On Bonus Program dated effective September 1, 1997, as amended (the
"Stay-On Bonus Program") as a result of the Merger. See "The Merger
Agreement -- Employee Matters."
44
<PAGE> 51
THE MERGER AGREEMENT
The following summary of the terms of the Merger Agreement is qualified in
its entirety by reference to the Merger Agreement, which is incorporated by
reference herein and attached as Appendix A to this Proxy Statement/Prospectus.
Certain defined terms used in the description of the Merger Agreement below
which are not otherwise defined in this Proxy Statement/Prospectus and which are
defined in the Merger Agreement or the exhibits thereto shall have the
respective meanings set forth therein.
GENERAL
The Merger Agreement contemplates the Merger of Newco with and into Zilkha,
which shall survive the Merger as a wholly-owned subsidiary of Sonat and
promptly change its name to Sonat GOM. The Merger will become effective in
accordance with the Certificate of Merger to be filed with the Secretary of
State of the State of Delaware. It is anticipated that such filing will be made
contemporaneously with the closing under the Merger Agreement, which closing, in
turn, should occur as soon as practicable after the last of the conditions
precedent to the Merger set forth in the Merger Agreement has been satisfied.
The Merger Agreement obligates Sonat to have the shares of Sonat Common Stock to
be issued in connection with the Merger approved for listing on the NYSE,
subject only to official notice of issuance, prior to the Effective Time.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time: (i) the issued and outstanding shares of Zilkha
Stock will be converted into the right to receive, without interest, the Merger
Consideration, together with the associated Sonat Rights in accordance with the
Sonat Rights Plan; and (ii) each issued and outstanding share of the capital
stock of Newco will be converted into and become one fully paid and
nonassessable share of common stock of Sonat GOM. As a result of the Merger,
Sonat will, in effect, assume and pay in due course approximately $280.2 million
of indebtedness and other obligations of Zilkha (net of Zilkha's current assets
and other investments determined as of September 30, 1997).
To the extent that additional production data which becomes available to
Zilkha between the date of the Merger Agreement and the Effective Time indicates
a material decline in the estimates of Zilkha's proved oil and gas reserves
reflected in the Reserve Report, Sonat may, at any time up to 30 days prior to
the Effective Time, request that the estimated future net cash flow, discounted
at 10%, from the affected field or fields be recalculated. In making any
recalculation based on the new production data, Cobb shall use the same
operating costs, oil and gas prices, taxes, discounting methods, effective date
(July 1, 1997) and other data and parameters that were used to prepare the
Reserve Report and shall provide a written report with respect to such
recalculations to Sonat and Zilkha no later than 10 days prior to the Effective
Time. If the aggregate difference in future net cash flow, discounted at 10%,
for the affected field or fields as reflected in the Reserve Report and as
recalculated exceeds $50 million, the Purchase Price shall be reduced by the
amount of such difference.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective at the time that the Certificate of Merger
is filed with the Secretary of State of the State of Delaware, which is
currently expected to occur once requisite regulatory and stockholder approval
of the Stock Issuance is secured and the other conditions set forth in the
Merger Agreement are satisfied. See "-- Conditions Precedent."
CORPORATE ORGANIZATION AND GOVERNANCE
Certificate of Incorporation. The Zilkha Charter as in effect at the
Effective Time will be the certificate of incorporation of Sonat GOM, and
thereafter may be amended in accordance with applicable law.
By-laws. The Zilkha By-laws as in effect at the Effective Time will be the
by-laws of Sonat GOM, and thereafter may be amended in accordance with
applicable law.
45
<PAGE> 52
Board of Directors; Officers. The directors and officers of Newco
immediately prior to the Effective Time will be the directors and officers of
Sonat GOM, in each case until their respective successors are duly elected and
qualified.
Exchange of Shares. At the Effective Time, the stockholders of Zilkha will
deliver to Sonat certificates representing all the outstanding shares of Zilkha
Stock, and Sonat will deliver, in exchange therefor, certificates representing
the Merger Consideration. No fractional shares of Sonat Common Stock will be
issued in the Merger, but in lieu thereof each holder of Zilkha Stock otherwise
entitled to a fractional share of Sonat Common Stock will be entitled to receive
from Sonat a cash payment equal to such fraction multiplied by the Closing
Price.
STOCKHOLDERS' APPROVALS
Sonat. Sonat will convene a meeting of its stockholders as promptly as
practicable to consider and vote upon the approval by the holders of a majority
of the shares of Sonat Common Stock present and entitled to vote on the Stock
Issuance. The affirmative vote of the holders of a majority of the shares of
Sonat Common Stock present and entitled to vote at the Special Meeting is
required to approve the Stock Issuance; provided that the total number of votes
cast (excluding abstentions and broker non-votes) on the Stock Issuance
represents more than 50% of the shares of Sonat Common Stock entitled to vote
thereon at the Special Meeting. Sonat will take all action necessary to
authorize Newco to consummate the Merger. The Sonat Board recommends such
approval, and Sonat will take all lawful action to solicit such approval;
including, without limitation, timely and promptly mailing this Proxy
Statement/Prospectus; provided, however, that such recommendation is subject to
any action required by the fiduciary duties of the Sonat Board under Delaware
law.
Zilkha. Effective as of November 22, 1997, the three Zilkha stockholders
executed a unanimous written consent approving the Merger, the Merger Agreement
and the transactions contemplated thereby as required by the DGCL. The Zilkha
stockholders have agreed not to rescind the foregoing approval unless Zilkha
terminates the Merger Agreement as permitted by the terms thereof.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Sonat and Zilkha, relating, among other things, to the following: (i) their
incorporation, existence, good standing, corporate power and similar corporate
matters; (ii) their capitalization; (iii) their authorization, execution,
delivery and performance and the enforceability of the Merger Agreement and
related matters; (iv) the absence of conflicts, violations and defaults under
their respective certificates of incorporation and by-laws and certain other
agreements and documents; (v) the absence of certain material changes or events
since September 30, 1997; (vi) pending or threatened investigations or
litigation; (vii) labor and employee benefit matters; (viii) compliance with
laws, ordinances and regulations; (ix) environmental matters; (x) the accuracy
of information supplied by each for inclusion in this Proxy Statement/Prospectus
and the Registration Statement; (xi) tax matters; and (xii) the qualification of
the Merger as a reorganization within the meaning of the Code and the
availability of "pooling of interests" accounting treatment. Zilkha made
additional representations and warranties as to: (i) the factual information
provided by Zilkha to Cobb in connection with the Reserve Report; (ii)
defensible title to certain identified leases and wells; (iii) financial and
commodity hedging transactions; (iv) production and pipeline imbalances; (v)
preferential purchase rights; (vi) the audited and unaudited consolidated
financial statements of Zilkha set forth in this Proxy Statement/ Prospectus;
and (vii) brokerage fees and commissions. Sonat also made additional
representations and warranties as to: (i) the receipt of a fairness opinion from
Merrill Lynch; (ii) the documents and reports filed by Sonat with the Commission
and the accuracy and completeness of the information contained therein; and
(iii) the inapplicability of the Sonat Rights Plan to the Merger Agreement and
the Merger.
All representations and warranties of Sonat and Zilkha expire at the
Effective Time.
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CONDUCT OF BUSINESS PENDING THE MERGER
Sonat
Sonat has agreed that prior to the Effective Time, unless Zilkha otherwise
agrees in writing or except as otherwise provided in or contemplated by the
Merger Agreement, it will and will cause each of its subsidiaries to: (i)
operate their businesses (including the making of capital expenditures) in the
ordinary and usual course in all material respects in accordance with past
practices; (ii) not make any change or amendment in their respective
certificates of incorporation or by-laws that would have a material adverse
effect on Zilkha or Zilkha's stockholders; (iii) not issue, sell, or agree to
issue or sell (a) any shares of their capital stock or (b) any securities
convertible into, or options with respect to, or warrants to purchase or rights
to subscribe for, any shares of their capital stock, except that (1) Sonat may
issue shares upon conversion of convertible securities and exercise of options
and may grant shares pursuant to stock based compensation plans for directors
and employees and (2) Sonat may issue options with an exercise price per share
of Sonat Common Stock no less than the fair market value of a share of Sonat
Common Stock on the date of grant thereof (and shares upon exercise of such
options) pursuant to its employee stock option plans in effect on the date of
the Merger Agreement; (iv) except in the ordinary course of business and
consistent with past practices, not (a) sell, transfer, or otherwise dispose of
any of its assets, (b) create or permit to exist any new material Lien on its
assets, other than Permitted Encumbrances, or (c) enter into any material joint
venture, partnership, or other similar arrangement; (v) not pay or declare any
dividend on, or make any distribution with respect to, or purchase or redeem any
of their capital stock, except for quarterly cash dividends by Sonat and stock
repurchases by Sonat for stock based compensation plans, in each case not in
excess of historical amounts, and dividends by wholly-owned subsidiaries; and
(vi) not take any action that would make any representation and warranty of
Sonat under the Merger Agreement materially inaccurate in any respect at, or as
of any time prior to, the Effective Time. Sonat has also agreed to take all
action necessary to create Newco and to cause it to perform its obligations
under the Merger Agreement and to consummate the Merger on the terms and
conditions set forth in the Merger Agreement.
Sonat has also agreed that it will (i) submit the Stock Issuance for
approval of the stockholders of the Special Meeting; (ii) subject to the
fiduciary duties of the Sonat Board under Delaware law, (a) use its reasonable
best efforts to obtain stockholder approval of the Stock Issuance and (b)
through the Sonat Board recommend to its stockholders approval of the Stock
Issuance; (iii) authorize and cause an officer of Sonat to vote Sonat's shares
of common stock of Newco for approval and adoption of this Agreement and the
transactions contemplated by the Merger Agreement and take all additional
actions as the sole stockholder of Newco necessary to approve and adopt the
Merger Agreement and the transactions contemplated thereby; (iv) upon or
immediately following the Effective Time, cause Sonat GOM to cease using the
name "Zilkha" or any similar name, and take all action, including causing Sonat
GOM to file all documents, necessary to change the name of Sonat GOM to a name
that does not use the name "Zilkha"; (v) upon the Effective Time, cause Sonat
GOM to cease using the trademarks, service marks, logos or trade names of
Zilkha, including, without limitation, any name including the word "Zilkha" and
the "Zilkha logo"; (vi) as promptly as practicable, and in any event within 90
calendar days following the Effective Time, cause Sonat GOM to remove all
references to and representations of any of the foregoing trademarks, service
marks, logos or trade names from its properties and equipment; (vii) at the
Effective Time enter into a Registration Rights Agreement (the "Registration
Rights Agreement") with the Zilkha stockholders, substantially in the form of
Exhibit A to the Merger Agreement included as part of Appendix A to this Proxy
Statement/Prospectus and as discussed below under "Registration Rights
Agreement"; (viii) issue, in a manner satisfying the requirements of the
Commission's Accounting Series Release No. 135, an earnings statement containing
at least 30 days of post-Merger combined financial results of Sonat and Zilkha
as soon as reasonably practicable following the Effective Time but in no event
later than 30 days following such 30-day period; (ix) if the promissory note in
favor of the Selim K. Zilkha Trust in the principal amount of $4.5 million at
September 30, 1997 has not been paid in full prior to the Effective Time,
immediately cause Sonat GOM to pay in full all of the outstanding principal of
and unpaid interest on such promissory note; and (x) not take, or permit to be
taken, any action that would make the representation regarding the
inapplicability of the Sonat Rights Plan to
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the Merger Agreement or the Merger inaccurate in any material respect at any
time, whether at or prior to the Effective Time or thereafter.
Newco
Sonat has agreed that Newco will not engage, prior to the Effective Time,
in any activities of any nature except as provided in or contemplated by the
Merger Agreement.
Zilkha
Zilkha has agreed that prior to the Effective Time, unless Sonat otherwise
agrees in writing or except as otherwise provided in or contemplated by the
Merger Agreement, it will and will cause its subsidiary to: (i) operate the
Business (including the making of capital expenditures) in the ordinary and
usual course in all material respects in accordance with past practices; (ii)
not make any change or amendment in its certificate of incorporation or by-laws;
(iii) not issue, sell, or agree to issue or sell (a) any shares of its capital
stock or (b) any securities convertible into, or options with respect to, or
warrants to purchase or rights to subscribe for, any shares of its capital
stock; (iv) except in the ordinary course of business and consistent with past
practices, or as required by law or contractual obligations or other policies,
benefit proposals, understandings, or arrangements existing on the date of the
Merger Agreement, not (a) increase in any manner the base compensation of, or
enter into any new bonus or incentive agreement or arrangement with, any of its
directors, officers, or other employees, (b) pay or agree to pay any pension,
retirement allowance, or other employee benefit to any such director, officer,
or employee, whether past or present, (c) enter into any new employment,
severance, consulting or other compensation agreement with any existing
director, officer, or employee, or (d) commit itself to any additional pension,
profit-sharing, deferred compensation, group insurance, severance pay,
retirement, or other employee benefit plan, fund, or similar arrangement or
amend or commit itself to amend any of such plans, funds, or similar
arrangements in existence on the date of the Merger Agreement; (v) not (a) sell,
transfer, or otherwise dispose of any of its assets, except in the ordinary
course of business and consistent with past practices, (b) create or permit to
exist any new material Lien on its assets, other than Permitted Encumbrances,
(c) enter into any material joint venture, partnership, or other similar
arrangement or form any other new material arrangement for the conduct of the
Business, (d) purchase any material assets or securities of any Person, (e)
enter into any agreement for the forward sale of production of oil, gas, or
liquids or other hedging transaction, or (f) except in the ordinary course of
business and consistent with past practices, enter into any other material
agreement; (vi) not pay or declare any dividend on, or make any distribution
with respect to, or purchase or redeem any of its capital stock; and (vii) not
take any action that would make any representation or warranty of Zilkha under
the Merger Agreement materially inaccurate in any respect at, or as of any time
prior to, the Effective Time.
Zilkha has also agreed that it will: (i) to the maximum extent permitted by
GAAP, expense in 1997 all incurred expenses related to the Merger; and (ii) with
respect to its 1997 financial results and all prior year financial results, use
its reasonable best efforts to convert from the "full cost" to the "successful
efforts" method of accounting. Zilkha has also agreed to use its reasonable best
efforts to negotiate: (i) the payment by Zilkha of a specific amount to be paid
in 1998 for the buy-down of the premium on Zilkha's indebtedness under the First
Amended and Restated Note Purchase Agreement dated October 30, 1996 between
Zilkha and Joint Energy Development Investments Limited Partnership; (ii) the
payment by Zilkha of a specific amount to be paid in 1998 for the right to
transfer pursuant to the Merger the right to use Zilkha's licensed seismic data;
and (iii) the payment by Zilkha of the minimum investment banking fee to be paid
Goldman Sachs at the earlier of the Effective Time or the termination of the
Merger Agreement.
ADDITIONAL AGREEMENTS
The Merger Agreement contains certain covenants and agreements of Sonat and
Zilkha customary for transactions such as those contemplated by the Merger
Agreement. These relate to, among other things: (i) each party allowing the
other access, during normal business hours, to its offices, properties, books
and records and such financial and other data and information to which the other
party may reasonably request access, subject to existing confidentiality
obligations; (ii) the preparation of the Registration Statement and
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this Proxy Statement/Prospectus; (iii) each party delivering an affiliate letter
from each of its affiliates in one of the forms set forth in Exhibit B to the
Merger Agreement and using best reasonable efforts to cause the Merger to
qualify as a reorganization under Section 368(a) of the Code and for "pooling of
interests" accounting treatment; (iv) the listing of the Sonat Common Stock
constituting the Stock Issuance by Sonat on the NYSE, upon official notice of
issuance; (v) certain employee matters; (vi) filing of such notifications as are
required to be filed under the HSR Act; (vii) using reasonable best efforts to
consummate and make effective the transactions contemplated by the Merger
Agreement; (viii) advising the other party of (a) any notice or other
communication from any Person alleging that the consent of such Person is or may
be required in connection with the transactions contemplated by the Merger
Agreement, (b) any notice or communication from a Governmental Authority in
connection with the transactions contemplated by the Merger Agreement, (c) any
actions, suits, claims, or investigations or proceedings that have commenced or
are known to be threatened that would have been required to have been disclosed
under or relate to the consummation of the transactions contemplated by the
Merger Agreement and (d) (1) the discovery by such party that any representation
or warranty contained in the Merger Agreement is untrue or inaccurate in any
material respect, (2) the occurrence or failure to occur of any event which
occurrence or failure to occur would be likely to cause any of the
representations or warranties in the Merger Agreement to be untrue or incorrect
in any material respect at the Effective Time, except for representations and
warranties that speak as of a specified date, which need only be true and
correct as of the specified date, and (3) any material failure on its part to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under the Merger Agreement; provided, however, that the
delivery of any notice pursuant to the Merger Agreement shall not limit or
otherwise affect the remedies available thereunder to the party receiving such
notice.
EMPLOYEE MATTERS
At or immediately following the Effective Time, Sonat will make or cause
Sonat GOM to make all payments due under the Stay-On Bonus Program and under the
Executive Compensation Plan. These payments are expected to approximate $4.6
million and $73.7 million, respectively. From and after the Effective Time,
Sonat: (i) will provide the employees of Sonat GOM with compensation and
benefits on the same basis as Sonat provides compensation and benefits to
similarly situated employees of Sonat and its affiliates, and shall credit each
person who is an employee of Zilkha at the Effective Time with such employee's
service that is recognized as of the Effective Time under Zilkha's benefit plans
(including industry service for vacation purposes) for all purposes under
Sonat's plans or programs, except for the accrual of benefits under a defined
benefit plan; (ii) will waive any exclusion or limitation with respect to
pre-existing conditions under Sonat's group health plan and will provide that
any out-of-pocket health expenses incurred by a Zilkha employee or his or her
covered dependents prior to the Effective Time shall be taken into account under
Sonat's group health plan for purposes of satisfying applicable deductible,
coinsurance and maximum covered health benefit claims for services rendered on
and after the Effective Time; and (iii) will not permit Sonat GOM to amend,
revise or terminate (a) the Severance Plan, (b) the Incentive Pool Plans in a
manner that would adversely affect the interest of any participant in such plans
(who was a participant in such plans as of the date of the Merger Agreement) in
any prospect that has been designated or assigned prior to the Effective Time
or, with respect to properties owned by Zilkha as of the Effective Time,
designated or assigned within three years following the Effective Time, in each
case pursuant to the terms of the Incentive Pool Plans, or (c) the Retirement
Savings Plan in a manner that would adversely affect the vesting of the
participants thereunder. The payments under the Executive Compensation Plan will
be accelerated upon consummation of the Merger, and an aggregate of
approximately $73.7 million will be paid to the four senior managers of Zilkha
(other than Mr. Selim K. Zilkha), of which approximately $15.7 million will be
paid to Mr. Michael Zilkha. See "Description of Zilkha -- Employee Benefit
Plans."
CONDITIONS PRECEDENT
The obligations of Sonat and Zilkha to effect the Merger are subject among
other things, to the fulfillment of certain conditions, including without
limitation: (i) the approval of the Stock Issuance by the requisite vote of the
stockholders of Sonat; (ii) the expiration or termination of any waiting period
applicable to the consummation of the Merger under the HSR Act; (iii) the
effectiveness of the Registration Statement
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and the absence of any stop order suspending such effectiveness or, in the case
of Sonat, the Sonat Common Stock being exempt from the registration requirements
of the Securities Act; (iv) the absence of any applicable law or regulation or
any judgment, injunction, order or decree prohibiting the consummation of the
Merger; (v) the approval for listing on the NYSE, subject only to official
notice of issuance, of the shares of Sonat Common Stock to be issued pursuant to
the Stock Issuance; (vi) the delivery by Ernst & Young LLP, Sonat's independent
auditors, of a letter addressed to Sonat that the Merger qualifies as a Pooling
Transaction; (vii) the delivery by KPMG Peat Marwick LLP, Zilkha's independent
public accounts, of a letter addressed to Zilkha that Zilkha has met the
requirements of a Pooling Transaction; (viii) a Closing Price of the Sonat
Common Stock used to compute the number of shares comprising the Merger
Consideration of not less than $39 per share unless Sonat otherwise agrees or
Zilkha agrees to fix such Closing Price at $39 per share; and (ix) the receipt
by Zilkha of an opinion of Andrews & Kurth L.L.P., and the receipt by Sonat of
an opinion of Bracewell & Patterson, L.L.P., in each case, that the Merger will
qualify as a reorganization within the meaning of Section 368(a) of the Code.
The obligation of Zilkha to effect the Merger is also subject to the
satisfaction of certain additional conditions, including: (i) the absence of any
breach or breaches of the representations and warranties of Sonat that would,
individually or in the aggregate, have a material adverse effect; (ii) the
performance in all material respects of the obligations and covenants of Sonat
under the Merger Agreement; and (iii) the receipt of a certificate from Sonat to
such effect.
The obligation of Sonat to effect the Merger is also subject to the
satisfaction of certain additional conditions, including: (i) the absence of any
breach or breaches of the representations and warranties of Zilkha that would,
individually or in the aggregate, have a material adverse effect; (ii) the
performance in all material respects of the obligations and covenants of Zilkha
under the Merger Agreement; and (iii) the receipt of a certificate from Zilkha
to such effect.
TERMINATION AND AMENDMENT
The Merger Agreement may be terminated by action of either Sonat or Zilkha
and the Merger abandoned under certain circumstances, including, but not limited
to, the following: (i) the Merger has not been consummated by May 31, 1998,
provided that the terminating party has not breached in any material respect its
obligations under the Merger Agreement in any manner that results in the failure
of the Merger to be consummated by such date; (ii) any law or regulation makes
consummation of the Merger illegal or any judgment, injunction, order or decree
enjoining Sonat or Zilkha from consummating the Merger is entered and shall have
become final and non-appealable; or (iii) if the Stock Issuance is not approved
by the Sonat stockholders after the matter has been presented to them for a vote
at the Special Meeting. The Merger Agreement may also be terminated prior to the
Effective Time, before or after approval by the Sonat stockholders of the Stock
Issuance, by the mutual consent of Sonat and Zilkha.
If the Merger Agreement is terminated (i) by Sonat or Zilkha because the
Sonat stockholders do not approve the Stock Issuance after the matter shall have
been presented to them for a vote,(ii) by Sonat after May 31, 1998 and prior to
the approval of the Stock Issuance by its stockholders at the Special Meeting,
or (iii) by Sonat after May 31, 1998 and prior to the consummation of the Merger
because the Closing Price is less than $39 per share, Sonat will pay Zilkha $25
million in lieu of any other damages resulting from such termination. If the
Merger Agreement is terminated because the Sonat stockholders do not approve the
Stock Issuance after the Sonat Board has withdrawn or modified in a manner
adverse to Zilkha its favorable recommendation regarding the Stock Issuance,
Sonat will pay Zilkha $50 million in lieu of any other damages resulting from
such termination.
Either party to the Merger Agreement may, by an instrument in writing,
waive compliance by the other party with any term or provision of the Merger
Agreement on the part of such other party to be performed or complied with.
The provisions in the Merger Agreement relating to, among other things,
confidentiality, the selection of the State of Texas for governing law purposes,
the payment of fees and expenses, the waiver of a right to a jury
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trial and exclusive jurisdiction in the federal or state courts in Harris
County, Texas will survive the termination of the Merger Agreement.
REGISTRATION RIGHTS AGREEMENT
Sonat and Messrs. Selim K. Zilkha and Michael Zilkha, the Selim K. Zilkha
Trust and the Selim K. Zilkha (1996) Annuity Trust (the "Purchasers") propose to
enter the Registration Rights Agreement. Under the Registration Rights
Agreement, which has a term of five years, Purchasers holding at least 50% of
the shares issued in the Merger that have not theretofore been registered
("Registrable Securities") may upon three occasions request Sonat to register
any Registrable Securities for sale under the Securities Act. Under certain
circumstances, Sonat may defer the filing of any such registration statement for
a period of 90 days. The Purchasers will also be entitled to participate in
certain other incidental registrations filed by Sonat, if their inclusion would
not adversely affect the offering made thereby. Sonat will pay all fees and
expenses of each such registration other than underwriting discounts and
commissions and the costs of insurance procured by the participating Purchasers.
The Registration Rights Agreement contains provisions customarily found in
agreements relating to comparable transactions, including indemnification and
contribution rights.
FEES AND EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated by the
Merger Agreement will be paid by the party incurring such expenses, except that
all costs and expenses associated with any litigation pertaining to compliance
with the HSR Act will be shared equally by Zilkha and Sonat. Additionally, if
the Merger does not occur, Sonat will also reimburse Zilkha for all funds
expended by it in eliminating the premium payable upon the early extinguishment
of Zilkha's debt, securing the right to transfer or use seismic data and paying
the fee of Goldman Sachs.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Prior to the execution of the Merger Agreement by Zilkha and the unanimous
written consent approving the Merger, the Merger Agreement and the transactions
contemplated thereby, Zilkha and the Zilkha stockholders conferred with their
counsel, Andrews & Kurth L.L.P., and were satisfied with respect to the tax
consequences of the Merger.
GENERAL
It is a condition to the consummation of the Merger that Sonat receive an
opinion of its tax counsel, Bracewell & Patterson, L.L.P., and that Zilkha
receive an opinion of its tax counsel, Andrews & Kurth L.L.P., that the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Code. In rendering these opinions with respect to the U.S. federal income tax
consequences, Bracewell & Patterson, L.L.P. and Andrews & Kurth L.L.P. will
assume that the Merger generally will be consummated as contemplated by this
Proxy Statement/Prospectus, and will receive and will rely upon representations
of fact contained in certificates of the stockholders of Zilkha, Sonat, Newco
and Zilkha, including that: (i) there is no plan or intention on the part of the
holders of Zilkha Stock to sell, exchange or otherwise dispose of a number of
shares of Sonat Common Stock received in the Merger in exchange for such Zilkha
Stock that would reduce the Zilkha stockholders' ownership of Sonat Common Stock
to a number of shares having a value, as of the Effective Time of the Merger, of
less than 50% of the value of all of the formerly outstanding Zilkha Stock
immediately prior to the Effective Time of the Merger; (ii) Sonat intends to
cause Zilkha to continue Zilkha's historic business or use a significant portion
of Zilkha's historic business assets in a business; and (iii) after the Merger,
Zilkha will hold at least 90% of the fair market value of its net assets and at
least 70% of the fair market value of its gross assets held immediately prior to
the Merger.
TAX CONSEQUENCES TO SONAT AND ZILKHA
Sonat, Newco and Zilkha will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code. No gain or loss will be recognized by
Sonat or Zilkha with respect to the exchange of Zilkha Stock and Sonat Common
Stock as a result of the Merger.
TAX CONSEQUENCES TO HOLDERS OF ZILKHA STOCK
A holder of Zilkha Stock will not recognize gain or loss on the exchange of
Zilkha Stock for Sonat Common Stock pursuant to the Merger, except to the extent
that such holder receives cash in lieu of a fractional share of Sonat Common
Stock. Such holder's aggregate adjusted tax basis in the shares of Sonat Common
Stock received in the Merger will equal such holder's adjusted tax basis in the
shares of Zilkha Stock surrendered in exchange therefor, less the portion of
such basis, if any, allocable to a fractional share. The holding period of the
shares of Sonat Common Stock received by each holder of Zilkha Stock in the
Merger (including any fractional share interest) will include the holding period
of the Zilkha Stock surrendered in exchange therefor.
No fractional shares of Sonat Common Stock will be issued pursuant to the
Merger. A holder of Zilkha Stock who, pursuant to the Merger, receives cash in
lieu of a fractional share of Sonat Common Stock will be treated as having
received such fractional share of Sonat Common Stock pursuant to the Merger and
then as having received such cash in a redemption of such fractional share of
Sonat Common Stock. Under Section 302 of the Code, provided that such deemed
redemption is "substantially disproportionate" with respect to such holder or is
not "essentially equivalent to a dividend" after giving effect to the
constructive ownership rules of the Code, the holder generally will recognize
capital gain or loss on such deemed redemption equal to the difference between
the amount of cash received and the holder's adjusted tax basis in the
fractional share of Sonat Common Stock deemed to have been issued.
BACKUP WITHHOLDING
Generally, U.S. backup withholding tax and information reporting
requirements will apply to payments with respect to the Merger to the Zilkha
stockholders. The payor will be required to withhold 31% of any such
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payment if the U.S. holder fails to furnish its correct taxpayer identification
number or otherwise fails to comply with such backup withholding tax
requirements.
These backup withholding tax and information reporting rules currently are
under review by the U.S. Treasury Department and proposed Treasury Regulations
issued on April 15, 1996 would modify certain of such rules generally with
respect to payments made after December 31, 1997. Accordingly, the application
of such rules to payments with respect to the Merger could be changed.
COMPARISON OF THE RIGHTS OF HOLDERS OF SONAT COMMON
STOCK AND ZILKHA STOCK
Sonat and Zilkha are both incorporated under the laws of the State of
Delaware. If the Merger is consummated, the Zilkha stockholders will become
Sonat stockholders and, as such, their rights will be governed by the Sonat
Charter and the Sonat By-laws rather than the Zilkha Charter and the Zilkha
By-laws. Certain differences between the Sonat Charter and Sonat By-laws and the
Zilkha Charter and the Zilkha By-laws, are summarized below. These summaries do
not purport to be complete, do not address differences between shares of
preferred stock and shares of common stock and are qualified in their entirety
by reference to the Sonat Charter, Sonat By-laws, Zilkha Charter and Zilkha
By-laws, as applicable.
DIRECTORS
Number. Under the DGCL, the certificate of incorporation or by-laws of a
corporation may specify the number of directors. The Sonat Charter specifies
that the number of directors (exclusive of directors who may be elected by the
holders of one or more series of preference stock) shall not be less than five
nor more than 15 as fixed by resolution of the Sonat Board. The current Sonat
Board consists of 12 members. Upon consummation of the Merger, the number of
members of the Sonat Board will be increased to 14 to accommodate the election
of Messrs. Selim K. Zilkha and Michael Zilkha as directors. The Sonat Charter
provides for the classification of the Sonat Board into three classes (Class I,
Class II and Class III). The terms of the Class I, Class II, and Class III
Directors will expire in 1999, 2000, and 1998, respectively. The Zilkha Charter
provides that the Board of Directors of Zilkha ("Zilkha Board") shall consist of
not less than one nor more than seven directors as may be fixed from time to
time by the Zilkha Board. The Zilkha Board is not classified and currently
consists of one director, Selim K. Zilkha.
Removal. The Sonat Charter provides that directors can only be removed for
cause. The Zilkha By-laws permit the removal of any or all directors, with or
without cause, by the holders of a majority of the shares entitled to vote in
the election of directors.
Vacancies. Under the Sonat Charter, vacancies on the Sonat Board can be
filled only by action of a majority of the directors. The Zilkha By-laws provide
that vacancies on the Zilkha Board may be filled by a majority vote of the
remaining directors, although less than quorum, or by a sole remaining director.
ANNUAL AND SPECIAL MEETINGS
Annual Meetings. Under the Sonat Charter, the annual meeting must be held
during the first five months of the calendar year at the time specified in the
Sonat By-laws. The Sonat By-laws provide that the date of the annual meeting
shall be fixed by resolution of the Sonat Board. Under the terms of the Zilkha
By-laws, the annual meeting of the stockholders of Zilkha shall be held each
year at such time, on such day and at such place as may be designated by the
Zilkha Board.
Special Meetings. Under the Sonat Charter, special meetings of stockholders
can only be called by a majority of the directors unless called by a "qualified
holder" that complies with the notice requirements of the Sonat Charter. A
qualified holder is a stockholder that has owned at least 3% of the outstanding
Sonat Common Stock for a period of six months prior to the request for the
meeting. Under the terms of the Zilkha By-laws, special meetings of the
stockholders of Zilkha may be held at any time pursuant to a call by the Zilkha
Board.
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Written Consent. The ability of Sonat stockholders to take action by
written consent without a meeting is denied by the Sonat Charter. Under the
Zilkha By-laws, stockholders of Zilkha can take action by written consent
without a meeting.
LIMITATION ON TRANSACTIONS WITH RELATED PARTIES
Under the Sonat Charter, a merger, sale or similar material transaction
between Sonat or one of its subsidiaries and the owner of 10% or more of the
outstanding Sonat voting securities ("Related Party") requires the approval of
the holders of 80% of the Sonat voting stock and 67% of the Sonat voting stock
owned by stockholders other than the Related Party. This provision is not
applicable to 10% stockholders who acquire their shares with the approval of
disinterested directors or who propose to effect the transaction at a price
equal to the highest price at which such party acquired its voting stock. While
the Sonat Charter permits mergers and sales or exchanges of all or substantially
all of the assets of Sonat with another party that is not a Related Party, with
the approval of the holders of a majority of Sonat's shares entitled to vote
thereon, the Zilkha Charter requires the approval of the holders of two-thirds
of Zilkha's shares entitled to vote thereon for any such transaction.
BY-LAW AMENDMENTS
Under the Sonat Charter, the Sonat By-laws can be amended by affirmative
vote of stockholders holding not less than 60% of Sonat's voting stock or by the
unanimous vote of all members of the Sonat Board at any meeting or by the
affirmative vote of a majority of the members of the Sonat Board if proper
notice of the amendment has been given prior to the meeting. A majority of the
members of the Zilkha Board or the holders of a majority of the shares of Zilkha
capital stock entitled to vote in the election of directors can amend the Zilkha
By-laws.
CERTAIN CHARTER AMENDMENTS
The provisions in the Sonat Charter relating to the number and
classification of directors, the filling of vacancies on the board, the calling
of special meetings by stockholders, the removal of directors for cause, and the
prohibition upon taking stockholder action by consent without a meeting, in each
case can only be amended with the affirmative vote of the holders of 60% of
Sonat's voting stock. Neither the Zilkha Charter nor the Zilkha By-laws contains
similar provisions.
54
<PAGE> 61
MARKET PRICE AND DIVIDEND INFORMATION
The Sonat Common Stock is listed and traded on the NYSE and the PSE, and
the Zilkha Stock is privately held. The following table sets forth the high and
low trading prices per share of the Sonat Common Stock on the NYSE for the
periods indicated as reported in published financial sources and the dividends
declared per share for such periods:
<TABLE>
<CAPTION>
SONAT
COMMON SONAT
STOCK PRICES DIVIDENDS
------------- DECLARED
HIGH LOW PER SHARE
----- ---- ---------
<S> <C> <C> <C>
1995
First Quarter............................................. $303/8 $26 $0.27
Second Quarter............................................ 33 293/4 0.27
Third Quarter............................................. 331/2 291/4 0.27
Fourth Quarter............................................ 361/4 273/4 0.27
1996
First Quarter............................................. 371/4 311/8 0.27
Second Quarter............................................ 453/8 361/8 0.27
Third Quarter............................................. 471/2 41 0.27
Fourth Quarter............................................ 543/4 441/8 0.27
1997
First Quarter............................................. 57 451/2 0.27
Second Quarter............................................ 591/8 505/8 0.27
Third Quarter............................................. 541/4 453/8 0.27
Fourth Quarter (through December 26, 1997)................ 515/16 421/4 0.27
</TABLE>
On November 21, 1997, the last full trading day prior to the first public
announcement of the execution of the Merger Agreement, the reported high and low
sale prices per share and closing price per share of Sonat Common Stock on the
NYSE were $46 5/16, $45 9/16 and $45 5/8, respectively. On December 26, 1997,
the last full trading day prior to the date of this Proxy Statement/Prospectus,
the reported high and low sale prices per share and closing price per share of
Sonat Common Stock on the NYSE were $ , $ and $ , respectively.
Stockholders are urged to obtain current market quotations for shares of
Sonat Common Stock.
55
<PAGE> 62
EXPERTS
The Consolidated Financial Statements of Sonat Inc. at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Proxy Statement/ Prospectus of Sonat Inc. and
the Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report incorporated by reference herein, and are
incorporated herein in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
The Consolidated Financial Statements of Zilkha as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
have been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP dated December 8,
1997 refers to a change from the full cost method to the successful efforts
method of accounting for oil and gas properties.
Information relating to the estimated proved reserves attributable to
certain oil and gas properties of Zilkha as of July 1, 1997, estimates of future
net cash flows and present values thereof included herein have been derived from
the Reserve Report as of July 1, 1997 prepared by William M. Cobb & Associates,
Inc., independent petroleum engineers, and is included herein in reliance upon
the authority of such firm as experts in petroleum engineering.
Representatives of Ernst & Young LLP, Sonat's independent auditors, will be
present at the Special Meeting and will have the opportunity to make a statement
if they desire to do so and to respond to appropriate questions.
Representatives of KPMG Peat Marwick LLP, Zilkha's independent certified
public accountants, will be present at the Special Meeting and will have the
opportunity to make a statement if they desire to do so and to respond to
appropriate questions.
LEGAL MATTERS
The validity of the Sonat Common Stock to be issued by Sonat pursuant to
the Merger will be passed upon by Bracewell & Patterson, L.L.P. Certain tax
matters will be passed upon by Bracewell & Patterson, L.L.P. on behalf of Sonat
and by Andrews & Kurth L.L.P. on behalf of Zilkha.
STOCKHOLDER PROPOSALS
Stockholder proposals to be considered for inclusion in the proxy statement
of Sonat to be issued in connection with the 1998 Annual Meeting of Sonat
stockholders were required to have been mailed to and received by Beverley T.
Krannich, Secretary, 1900 Fifth Avenue North, Birmingham, no later than November
24, 1997.
56
<PAGE> 63
GLOSSARY OF CERTAIN OIL AND NATURAL GAS TERMS
The definitions set forth below apply to the indicated terms used in this
Proxy Statement/Prospectus. Unless otherwise noted herein, Mcfes are determined
using the ratio of six Mcf of natural gas to one barrel of oil, condensate or
natural gas liquids, which approximates the relative energy content of crude
oil, condensate and natural gas liquids are compared to natural gas. Prices have
historically been substantially higher for crude oil than natural gas on an
energy equivalent basis. Any reference to net wells or net acres was determined
by multiplying gross wells or acres by Zilkha's working percentage interest
therein.
"Bbl" means barrel and "Bbls" means barrels.
"Bblspd" means barrels per day.
"Bcf" means billion cubic feet.
"Bcfe" means billion cubic feet of natural gas equivalent.
"Btu" means British Thermal Unit.
"MBbls" means thousand barrels.
"Mcfe" means thousand cubic feet of natural gas equivalent.
"Mcfpd" means thousands of cubic feet per day.
"MMBbls" means million barrels.
"MMBtu" means million Btus.
"MMcf" means million cubic feet.
"MMcfpd" means million cubic feet per day.
"MMcfe" means million cubic feet of natural gas equivalent.
"MMcfepd" means million cubic feet of natural gas equivalent per day.
"Pre-Tax SEC-10" means the present value of estimated future cash flow to
be generated from the production of proved reserves calculated in accordance
with Commission guidelines, net of estimated production and future development
costs, using prices and costs as of the date of estimation without future
escalation, without giving effect to non-property related expenses such as
general and administrative expenses, debt service, future income tax expenses
and depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
"Tcfe" means trillion cubic feet of natural gas equivalent.
57
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Sonat Inc. and Zilkha Energy Company
Pro Forma Combined Financial Statements................... F-2
Pro Forma Combined Statements of Income (Loss) (Unaudited)
For the Nine Months Ended September 30, 1997 and the
Years Ended December 31, 1996, 1995 and 1994........... F-3
Pro Forma Combined Balance Sheet (Unaudited) at September
30, 1997............................................... F-5
Notes to Pro Forma Combined Financial Statements.......... F-6
Zilkha Energy Company
Independent Auditors' Report.............................. F-7
Consolidated Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996
and 1995............................................... F-8
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1997 and 1996 (unaudited) and Years
Ended December 31, 1996, 1995 and 1994................. F-9
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 and the
Nine Months Ended September 30, 1997 (Unaudited)....... F-10
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) and the
Years Ended December 31, 1996, 1995 and 1994........... F-11
Notes to Consolidated Financial Statements................ F-12
</TABLE>
F-1
<PAGE> 65
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma combined financial statements are
presented to give effect to the merger ("Merger") of a wholly-owned subsidiary
of Sonat Inc. ("Sonat") with and into Zilkha Energy Company ("Zilkha") under the
pooling of interests method of accounting. The income statements for each of the
three years in the period ended December 31, 1996 and nine months ended
September 30, 1997, assume that the Merger had been consummated at the beginning
of the earliest period presented. The balance sheet assumes that the Merger had
been consummated on September 30, 1997. The unaudited pro forma combined
financial statements do not reflect any cost savings and other synergies
anticipated by Sonat management as a result of the Merger and are not
necessarily indicative of the results of operations or the financial position
which would have occurred had the Merger been consummated at the beginning of
the earliest period presented, nor are they necessarily indicative of future
results of operations or financial position. Additionally, the unaudited pro
forma combined statements of income exclude non-recurring charges directly
attributable to the Merger which will be charged to operations in the quarter in
which such expenses are incurred. The unaudited pro forma combined financial
statements should be read in conjunction with the historical consolidated
financial statements of Sonat and Zilkha, including the notes thereto, included
or incorporated by reference in this Proxy Statement/Prospectus. See "Available
Information," "Incorporation of Documents by Reference," and "Index to Financial
Statements -- Zilkha Energy Company."
F-2
<PAGE> 66
SONAT INC. AND ZILKHA ENERGY COMPANY
PRO FORMA COMBINED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------
PRO FORMA PRO FORMA
SONAT ZILKHA ADJUSTMENTS COMBINED
-------- --------- ------------ ----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $ 2,911 $ 142 $ -- $ 3,053
------- -------- ------- --------
Costs and Expenses:
Natural gas cost.............................. 2,014 -- -- 2,014
Electric power cost........................... 175 -- -- 175
Operating and maintenance..................... 140 90 -- 230
General and administrative.................... 108 34 -- 142
Depreciation, depletion and amortization...... 245 61 -- 306
Taxes, other than income...................... 28 -- -- 28
------- -------- ------- --------
2,710 185 -- 2,895
------- -------- ------- --------
Operating Income (Loss)......................... 201 (43) -- 158
Interest Expense................................ (63) (7) -- (70)
Other Income (Expense) -- Net................... 33 (3) -- 30
------- -------- ------- --------
Income (Loss) Before Income Taxes............... 171 (53) -- 118
Income Tax Expense (Benefit).................... 55 (18) -- 37
------- -------- ------- --------
Net Income (Loss)............................... $ 116 $ (35) $ -- $ 81
======= ======== ======= ========
Earnings (Loss) per Common Share................ $ 1.35 $(484.74) $ .74
======= ======== ========
Weighted Average Number of Common Shares
Outstanding (in thousands).................... 86,006 75 23,372 109,453
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
PRO FORMA PRO FORMA
SONAT ZILKHA ADJUSTMENTS COMBINED
-------- --------- ------------ ----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $ 3,395 $ 165 $ -- $ 3,560
------- -------- ------- --------
Costs and Expenses:
Natural gas cost.............................. 2,329 -- -- 2,329
Electric power cost........................... 66 -- -- 66
Operating and maintenance..................... 173 77 -- 250
General and administrative.................... 151 23 -- 174
Depreciation, depletion and amortization...... 288 66 -- 354
Taxes, other than income...................... 47 -- -- 47
------- -------- ------- --------
3,054 166 -- 3,220
------- -------- ------- --------
Operating Income (Loss)......................... 341 (1) -- 340
Interest Expense................................ (83) (7) -- (90)
Other Income -- Net............................. 36 65 -- 101
------- -------- ------- --------
Income Before Income Taxes...................... 294 57 -- 351
Income Tax Expense.............................. 93 20 -- 113
------- -------- ------- --------
Net Income...................................... $ 201 $ 37 $ -- $ 238
======= ======== ======= ========
Earnings per Common Share....................... $ 2.33 $ 459.26 $ 2.17
======= ======== ========
Weighted Average Number of Common Shares
Outstanding (in thousands).................... 86,211 75 23,372 109,658
======= ======== ======= ========
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-3
<PAGE> 67
SONAT INC. AND ZILKHA ENERGY COMPANY
PRO FORMA COMBINED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
PRO FORMA PRO FORMA
SONAT ZILKHA ADJUSTMENTS COMBINED
-------- --------- ------------ ----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $ 1,990 $ 148 $ -- $ 2,138
------- -------- -------- --------
Costs and Expenses:
Natural gas cost.............................. 1,149 -- -- 1,149
Operating and maintenance..................... 172 58 -- 230
General and administrative.................... 140 17 -- 157
Depreciation, depletion and amortization...... 299 54 -- 353
Taxes, other than income...................... 41 -- -- 41
------- -------- -------- --------
1,801 129 -- 1,930
------- -------- -------- --------
Operating Income................................ 189 19 -- 208
Interest Expense................................ (90) (8) -- (98)
Other Income -- Net............................. 189 7 -- 196
------- -------- -------- --------
Income Before Income Taxes...................... 288 18 -- 306
Income Tax Expense.............................. 95 7 -- 102
------- -------- -------- --------
Net Income...................................... $ 193 $ 11 $ -- $ 204
======= ======== ======== ========
Earnings per Common Share....................... $ 2.24 $ 121.97 $ 1.86
======= ======== ========
Weighted Average Number of Common Shares
Outstanding (in thousands).................... 86,270 75 23,372 109,717
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------
PRO FORMA PRO FORMA
SONAT ZILKHA ADJUSTMENTS COMBINED
--------- --------- ------------ ----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues....................................... $ 1,736 $ 75 $ -- $ 1,811
-------- -------- -------- --------
Costs and Expenses:
Natural gas cost............................. 911 -- -- 911
Operating and maintenance.................... 223 44 -- 267
General and administrative................... 133 11 -- 144
Depreciation, depletion and amortization..... 258 30 -- 288
Taxes, other than income..................... 42 -- -- 42
-------- -------- -------- --------
1,567 85 -- 1,652
-------- -------- -------- --------
Operating Income (Loss)........................ 169 (10) -- 159
Interest Expense............................... (73) (5) -- (78)
Other Income -- Net............................ 61 5 -- 66
-------- -------- -------- --------
Income (Loss) Before Income Taxes.............. 157 (10) -- 147
Income Tax Expense (Benefit)................... 16 (3) -- 13
-------- -------- -------- --------
Net Income (Loss).............................. $ 141 $ (7) $ -- $ 134
======== ======== ======== ========
Earnings (Loss) per Common Share............... $ 1.62 $(119.95) $ 1.22
======== ======== ========
Weighted Average Number of Common Shares
Outstanding (in thousands)................... 87,119 75 23,372 110,566
======== ======== ======== ========
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-4
<PAGE> 68
SONAT INC. AND ZILKHA ENERGY COMPANY
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------
PRO FORMA PRO FORMA
SONAT ZILKHA ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Current Assets
Cash and Cash Equivalents.................... $ 97 $ 23 $ -- $ 120
Accounts Receivable.......................... 516 22 -- 538
Inventories.................................. 41 -- -- 41
Assets from Price Risk Management
Activities................................ 55 -- -- 55
Other........................................ 82 3 -- 85
-------- -------- -------- --------
Total Current Assets................. 791 48 -- 839
-------- -------- -------- --------
Plant, Property and Equipment.................. 5,534 471 -- 6,005
Accumulated Depreciation, Depletion and
Amortization................................. 2,838 250 -- 3,088
-------- -------- -------- --------
Properties -- Net.............................. 2,696 221 -- 2,917
-------- -------- -------- --------
Investments.................................... 515 11 -- 526
-------- -------- -------- --------
Other Assets................................... 183 -- -- 183
-------- -------- -------- --------
Total Assets......................... $ 4,185 $ 280 $ -- $ 4,465
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Long-term Debt Due Within One Year and
Unsecured Notes........................... $ 243 $ 4 $ -- $ 247
Accounts Payable............................. 469 30 -- 499
Liabilities from Price Risk Management
Activities................................ 53 -- -- 53
Other........................................ 120 42 49(1) 211
-------- -------- -------- --------
Total Current Liabilities............ 885 76 49 1,010
-------- -------- -------- --------
Long-term Debt................................. 1,161 190 -- 1,351
-------- -------- -------- --------
Deferred Income Taxes.......................... 352 (21) -- 331
-------- -------- -------- --------
Other Liabilities and Deferred Credits......... 188 1 -- 189
-------- -------- -------- --------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred Stock.............................. -- 20 (20)(2) --
Common Stock................................. 87 -- 23(2) 110
Other Capital................................ 37 27 (3)(2) 61
Retained Earnings............................ 1,542 (13) (49)(1) 1,480
Cost of Treasury Stock....................... (67) -- -- (67)
-------- -------- -------- --------
Total Stockholders' Equity................... 1,599 34 (49) 1,584
-------- -------- -------- --------
Total Liabilities and Stockholders'
Equity............................. $ 4,185 $ 280 $ -- $ 4,465
======== ======== ======== ========
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
F-5
<PAGE> 69
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
Under terms of the Merger, the shares of common stock and preferred stock
of Zilkha outstanding immediately prior to the effective time of the Merger will
be converted into the right to receive, without interest, the number of shares
of Sonat Common Stock, together with the associated preference stock purchase
rights, under Sonat's Rights Plan dated as of January 8, 1996, as amended, equal
to the quotient of (i) $1,044,850,000 divided by (ii) the average closing price
of the Sonat Common Stock on the New York Stock Exchange, for the 15 consecutive
trading days ending on and including the third trading day prior to the
effective time of the Merger; provided that, for purposes of the foregoing
determination, in no event shall the average closing price be more than $51 per
share nor, unless Sonat otherwise agrees, less than $39 per share. The business
combination will be accounted for using the pooling of interests method of
accounting.
PRO FORMA ADJUSTMENTS
The accompanying Pro Forma Combined Balance Sheet as of September 30, 1997,
has been prepared as if the combination of Sonat and Zilkha had occurred on that
date and includes the following adjustments to reflect the combination as a
pooling of interests:
(1) To record the estimated costs to complete the combination of Sonat
and Zilkha under pooling of interests accounting. These costs, which
primarily relate to compensation, property transfer fees and other
transaction costs, are currently estimated to be approximately $49.2
million, net of a tax benefit of $25.7 million and are reflected as a
reduction in retained earnings in the accompanying pro forma balance sheet.
Such costs will be charged to operations when incurred which is expected in
the fourth quarter of 1997. It is possible that some portion of the balance
will be recorded in the first quarter of 1998.
(2) To adjust common stock, preferred stock and other capital for
approximately 23,446,844 shares of Sonat Common Stock to be issued to
Zilkha stockholders based on the closing price for Sonat Common Stock at
December 8, 1997.
The accompanying Pro Forma Combined Statements of Income for each of the
three years in the period ended December 31, 1996, and for the nine months ended
September 30, 1997, have been prepared by combining the historical results of
Sonat and Zilkha for such periods. The Pro Forma Combined Statements of Income
do not reflect non-recurring costs resulting directly from the Merger, discussed
in paragraph (1) above.
PRO FORMA NET INCOME PER COMMON SHARE
The pro forma weighted average common shares outstanding have been computed
by adjusting the historical weighted average common shares outstanding of Sonat
for the shares assumed to be issued in exchange for the outstanding common
shares and preferred shares and associated preferred dividends in arrears of
Zilkha based on the closing price for Sonat Common Stock on December 8, 1997.
F-6
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Sole Director
Zilkha Energy Company:
We have audited the accompanying consolidated balance sheets of Zilkha
Energy Company as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zilkha
Energy Company as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the
Company has given retroactive effect to the change in accounting for oil and gas
properties from the full cost method to the successful efforts method.
KPMG PEAT MARWICK LLP
Houston, Texas
December 8, 1997
F-7
<PAGE> 71
ZILKHA ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
SEPTEMBER 30, ----------------------
1997 1996 1995
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 23,051 $ 18,370 $ 13,419
Accounts receivable................................. 21,483 34,779 23,855
Other current assets................................ 3,251 1,023 1,078
--------- --------- ---------
Total current assets........................ 47,785 54,172 38,352
Oil and gas properties under successful efforts
method.............................................. 462,543 344,978 257,366
Other property and equipment.......................... 8,885 7,663 4,208
--------- --------- ---------
471,428 352,641 261,574
Accumulated depreciation, depletion, amortization and
valuation allowance................................. (249,795) (177,896) (126,519)
--------- --------- ---------
221,633 174,745 135,055
Investments and other assets.......................... 10,715 22,899 21,427
Deferred income tax assets............................ 20,639 213 19,847
--------- --------- ---------
$ 300,772 $ 252,029 $ 214,681
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 29,757 $ 42,035 $ 27,746
Accrued liabilities and other....................... 5,747 6,751 2,969
Current portion of accrued long-term compensation... 37,064 4,306 6,459
Current maturities of note payable to stockholder... 4,000 4,000 4,000
--------- --------- ---------
Total current liabilities................... 76,568 57,092 41,174
Accrued long-term compensation........................ -- 12,000 4,306
Note payable to stockholder........................... 500 3,500 3,500
Deferred revenue...................................... -- -- 99,461
Long-term debt........................................ 190,000 105,000 32,000
Stockholders' equity:
Preferred stock, no par value, 11% cumulative,
200,000 shares authorized, issued and
outstanding...................................... 20,000 20,000 20,000
Common stock, $1 par value; 100,000 shares
authorized; 75,000 issued and outstanding........ 75 75 75
Additional paid-in capital.......................... 24,059 24,059 24,059
Unrealized net gains in value of marketable equity
securities....................................... 3,011 9,038 5,486
Retained earnings (deficit)......................... (13,441) 21,265 (15,380)
--------- --------- ---------
Total stockholders' equity.................. 33,704 74,437 34,240
--------- --------- ---------
Commitments and contingencies.........................
$ 300,772 $ 252,029 $ 214,681
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 72
ZILKHA ENERGY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------
1997 1996 1996 1995 1994
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Oil and gas sales.................... $141,534 $120,768 $165,041 $148,131 $ 75,010
Management fees and other............ 131 116 144 158 293
-------- -------- -------- -------- --------
141,665 120,884 165,185 148,289 75,303
-------- -------- -------- -------- --------
Operating costs and expenses:
Production expenses.................. 9,881 8,684 12,437 12,542 6,860
Depletion, depreciation and
amortization...................... 47,623 46,214 61,618 53,901 29,577
Impairment of oil and gas
properties........................ 13,285 -- 4,323 -- --
Exploration expenses................. 79,823 53,987 64,674 45,261 36,833
General and administrative
expenses.......................... 33,835 17,608 22,902 17,187 11,064
-------- -------- -------- -------- --------
184,447 126,493 165,954 128,891 84,334
-------- -------- -------- -------- --------
Income (loss) from operations.......... (42,782) (5,609) (769) 19,398 (9,031)
-------- -------- -------- -------- --------
Other income (expense):
Gain on sale of oil and gas
properties........................ -- 65,110 65,110 59 5,260
Gain (loss) on sale of marketable
equity securities................. 2,901 27 27 7,464 (419)
Interest and dividend income......... 968 507 721 667 467
Interest expense..................... (6,956) (4,779) (6,815) (7,882) (4,854)
Other expense........................ (7,189) (1,110) (1,276) (1,830) (1,871)
-------- -------- -------- -------- --------
(10,276) 59,755 57,767 (1,522) (1,417)
-------- -------- -------- -------- --------
Income (loss) before income tax expense
(benefit)............................ (53,058) 54,146 56,998 17,876 (10,448)
Income tax expense (benefit)........... (18,352) 19,254 20,353 6,528 (3,652)
-------- -------- -------- -------- --------
Net income (loss)...................... $(34,706) $ 34,892 $ 36,645 $ 11,348 $ (6,796)
Cumulative dividends on preferred
stock................................ 1,650 1,650 2,200 2,200 2,200
-------- -------- -------- -------- --------
Net income (loss) available to common
stockholders......................... $(36,356) $ 33,242 $ 34,445 $ 9,148 $ (8,996)
======== ======== ======== ======== ========
Earnings (loss) per share.............. $(484.74) $ 443.22 $ 459.26 $ 121.97 $(119.95)
======== ======== ======== ======== ========
Common shares outstanding.............. 75,000 75,000 75,000 75,000 75,000
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 73
ZILKHA ENERGY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NET GAINS IN
PREFERRED STOCK COMMON STOCK ADDITIONAL MARKETABLE RETAINED
----------------- --------------- PAID-IN EQUITY EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL SECURITIES (DEFICIT) TOTAL
------- ------- ------ ------ ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.......... 200,000 $20,000 75,000 $75 $24,059 $ 5,814 $(19,932) $ 30,016
Unrealized net losses in marketable
equity securities (net of deferred
taxes).............................. -- -- -- -- -- (1,127) -- (1,127)
Net loss.............................. -- -- -- -- -- -- (6,796) (6,796)
------- ------- ------ --- ------- ------- -------- --------
BALANCE AS OF DECEMBER 31, 1994....... 200,000 20,000 75,000 75 24,059 4,687 (26,728) 22,093
Realized net gains in marketable
equity securities................... -- -- -- -- -- (4,624) -- (4,624)
Unrealized net gains in marketable
equity securities (net of deferred
taxes).............................. -- -- -- -- -- 5,423 -- 5,423
Net income............................ -- -- -- -- -- -- 11,348 11,348
------- ------- ------ --- ------- ------- -------- --------
BALANCE AS OF DECEMBER 31, 1995....... 200,000 20,000 75,000 75 24,059 5,486 (15,380) 34,240
Unrealized net gains in marketable
equity securities (net of deferred
taxes).............................. -- -- -- -- -- 3,552 -- 3,552
Net income............................ -- -- -- -- -- -- 36,645 36,645
------- ------- ------ --- ------- ------- -------- --------
BALANCE AS OF DECEMBER 31, 1996....... 200,000 20,000 75,000 75 24,059 9,038 21,265 74,437
Realized net gains in marketable
equity securities................... -- -- -- -- -- (1,134) -- (1,134)
Unrealized net losses in marketable
equity securities (net of deferred
taxes).............................. -- -- -- -- -- (4,893) -- (4,893)
Net loss.............................. -- -- -- -- -- -- (34,706) (34,706)
------- ------- ------ --- ------- ------- -------- --------
BALANCE AS OF SEPTEMBER 30, 1997
(UNAUDITED)......................... 200,000 $20,000 75,000 $75 $24,059 $ 3,011 $(13,441) $ 33,704
======= ======= ====== === ======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 74
ZILKHA ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (34,706) $ 34,892 $ 36,645 $ 11,348 $ (6,796)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depletion, depreciation and amortization........ 47,623 46,214 61,618 53,901 29,577
Impairment of oil and gas properties............ 13,285 -- 4,323 -- --
Exploration expenses............................ 79,823 53,987 64,674 45,261 36,833
Amortization of deferred revenues............... -- (13,773) (13,773) (47,231) (26,760)
Gain on sale of oil and gas properties.......... -- (65,110) (65,110) (59) (5,260)
Realized gain on sale of investments and
other......................................... (2,901) (27) (27) (7,464) 419
Deferred income taxes........................... (18,352) 17,846 19,164 6,468 (3,597)
Changes in assets and liabilities:
Accounts receivable........................... 13,296 87 (10,924) (9,989) (1,548)
Due from stockholder.......................... -- -- -- -- 100
Other current assets.......................... (2,228) (368) 55 (757) 122
Accounts payable.............................. (12,278) 5,721 14,290 (6,670) 18,366
Accrued liabilities and other................. (1,004) 1,232 3,782 1,567 48
Accrued long-term compensation................ 20,757 2,541 5,541 (2,235) 3,600
Deferred revenue.............................. -- -- -- 89,328 52,678
Deferred credit, net.......................... -- -- -- (10,982) 10,090
Other......................................... 3,369 5,270 (375) (5,208) (675)
--------- --------- --------- --------- ---------
Net cash provided by operating
activities............................. 106,684 88,512 119,883 117,278 107,197
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from disposal of marketable equity
securities...................................... 3,616 120 120 7,727 27
Investment in marketable equity securities and
other........................................... -- -- (466) (250)
Proceeds from the sale of oil and gas properties
and other....................................... (29) 99,991 99,991 245 18,847
Investment in oil and gas properties and other.... (187,590) (149,500) (202,355) (120,894) (119,608)
--------- --------- --------- --------- ---------
Net cash used in investing activities.... (184,003) (49,389) (102,244) (113,388) (100,984)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Notes payable to stockholders..................... (3,000) 1,000 -- (6,000) (6,335)
Proceeds from long-term debt...................... 85,000 61,312 131,312 93,000 23,000
Repayments on long-term debt...................... -- (99,000) (144,000) (84,000) (22,200)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................. 82,000 (36,688) (12,688) 3,000 (5,535)
--------- --------- --------- --------- ---------
Net increase in cash and cash equivalents......... 4,681 2,435 4,951 6,890 678
Cash and cash equivalents at beginning of
period.......................................... 18,370 13,419 13,419 6,529 5,851
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period........ $ 23,051 $ 15,854 $ 18,370 $ 13,419 $ 6,529
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 75
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Zilkha Energy Company (the "Company") is a privately-held independent
energy company engaged in the exploration for and acquisition, development and
production of oil and natural gas in the Gulf of Mexico.
The stockholders' equity of the Company consists of 100,000 shares of
common stock and 200,000 shares of an 11% cumulative preferred stock, no par
value, of which 75,000 shares and 200,000 shares, respectively, are outstanding.
At September 30, 1997 and December 31, 1996, dividends in arrears on the 11%
cumulative preferred stock were $11.3 million (or $56.375 per share) and $13.0
million (or $64.625 per share), respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany accounts and transactions have
been eliminated.
In connection with the consummation of a plan of reorganization, the
Company implemented a quasi-reorganization at December 31, 1985, whereby its
assets and liabilities were restated to estimated fair value and the deficit in
retained earnings was eliminated.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
OIL AND GAS ACTIVITIES
In 1997, the Company adopted the successful efforts method of accounting
for its oil and gas operations as prescribed by the Financial Accounting
Standards Board. All financial statements have been retroactively restated.
Under the successful efforts method of accounting, acquisition costs and
exploratory drilling costs related to properties with proved reserves and all
development costs including development dry holes are capitalized. The
acquisition costs of unproved leaseholds are capitalized pending the results of
exploration efforts. At September 30, 1997 and December 31, 1996 and 1995, such
costs totaled $38.6 million, $34.5 million and $16.2 million, respectively.
Unproved leaseholds with significant acquisition costs are assessed
periodically, on a property by property basis, and a loss is recognized to the
extent, if any, that the cost of the property has been impaired. Unproved
leaseholds whose acquisition costs are not individually significant are
aggregated and, based on experience, amortized over an average holding period.
As unproved leaseholds are determined to be productive, the related costs are
transferred to proved leaseholds. Exploratory dry holes and geological and
geophysical charges are expensed as incurred. Capitalized costs are depleted
using the unit-of-production method based upon estimates of proved oil and gas
reserves on a depletable unit basis. Estimated costs (net of salvage value) of
dismantling and abandoning oil and gas production facilities are computed by the
Company's independent reserve engineers and included when calculating
depreciation and depletion using the unit-of-production method. The total
estimated future dismantlement and abandonment cost being amortized as of
December 31, 1996 was approximately $31 million.
The Company performs a review for impairment of proved oil and gas
properties on a depletable unit basis. For each depletable unit determined to be
impaired, an impairment loss equal to the difference between the carrying value
and the fair value of the depletable unit will be recognized. Fair value, on a
depletable unit basis, is estimated to be the present value of expected future
net cash flows computed by applying estimated
F-12
<PAGE> 76
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
future oil and gas prices, as determined by management, to estimated future
production of oil and gas reserves over the economic lives of the reserves.
Interest costs associated with non-producing leases and exploration and
major development projects are capitalized until the related properties are
evaluated and are subject to depletion. The capitalization rates are based on
the Company's weighted average cost of funds used to finance expenditures.
OTHER PROPERTY AND EQUIPMENT
Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets, which range from three to ten years.
Expenditures for renewals and betterments are capitalized, while expenditures
for maintenance and repairs are expensed as incurred.
INVESTMENTS
The Company's equity security investments with readily determinable fair
values and debt securities held as of December 31, 1996 and 1995 are classified
as available-for-sale, with unrealized gains and losses reported in the
accompanying balance sheet as unrealized net gains in value of investments. The
Company's other long-term investments which do not have readily determinable
fair values are recorded at the lower of aggregate cost or market value.
DERIVATIVES
The Company uses derivative financial instruments to reduce its exposure to
changes in the market price of natural gas and crude oil, to fix the price for
natural gas and crude oil independently of the physical purchase of sale, and to
manage interest rates. Commodity financial instruments also provide methods to
meet customer pricing requirements while achieving a price structure consistent
with the Company's overall pricing strategy. The types of commodity derivative
financial instruments currently used by the Company are options and swaps.
The Company utilizes hedge accounting for commodity derivative financial
instruments whereby gains and losses on these hedging instruments are realized
and recorded as revenues when the related natural gas or oil production has been
produced, purchased or delivered. As a result, gains and losses on commodity
financial instruments are generally offset by similar changes in the realized
prices of natural gas and crude oil. To qualify as hedging instruments, these
instruments must be highly correlated to anticipated future sales such that the
Company's exposure to the risks of commodity price changes is reduced. While
commodity financial instruments are intended to reduce the Company's exposure to
declines in the market price of natural gas and crude oil, the commodity
financial instruments may also limit the Company's gain from increases in the
market price of natural gas and crude oil.
Gains or losses attributable to the termination of a swap contract are
deferred and recognized in revenue when the hedged crude oil and natural gas is
sold. Gains and losses on other derivative financial instruments that qualify as
a hedge of firmly committed or anticipated purchases and sales of oil and gas
commodities are deferred and recognized in income when the related hedged
transaction occurs. Gains or losses on derivative financial instruments that do
not qualify as a hedge are recognized in income currently. Cash flows from
hedging activities are recognized in the same section of the Consolidated
Statements of Cash Flows as the hedged transaction.
The Company entered into several interest rate swap agreements to manage
interest rate fluctuations during 1996, 1995 and 1994. Monthly settlements are
based on the difference between a fixed and floating interest rate at specified
notional amounts. Interest expense increased $900,000, $69,000 and $277,000 in
1996, 1995 and 1994, respectively, due to interest rate swaps. Interest expense
increased $283,000 and
F-13
<PAGE> 77
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
$432,000 during the nine months ended September 30, 1997 and 1996, respectively,
due to interest rate swaps. At December 31, 1996, the Company had interest rate
swaps in effect through September 1997.
INCOME TAXES
The tax benefits related to net operating loss carryforwards, in excess of
the related valuation allowance, generated prior to the quasi-reorganization
have been credited to additional paid-in capital.
Deferred taxes are accounted for under the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of temporary differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled.
ENVIRONMENTAL
The Company is subject to Federal, state and local environmental laws and
regulations, which regulate the discharge of materials into the environment and
may require the Company to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their future
economic benefit. Liabilities for expenditures of a noncapital nature are
recorded when environmental assessment and/or remediation is probable and the
costs can be reasonably estimated.
GAS BALANCING
The Company uses the entitlement method of recording sales of natural gas.
Under the entitlement method of accounting, revenue is recorded based on the
Company's net revenue interest in production. Deliveries of natural gas in
excess of the Company's net revenue interest are recorded as liabilities and
under-deliveries are recorded as assets. Production imbalances receivables are
recorded at the lower of the sales price in effect at the time of production or
the current market value. At September 30, 1997 and December 31, 1996, the
Company had a net liability of $632,000 and $400,000, respectively, as opposed
to a net asset of $460,000 at December 31, 1995.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are calculated based on the weighted average
common shares outstanding divided into net income (loss) after deducting the
annual preferred dividends which accumulate.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as well as reserve information which affects
the depletion calculation to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements for the nine months ended September
30, 1997 and 1996 have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect adjustments of a normal recurring nature which are, in the opinion of
F-14
<PAGE> 78
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
management, necessary to present fairly such information. Results for the
interim periods are not necessarily indicative of the results which may be
achieved for an entire year.
2. PROPERTY ACQUISITIONS, DIVESTITURES AND IMPAIRMENTS
During September 1996, the Company sold all of its working interest in East
Cameron 328 and High Island 116 for $44.5 million, resulting in a gain of $25.4
million.
During March 1996, the Company sold its working interest in certain oil and
gas properties located in the Gulf of Mexico for $55.3 million, resulting in a
gain of $38.5 million.
During April 1994, the Company acquired the partnership interest of a
stockholder consisting of producing oil and gas properties. The total cost of
the acquisition was $21.4 million and it was funded through the incurrence of a
loan from a stockholder for $13.5 million, the assumption of a volumetric
production payment liability of $5.3 million and the forgiveness of a balance
due from the stockholder of $2.6 million. The acquisition was recorded at the
historical cost of the assets acquired and liabilities assumed.
During March 1994, the Company sold all of its remaining onshore properties
for approximately $13.7 million, resulting in a $1.2 million gain. During 1994,
the Company also sold certain of its working interest in oil and gas properties
located in the Gulf of Mexico for aggregate proceeds of $5.4 million, resulting
in a gain of $3.5 million.
Impairment expenses of $13.3 million and $4.3 million were recognized
during the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively.
3. INVESTMENTS AND OTHER ASSETS
A summary of the Company's investments as of December 31, 1996 and December
31, 1995 which have readily determinable fair values, is as follows (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED CARRYING
TYPE OF INVESTMENT COST LOSS GAIN AMOUNT
------------------ ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
At December 31, 1996:
Marketable equity securities.................... $2,907 $ -- $13,904 $16,811
====== ====== ======= =======
At December 31, 1995:
Marketable equity securities.................... $2,907 $ -- $ 8,429 $11,336
Debt Securities................................. 101 -- 11 112
------ ------ ------- -------
$3,008 $ -- $ 8,440 $11,448
====== ====== ======= =======
</TABLE>
Proceeds from the sale of available-for-sale securities were $120,000, $7.7
million and $27,000 during 1996, 1995 and 1994, respectively, resulting in gross
realized gains of $19,000 and $7.5 million in 1996 and 1995, respectively, and
gross realized losses of $419,000 in 1994. During the nine months ended
September 30, 1997 and 1996, such proceeds were $3.1 million and $120,000,
respectively, resulting in gross realized gains of $2.9 million and $27,000,
respectively.
Long-term investments with carrying values of $59,000 at December 31, 1996
and 1995, respectively, do not have readily determinable fair values.
F-15
<PAGE> 79
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
Investments and other assets at December 31, 1996 also include (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Prepaid seismic charges..................................... $4,050 $6,698
Price options, net of amortization.......................... 1,716 2,068
Net deferred loss on hedge contracts........................ -- 891
Other....................................................... 263 263
------ ------
$6,029 $9,920
====== ======
</TABLE>
The Company prepays certain costs incurred under agreements with various
seismic vendors to purchase seismic data. As the seismic data is received the
cost is expensed as geological and geophysical cost.
4. RELATED PARTY TRANSACTIONS
PARTNERSHIP ADVANCES DUE FROM STOCKHOLDERS
The Company and a stockholder of the Company were partners in an oil and
gas general partnership (the "Partnership"). During 1994, the stockholder paid
$1.8 million to the Company related to this share of the Partnership
expenditures. On April 30, 1994, the Partnership was dissolved.
NOTE PAYABLE TO STOCKHOLDER
In conjunction with the purchase of a stockholder's partnership interest
during 1994, the Company entered into a $13.5 million note payable to a
stockholder. The note is unsecured and is subordinated to the long-term debt of
the Company; it bears interest at 9% per annum. The principal amount was
increased by $4 million in January 1996 due to the acquisition of a working
interest in a producing gas property of a stockholder by the Company. Principal
and interest are payable quarterly, commencing with the first principal
installment of $4 million on April 1, 1995, with subsequent principal
installments of $1 million each, commencing July 1, 1995 until October 1, 1998.
At December 31, 1996 and 1995, the outstanding balance was $7.5 million; at
September 30, 1997, the outstanding balance was $4.5 million
5. INCOME TAXES
For financial reporting purposes, the benefit associated with net operating
losses, net of valuation allowance, which arose prior to December 31, 1985 is
included in additional paid-in capital.
The net deferred tax assets and liabilities at December 31, 1996 and 1995
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued long-term compensation............................ $ 5,707 $ 3,902
Net operating loss carryforwards.......................... 16,607 37,764
Tax credit carryforwards.................................. 1,877 628
Other..................................................... 744 823
-------- --------
Total deferred tax assets................................... 24,935 43,117
Less valuation allowance.................................... (11,505) (11,505)
-------- --------
13,430 31,612
-------- --------
</TABLE>
F-16
<PAGE> 80
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Unrealized net gains in value of marketable equity
securities............................................. 4,867 2,954
Oil and gas properties.................................... 8,350 8,811
-------- --------
Total deferred tax liabilities.............................. 13,217 11,765
======== ========
Net deferred tax asset...................................... $ 213 $ 19,847
======== ========
</TABLE>
The Company has recorded a valuation allowance related to $32.8 million of
pre-quasireorganization net operating loss carryforwards which may not be fully
realizable. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The provision for income taxes for
each of the years ended December 31, 1996, 1995 and 1994 was different than the
amount computed using the federal statutory rate (35%) for the following
reasons:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- -----
<S> <C> <C> <C>
Federal statutory rate..................................... 35.0% 35.0% (35.0)%
Premiums for officers life insurance....................... 0.6 1.4 --
Other...................................................... 0.1 0.1 --
----- ---- -----
35.7% 36.5% (35.0)%
===== ==== =====
</TABLE>
Income tax expense benefit is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 1,189 $ 60 $ (55)
State................................................ -- -- --
------- ------ -------
1,189 60 (55)
------- ------ -------
Deferred:
Federal.............................................. 19,164 6,468 (3,597)
State................................................ -- -- --
------- ------ -------
19,164 6,468 (3,597)
------- ------ -------
Total income tax....................................... $20,353 $6,528 $(3,652)
======= ====== =======
</TABLE>
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $50 million for income tax purposes which expire
between 1999 and 2010. The Company also has a percentage depletion carryforward
of approximately $4.3 million and an alternative minimum tax carryforward of
approximately $1.9 million, both of which can be carried forward indefinitely.
6. DERIVATIVES AND FAIR VALUE INFORMATION
The Company has entered into a gas price option agreement which set floors
at $1.50 per MMBtu for the period January 1998 through December 1998 on
approximately 15,000,000 MMBtu. Gas collars are also in place on 12,000,000
MMBtu at prices ranging between $2.05 and $3.05 per MMBtu through April 1997.
Gas
F-17
<PAGE> 81
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
swap contracts on 1,900,000 MMBtu were entered into during 1996 at prices of
$2.07 through $2.69 per MMBtu.
The Company has purchased put options setting floors of $15.50 and $16.00
per Bbl on oil prices through December 1998 on 960,000 Bbls of oil.
During 1994, the Company entered into natural gas swap contracts on
approximately 36 Bbtu for volumes to be sold during 1994 through 1996. The
contract was terminated in November 1994 for discounted net proceeds of $9.3
million for the remaining contract period of January 1995 through June 1996. The
entire cash proceeds were reflected as a deferred credit at December 31, 1994.
There were $1.2 million and $8.1 million in deferred gains recognized as revenue
in 1996 and 1995, respectively. During the nine months ended September 30, 1996,
$1.2 million in deferred gains were recognized as revenue; there were no
deferred gains recognized as revenue during the nine months ended September 30,
1997.
These agreements are derivative financial instruments and do not require
deliveries of the commodity hedged. These agreements generally provide for
specified payments on a monthly basis by or to the Company based on differences
between a hedged price and a referenced price of crude oil or natural gas in an
agreed established market. Risks associated with these transactions arise
primarily from the possible inability of the counterparty to meet the terms of
these contracts. Each of these contracts is with a major investment grade
institution. Oil and gas revenues were decreased by $29.7 million in 1996 and
increased $8.8 million and $2.0 million in 1995 and 1994, respectively, as a
result of such hedging activity. During the nine months ended September 30, 1997
and 1996, oil and gas revenues were decreased by $5.1 million and $22.4 million,
respectively, as a result of such hedging activity.
Fair value for cash, receivables, investments, other assets and payables
approximates carrying value. The following table details the carrying values and
approximate fair values of the Company's derivative financial instruments and
long-term debt at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
APPROXIMATE
CARRYING FAIR
AMOUNT VALUE
-------- -----------
<S> <C> <C>
Oil and gas derivatives................................ $ 1,716 $ (6,815)
Long-term debt......................................... 105,000 105,000
Note payable to stockholder............................ 7,500 7,500
</TABLE>
7. DEFERRED COMPENSATION
At December 31, 1996, the Company had accrued $16.3 million, which
represents estimated compensation to certain employees under deferred
compensation plans. Of the balance, $4.3 million represents the remaining
payments to be made under the plan covering services performed during 1992
through 1994; this balance was paid in September 1997, at which time the
employees were fully vested. The remaining $12 million represents the estimated
liability at December 31, 1996 for the plan covering services performed during
1995 through 1997 and is estimated based on the fair market value of the Company
as of December 31, 1996. The actual compensation expense for this plan will be
determined from the fair market value of the Company on December 31, 1997. The
vesting period for this plan extends from 1997 to September 2000. The
compensation expense related to these plans is amortized over the services and
vesting periods. At September 30, 1997, $37.1 million was accrued under the
deferred compensation plan. During the years ended December 31, 1996, 1995 and
1994 and the nine months ended September 30, 1997 and 1996, $12 million, $8.5
million, $3.6 million, $25.1 million and $9 million, respectively, was expensed
related to the deferred compensation plans. See Note 13.
F-18
<PAGE> 82
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES
The Company entered into agreements with several seismic vendors to
purchase 3-D seismic data over the next two years. The future commitments are
contingent upon performance by the seismic vendors and could exceed $46 million
through 1998. Approximately $33 million is expected to be payable in 1997.
Presented below is a schedule by years of future minimum rental payments
required under noncancellable operating leases which, at December 31, 1996, have
initial or remaining lease terms in excess of one year (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 303
1998........................................................ 303
1999........................................................ 303
2000........................................................ 351
2001........................................................ 385
Thereafter.................................................. 1,385
------
Total minimum payments required............................. $3,030
======
</TABLE>
During 1996, 1995 and 1994, the Company incurred $295,000, $195,000 and
$285,000, respectively, in rental expense. During the nine months ended
September 30, 1997 and 1996, such expenses were $256,000 and $220,000,
respectively.
The Company has been named as a defendant in certain lawsuits incidental to
its business. Management does not believe that the outcome of such litigation
will have a material adverse impact on the Company.
9. DEFERRED REVENUE
On December 29, 1995, the Company retired $10 million of a volumetric
production payment and $69 million and $15 million of debt outstanding under the
Senior and Subordinated Revolving Credit Facility, respectively, and financed
these retirements through the incurrence of a volumetric production payment
liability of $99.5 million. As of December 31, 1995, volumes remaining to be
delivered were approximately 52,670 MMBtus and 799,300 Bbls.
On March 1, 1996, the Company borrowed $90 million under the Senior
Revolving Credit Facility to repurchase the outstanding volumetric production
payment for approximately $86 million and to repay $4.3 million of the principal
outstanding under the Subordinated Revolving Credit Facility. See Note 10.
10. LONG TERM DEBT
SENIOR REVOLVING CREDIT FACILITY
On November 30, 1994, the Company entered into a Loan Agreement ("Senior
Revolving Credit Facility"). As of December 31, 1996, this facility had a
borrowing base of $180 million, which is reevaluated semiannually. Advances can
be drawn on the Senior Revolving Credit Facility up to the lesser of the maximum
commitment of $250 million or the borrowing base. At September 30, 1997 and
December 31, 1996, the Company had an outstanding balance of $140 million and
$55 million, respectively, under the facility. The Senior Revolving Credit
Facility is secured by oil and gas properties and bears interest at variable
rates based on LIBOR (6.605% and 6.906% at December 31, 1996 and September 30,
1997, respectively). The Company also is assessed a commitment fee of .375% per
annum on the average daily amount by which the borrowing base exceeds the
aggregate outstanding advances.
F-19
<PAGE> 83
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
Principal payments are required when the advances outstanding exceed the
borrowing base, in amounts equal to the excess over the borrowing base. This
Senior Revolving Credit Facility matures on October 31, 1999 unless a change of
control occurs, at which time the facility becomes immediately payable. The
Company may request that the maturity date be extended for a period of one year.
The lender in its sole discretion shall determine whether to extend the maturity
date for said one-year period. At final maturity of the Senior Revolving Credit
Facility, the Company may request that the lender convert the outstanding amount
of all advances to a term loan. The lender in its sole discretion will at that
time determine the term loan amortization schedule. The final maturity date may
not exceed two years from the date of the conversion. Standard and customary
covenants prohibit the declaration and payment of dividends and include
limitations on additional debt, liens and sale of assets.
SENIOR SUBORDINATED NOTES
On July 24, 1996 the Company sold $50 million of five year, senior
subordinated notes. Interest is payable semiannually at 10.6% per annum with
principal due July 26, 2001. Proceeds from the notes were used to reduce senior
indebtedness by $45 million and provide $5 million of working capital. The notes
are unsecured, general corporate obligations. Standard and customary covenants
prohibit the declaration and payment of dividends and include limitations on
senior and additional indebtedness.
SUBORDINATED LOAN AGREEMENT
On November 30, 1994 the Company entered into a Subordinated Loan Agreement
("Subordinated Revolving Credit Facility"). At December 31, 1995, the Company
had an outstanding balance of $32 million under this facility. On July 24, 1996,
the Subordinated Loan Agreement was terminated.
During 1994, the Company entered into an interest rate swap agreement to
hedge against increasing interest rates. The interest rate swap was sold in
November 1994 for $771,000. A reduction in interest expense during 1996, 1995
and 1994 of $110,000, $640,000 and $21,000, respectively, was recorded. During
the nine months ended September 30, 1996, a reduction in interest expense of
$92,000 was recorded.
At December 31, 1996, the aggregate amount of debt maturing for long-term
debt and note payable to stockholder for the next five years is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1997...................................... $ 4,000
1998...................................... 3,500
1999...................................... 55,000
2000...................................... --
2001...................................... 50,000
--------
$112,500
--------
</TABLE>
11. STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
During 1996, 1995 and 1994, the Company paid interest of $7.2 million, $9.4
million and $6.0 million, respectively. During the nine months ended September
30, 1997 and 1996, interest of $10.7 million and $5.9 million, respectively, was
paid. Income taxes paid during 1996 were $780,000; no income taxes were paid
during 1995 or 1994. During the nine months ended September 30, 1997 and 1996,
income taxes of $252,000 and $280,000, respectively were paid.
F-20
<PAGE> 84
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
12. SIGNIFICANT CUSTOMERS
In the years ended December 31, 1996, 1995 and 1994, sales to a single
customer accounted for approximately 94%, 96% and 98%, respectively, of the
Company's oil and gas revenues. Due to the availability of other customers,
management does not believe that the loss of any single purchaser of its oil and
gas would have a material adverse on the Company's operations.
13. SUBSEQUENT EVENT
During November 1997, the Company entered into an agreement with Sonat Inc.
("Sonat") to merge with a wholly-owned subsidiary of Sonat in exchange for $1.04
billion of Sonat common stock. The proposed merger is subject to the approval of
the Sonat stockholders. If the merger is consummated, amounts due under the
deferred compensation plans become immediately payable due to change-of-control
provisions in the agreement. Such amount is approximately $74 million, in total,
of which $36.9 million is not accrued as of September 30, 1997.
14. OIL AND GAS OPERATIONS (UNAUDITED)
At December 31, 1996, the Company had interests in oil and gas properties
that are located offshore Louisiana and Texas in the Gulf of Mexico. The Company
does not own or lease any oil and gas properties outside the United States.
Capitalized costs relating to oil and gas producing activities and related
accumulated depreciation, depletion and amortization were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Oil and Gas Properties:
Proved Properties......................................... $ 296,046 $ 233,807
Unproved Properties....................................... 48,932 23,559
--------- ---------
344,978 257,366
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (173,528) (123,574)
--------- ---------
$ 171,450 $ 133,792
========= =========
</TABLE>
Costs incurred in oil and gas producing activities, whether capitalized or
expensed, were as follows:
COSTS INCURRED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Property Acquisition Costs:
Proved Properties........................................ $ 10,581 $ 1,352 $ 25,151
Unproved Properties...................................... 25,374 8,042 8,393
Exploration Costs.......................................... 127,604 90,294 72,887
Development Costs.......................................... 38,796 21,206 34,577
-------- -------- --------
Total Costs...................................... $202,355 $120,894 $141,008
======== ======== ========
</TABLE>
F-21
<PAGE> 85
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
Net quantities of proved developed and undeveloped reserves of natural gas
and crude oil, including condensate and natural gas liquids, and changes in such
quantities were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
LIQUIDS GAS LIQUIDS GAS LIQUIDS GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Proved (Developed and Undeveloped
Reserves, Net:
Beginning of year.............. 11,076 206,227 9,268 175,287 7,367 83,849
Revisions of previous
estimates.................... 1,027 7,842 2,765 74,356 2,560 19,481
Extensions, discoveries and
other additions.............. 9,710 161,952 2,302 59,549 1,690 93,109
Purchases of reserves in
place........................ 622 50,653 -- -- 616 14,011
Sales of reserves in place..... (6,217) (48,362) (752) (47,719) (2,103) (3,232)
Production..................... (1,672) (63,502) (2,507) (55,246) (862) (31,931)
------ ------- ------ ------- ------ -------
End of Year............... 14,546 314,810 11,076 206,227 9,268 175,287
====== ======= ====== ======= ====== =======
Proved Developed Reserves:
Beginning of year.............. 4,842 123,960 3,865 74,233 2,286 48,079
====== ======= ====== ======= ====== =======
End of year.................... 4,366 207,525 4,842 123,960 3,865 74,233
====== ======= ====== ======= ====== =======
</TABLE>
The significant changes to reserves, other than acquisitions, dispositions
or production, are due to reservoir performance in existing fields, drilling of
additional wells in existing fields and development of new fields. There were no
other events or major discoveries, favorable or adverse, that may be considered
to have caused a significant change in the estimated proved reserves since
December 31, 1996.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS REVENUES
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" (SFAS No. 69) and based on natural gas
and crude oil reserve and production volumes estimated by William M. Cobb &
Associates, Inc. It may be useful for certain comparative purposes, but should
not be solely relied upon in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should the
Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The Company believes that the following factors should be taken into
account in reviewing the following information: (1) future costs and selling
prices will probably differ from those required to be used in these
calculations; (2) due to future market conditions and governmental regulations,
actual rates of production achieved in future years may vary significantly from
the rate of production assumed in the calculations; (3) selection of a 10%
discount rate is arbitrary and may be subject to different rates of income
taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end proved reserves. As
of December 31, 1995, approximately 67 Bcf of the Company's future gas
production and 3,000 Mbls of oil were subject to open hedge positions. As of
December 31, 1996, approximately 27.3 Bcf of the Company's future gas production
and 960 MBls of oil were subject to such positions. Future cash inflows were
reduced by estimated future development, abandonment and production costs based
on period-end costs
F-22
<PAGE> 86
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
in order to arrive at net cash flow before tax. Future income tax expense has
been computed by applying period-end statutory tax rates to aggregate future
pretax net cash flows, reduced by the tax basis of the properties involved and
tax carryforwards. Use of a 10% discount rate is required by SFAS No. 69. The
volumes and revenues subject to volumetric production payments have been
excluded from the future net cash flow presented.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as proved reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
Results of operations from producing activities by fiscal year were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas revenues............................... $165,041 $148,131 $ 75,010
Production costs................................... (12,437) (12,542) (6,860)
Exploration expenses............................... (64,674) (45,261) (36,833)
Depreciation, depletion, amortization and
impairments...................................... (64,518) (52,929) (29,011)
-------- -------- --------
23,412 37,399 2,306
Income tax expense................................. (8,194) (13,090) (807)
-------- -------- --------
Results of operations from producing activities
(Excluding corporate overhead and interest
costs)........................................... $ 15,218 $ 24,309 $ 1,499
======== ======== ========
</TABLE>
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future Cash Inflows............................. $1,510,192 $ 698,273 $ 450,328
Future Production and Development Costs......... (254,069) (191,287) (153,785)
Future Income Tax Expenses...................... (369,386) (101,413) (30,735)
---------- --------- ---------
Future Net Cash Flows........................... 886,737 405,573 265,808
10% Annual Discount for Estimated Timing of Cash
Flows......................................... (186,370) (74,650) (41,892)
---------- --------- ---------
Standardized Measure of Discounted Future Net
Cash Flows.................................... $ 700,367 $ 330,923 $ 223,916
========== ========= =========
</TABLE>
F-23
<PAGE> 87
ZILKHA ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Sales and Transfers of Oil and Gas Produced, Net of
Production Costs....................................... $(152,604) $(135,589) $(68,150)
Net Changes in Prices and Production Costs............... 171,188 85,894 (24,988)
Extensions, Discoveries and Improved Recovery, Less
Related Costs.......................................... 491,841 108,467 94,637
Changes in Estimated Future Development Costs............ 28,051 34,105 12,219
Development Costs Incurred During the Period............. (46,899) (56,084) (26,265)
Revisions of Previous Quantity Estimates................. 39,033 163,736 51,558
Accretion of Discount.................................... 39,214 23,209 15,342
Net Change in Income Taxes............................... (207,816) (53,038) (5,363)
Purchases of Reserves in Place........................... 118,552 -- 23,103
Sales of Reserves in Place............................... (130,149) (119,632) (13,659)
Changes in Production Rates (Timing) and Other........... 19,033 55,939 (3,444)
--------- --------- --------
$ 369,444 $ 107,007 $ 54,990
========= ========= ========
</TABLE>
F-24
<PAGE> 88
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
NOVEMBER 22, 1997
BETWEEN
ZILKHA ENERGY COMPANY
AND
SONAT INC.
<PAGE> 89
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I
THE MERGER
Section 1.1 The Merger.................................................. A-1
Section 1.2 Conversion of Shares........................................ A-1
Section 1.3 Adjustments................................................. A-2
Section 1.4 Surrender and Payment....................................... A-2
Section 1.5 Fractional Shares........................................... A-2
Section 1.6 Withholding Rights.......................................... A-2
Section 1.7 Lost Certificates........................................... A-2
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation................................ A-3
Section 2.2 Bylaws...................................................... A-3
Section 2.3 Directors and Officers...................................... A-3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1 Organization and Qualification.............................. A-3
Section 3.2 Capitalization.............................................. A-3
Section 3.3 Authorization............................................... A-4
Section 3.4 Consents and Approvals; No Violation........................ A-4
Section 3.5 Financial Statements........................................ A-4
Section 3.6 Undisclosed Liabilities..................................... A-5
Section 3.7 Bank Account Information.................................... A-5
3.8 Conduct of the Business Since Company Unaudited Balance
Section Sheet Date.................................................. A-5
Section 3.9 Litigation; Orders.......................................... A-5
Section 3.10 Licenses; Approvals......................................... A-5
Section 3.11 Labor Matters............................................... A-5
Section 3.12 Compliance with Laws........................................ A-6
Section 3.13 Insurance................................................... A-6
Section 3.14 Material Contracts.......................................... A-6
Section 3.15 Environmental Matters....................................... A-7
Section 3.16 Condemnation................................................ A-7
Section 3.17 Taxes....................................................... A-8
Section 3.18 Employee Benefit Plans...................................... A-8
Section 3.19 Reserve Report.............................................. A-9
Section 3.20 Title....................................................... A-9
Section 3.21 Financial and Commodity Hedging............................. A-10
Section 3.22 Production and Pipeline Imbalances and Penalties............ A-10
Section 3.23 Preference Rights........................................... A-10
Section 3.24 Brokerage Fees and Commissions.............................. A-10
Section 3.25 Tax Treatment and Pooling of Interests...................... A-10
Section 3.26 Registration Statement and Proxy Statement.................. A-10
</TABLE>
A-i
<PAGE> 90
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Section 4.1 Organization and Qualification.............................. A-10
Section 4.2 Capitalization.............................................. A-11
Section 4.3 Authorization............................................... A-11
Section 4.4 Consents and Approval; No Violation......................... A-11
Section 4.5 SEC Filings................................................. A-12
Section 4.6 Financial Statements........................................ A-12
Section 4.7 Undisclosed Liabilities..................................... A-12
4.8 Conduct of the Business Since Parent Unaudited Balance Sheet
Section Date........................................................ A-12
Section 4.9 Litigation; Orders.......................................... A-12
Section 4.10 Licenses; Approvals......................................... A-13
Section 4.11 Labor Matters............................................... A-13
Section 4.12 Compliance with Laws........................................ A-13
Section 4.13 Environmental Matters....................................... A-13
Section 4.14 Taxes....................................................... A-13
Section 4.15 Employee Benefit Plans...................................... A-14
Section 4.16 Tax Treatment and Pooling of Interests...................... A-14
Section 4.17 Registration Statement and Proxy Statement.................. A-14
Section 4.18 Parent Stockholders' Approval............................... A-14
Section 4.19 Opinion of Financial Advisor................................ A-14
Section 4.20 Amendment of Rights Agreement............................... A-14
ARTICLE V
COVENANTS OF THE COMPANY
Section 5.1 Conduct of Business......................................... A-15
Section 5.2 Financial Reporting Matters................................. A-15
ARTICLE VI
COVENANTS OF PARENT
Section 6.1 Conduct of Business......................................... A-16
Section 6.2 Obligations of Merger Subsidiary............................ A-16
Section 6.3 Registration Statement and Proxy Statement.................. A-16
Section 6.4 Parent Stockholders' Approvals.............................. A-16
Section 6.5 Stock Exchange Listing...................................... A-17
Section 6.6 Employee Benefits........................................... A-17
Section 6.7 Corporate Name; Trademark Rights............................ A-17
Section 6.8 Registration Rights Agreement............................... A-17
Section 6.9 Post-Merger Combined Financial Statements................... A-17
Section 6.10 Stockholder Loan............................................ A-17
Section 6.11 Rights Agreement Amendment.................................. A-18
ARTICLE VII
COVENANTS OF PARENT AND THE COMPANY
Section 7.1 Reasonable Best Efforts..................................... A-18
Section 7.2 Certain Filings............................................. A-18
Section 7.3 Public Announcements........................................ A-18
Section 7.4 Further Assurances.......................................... A-18
Section 7.5 Notices of Certain Events................................... A-19
</TABLE>
A-ii
<PAGE> 91
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
7.6
Section Tax-Free Reorganization and Pooling......................... A-19
Section 7.7 Affiliates.................................................. A-19
Section 7.8 Access to Information; Confidentiality...................... A-19
Section 7.9 Registration Statement and Proxy Statement.................. A-20
ARTICLE VIII
CONDITIONS TO THE MERGER
Section 8.1 Conditions to the Obligations of Each Party................. A-20
8.2 Conditions to the Obligations of Parent and Merger
Section Subsidiary.................................................. A-20
Section 8.3 Conditions to the Obligations of the Company................ A-21
ARTICLE IX
TERMINATION
Section 9.1 Termination................................................. A-21
Section 9.2 Effect of Termination....................................... A-22
ARTICLE X
MISCELLANEOUS
Section 10.1 Representations, Warranties and Agreements.................. A-22
Section 10.2 Governing Law............................................... A-22
Section 10.3 Entire Agreement............................................ A-22
Section 10.4 Expenses and Fees........................................... A-23
Section 10.5 Notices..................................................... A-23
Section 10.6 Successors and Assigns...................................... A-23
Section 10.7 Headings; Definitions....................................... A-23
Section 10.8 Amendments and Waivers...................................... A-23
Section 10.9 Construction of Certain Provisions.......................... A-24
Section 10.10 Agreement for the Parties' Benefit.......................... A-24
Section 10.11 Severability................................................ A-24
Section 10.12 Jurisdiction................................................ A-24
Section 10.13 Waiver of Jury Trial........................................ A-24
Section 10.14 Specific Performance........................................ A-24
Section 10.15 Counterparts; Effectiveness................................. A-24
Section 10.16 Definitions and Usage....................................... A-24
</TABLE>
A-iii
<PAGE> 92
EXHIBITS AND SCHEDULES
<TABLE>
<S> <C> <C>
Exhibit A Form of Registration Rights Agreement
Exhibit B-1 Form of Company Affiliate Letter
Exhibit B-2 Form of Parent Affiliate Letter
Exhibit C Representations of Company Stockholders
Exhibit D Representations of Officers of Parent
Exhibit E Representations of Officers of Company
Exhibit F Leases and Wells
Exhibit G Form of Amendment to Rights Agreement
Schedule I Permitted Encumbrances
Schedule 3.4 Company Consents and Approvals; No Violation
Schedule 3.5 Company Financial Statements
Schedule 3.6 Company Undisclosed Liabilities
Schedule 3.7 Company Bank Account Information
Schedule 3.9 Company Litigation; Orders
Schedule 3.13 Company Insurance
Schedule 3.14 Material Contracts
Schedule 3.17 Company Taxes
Schedule 3.18 Company Employee Benefit Plans
Schedule 3.20 Title
Schedule 3.21 Company Financial and Commodity Hedging
Schedule 3.22 Company Production and Pipeline Imbalances and Penalties
Schedule 3.23 Company Preference Rights
Schedule 3.24 Company Brokerage Fees and Commission
Schedule 4.14 Parent Taxes
Schedule 5.1 Conduct of Business
</TABLE>
A-iv
<PAGE> 93
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of November 22, 1997
between Zilkha Energy Company, a Delaware corporation (the "Company"), and Sonat
Inc., a Delaware corporation ("Parent").
RECITALS:
WHEREAS, the Boards of Directors of the Company and Parent have determined
that the combination of the Company and Parent is in the best interests of the
stockholders of the Company and Parent, respectively;
WHEREAS, the Company and Parent intend the combination of the Company and
Parent to qualify as a tax-free reorganization under the provisions of Section
368 of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations thereunder; and
WHEREAS, the Company and Parent intend the combination of the Company and
Parent to be recorded as a "pooling of interests" for accounting purposes.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. (a) Upon the terms and subject to the conditions
hereof, at the Effective Time (as hereinafter defined), a newly formed
wholly-owned subsidiary of Parent (the "Merger Subsidiary") shall be merged (the
"Merger") with and into the Company in accordance with the General Corporation
Law of the State of Delaware ("Delaware Law"), whereupon the separate existence
of the Merger Subsidiary shall cease, and the Company shall be the surviving
corporation (the "Surviving Corporation").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger set forth herein, the Company
and Merger Subsidiary will file a certificate of merger (the "Certificate of
Merger") with the Delaware Secretary of State and make all other filings or
recordings required by Delaware Law in connection with the Merger. The Merger
shall become effective at such time (the "Effective Time") as the Certificate of
Merger is duly filed with the Delaware Secretary of State (or at such later time
as may be agreed in writing by the parties hereto and specified in the
Certificate of Merger).
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, assets, powers, privileges, and franchises and be
subject to all of the obligations, liabilities, restrictions, and disabilities
of the Company and the Merger Subsidiary, all as provided under Delaware Law.
Section 1.2 Conversion of Shares. At the Effective Time:
(a) the shares of common stock, $1.00 par value, of the Company ("Company
Common Stock") outstanding immediately prior to the Effective Time and the
shares of 11% cumulative preferred stock, no par value, of the Company ("Company
Preferred Stock" and, together with the Company Common Stock, "Company Stock")
outstanding immediately prior to the Effective Time shall (except as otherwise
provided in Section 1.5) be converted into the right to receive, without
interest, an aggregate number of shares of common stock, $1.00 par value, of
Parent ("Parent Common Stock") (the "Merger Consideration") equal to (i) the
Adjusted Purchase Price (as defined in Section 10.16) divided by (ii) the
average closing price (the "Closing Price") of the Parent Common Stock on the 15
consecutive trading days ending on and including the third trading day prior to
the Effective Time on the New York Stock Exchange (the "NYSE"), as reported in
The Wall Street Journal; provided, however, that if the Closing Price is greater
than $51.00 (the "Ceiling Amount"), the Closing Price shall be deemed for
purposes of this Agreement to equal the Ceiling Amount (the Ceiling Amount is
subject to appropriate adjustment in the event of any change in the Parent
Common Stock during the period between the date of this Agreement and the
Effective Time, including by reason of
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any reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares, or any stock dividend thereon with a record date during
such period); and
(b) each share of common stock of the Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become one
share of common stock of the Surviving Corporation with the same rights, powers,
and privileges as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation.
Section 1.3 Adjustments. The Reserve Report (as defined in Section 10.16)
was prepared by the Reserve Engineer (as defined in Section 10.16) effective as
of July 1, 1997. The Parties recognize that additional production data will
become available to the Company between the date of this Agreement and the
Effective Time which may affect the estimates of Proved Reserves (as defined in
Section 10.16) shown in the Reserve Report for each Reserve Report Field (as
defined in Section 10.16). If during the period between the date of this
Agreement and 30 days prior to the Effective Time the production rates from any
Reserve Report Field reasonably indicate to Parent that a material decline in
the recoverable Proved Reserves has occurred for such Reserve Report Field from
the Proved Reserves shown in the Reserve Report, then the Company shall request
that the Reserve Engineer reestimate the Proved Reserves for such Reserve Report
Field and recalculate the estimated future net revenues, discounted at 10%, for
such Reserve Report Field. The Reserve Engineer shall be instructed to use the
same operating costs, oil and gas prices, taxes, discounting methods, effective
date (July 1, 1997), and all other data and parameters that were used by the
Reserve Engineer to prepare the Reserve Report and, in addition, to take into
account the new production data available to the Company. Additionally, the
Reserve Engineer shall determine the Reserve Loss Amount, if any, for such
Reserve Report Field. The Company shall cause the Reserve Engineer to provide a
written report to the Company and Parent no later than 10 days prior to the
Effective Time showing (a) the reestimated Proved Reserves and future net
revenues, discounted at 10%, each effective as of July 1, 1997, for such Reserve
Report Field, and (b) the Reserve Loss Amount, if any, for such Reserve Report
Field. If the Reserve Engineer determines that the aggregate Reserve Loss
Amounts for all Reserve Report Fields redetermined by the Reserve Engineer under
this Section 1.3 exceeds $50,000,000 (such aggregate amount is referred to
herein as the "Reserve Adjustment Amount"), then the Purchase Price shall be
reduced by the Reserve Adjustment Amount.
Section 1.4 Surrender and Payment. At the Effective Time, the stockholders
of the Company (the "Company Stockholders") will deliver to Parent certificates
(the "Certificates") representing all of the outstanding shares of Company
Stock, and Parent will deliver, in exchange therefor, certificates representing
the Merger Consideration.
Section 1.5 Fractional Shares. No fractional shares of Parent Common Stock
shall be issued in the Merger, but in lieu thereof each holder of Company Stock
otherwise entitled to a fractional share of Parent Common Stock will be entitled
to receive from Parent, in accordance with the provisions of this Section 1.5, a
cash payment equal to such fraction multiplied by the Closing Price.
Section 1.6 Withholding Rights. Each of the Surviving Corporation and
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable to any Person (as defined in Section 10.16) pursuant to this Article I
such amounts as it is required to deduct and withhold with respect to the making
of such payment under any provision of federal, state, local, or foreign tax
law. To the extent that amounts are so withheld by the Surviving Corporation or
Parent, as the case may be, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Company Stock in respect of which such deduction and withholding was made by the
Surviving Corporation or Parent, as the case may be.
Section 1.7 Lost Certificates. If any Certificate shall have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen, or destroyed and, if required by
the Surviving Corporation, the posting by such Person of a bond, in such
reasonable amount as the Surviving Corporation may direct, as indemnity against
any claim that may be made against it with respect to such Certificate, Parent
will issue in exchange for such lost, stolen, or destroyed Certificate the
Merger
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Consideration to be paid in respect of the shares of Company Stock represented
by such Certificates as contemplated by this Article I.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The certificate of incorporation
of the Company in effect at the Effective Time shall be the certificate of
incorporation of the Surviving Corporation until amended in accordance with
applicable law.
Section 2.2 Bylaws. The bylaws of the Company in effect at the Effective
Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
Section 2.3 Directors and Officers. (a) From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the directors of the Merger Subsidiary at the Effective Time
shall be the directors of the Surviving Corporation and (ii) the officers of the
Merger Subsidiary at the Effective Time shall be the officers of the Surviving
Corporation.
(b) The Board of Directors of Parent shall take such action as may be
necessary to increase the size of Parent's Board of Directors immediately
following the Effective Time from 13 members to 14 members and shall cause to be
appointed to the Board of Directors of Parent Selim K. Zilkha and Michael Zilkha
(together, the "Zilkhas"). Selim K. Zilkha shall be appointed a Class III
director with a term of office expiring in 1998 and Michael Zilkha shall be
appointed a Class I director with a term of office expiring in 1999. After such
appointments, the Board of Directors shall cause the Zilkhas to stand for
election to the Board of Directors of Parent at Parent's next succeeding Annual
Meeting of Stockholders following the expiration of their respective term of
office. At each Annual Meeting of Stockholders of Parent, the Board of Directors
shall nominate the Zilkha whose term of office is then expiring to stand for
election to the Board of Directors of Parent and Parent shall support the
election of such Person. The Zilkhas shall be appointed by the Board of
Directors of Parent to the Strategic Planning Committee of the Board of
Directors of Parent.
(c) Notwithstanding anything to the contrary contained herein, if the
Zilkhas ever directly or indirectly beneficially own (including ownership by any
trust holding Parent Common Stock solely for the benefit of the Zilkhas or the
members of their immediate families) in the aggregate less than 8% of the shares
of outstanding Parent Common Stock, the Zilkhas shall promptly tender their
resignations as directors and the obligations of Parent under Section 2.3(b)
shall terminate.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent as follows:
Section 3.1 Organization and Qualification. Each of the Company and Zilkha
Energy Development I Company, a Delaware corporation (the "Subsidiary"), is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of its incorporation and has the requisite corporate power to
carry on its business as it is now being conducted. Each of the Company and the
Subsidiary is duly qualified to conduct business as a foreign corporation in
every state of the United States in which its ownership or lease of property or
the conduct of its business and operations makes such qualification necessary,
except for such states in which the Company's or Subsidiary's failure to be so
qualified is not reasonably expected to have, individually or in the aggregate,
a Company Material Adverse Effect (as defined in Section 10.16). The Company has
heretofore delivered to Parent true and complete copies of the certificate of
incorporation and bylaws of the Company and the Subsidiary as currently in
effect.
Section 3.2 Capitalization. (a) The authorized capital stock of the
Company consists of 100,000 shares of Company Common Stock and 200,000 shares of
Company Preferred Stock, of which 75,000 shares of Company Common Stock and
200,000 shares of Company Preferred Stock are issued and outstanding (the
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"Company Shares"). The Company Shares are all of the issued and outstanding
shares of capital stock of the Company and have been duly authorized and validly
issued and are fully paid and nonassessable and free of preemptive rights. There
are not, as of the date hereof, any outstanding or authorized subscriptions,
options, warrants, calls, rights, commitments, or any other agreements of any
character (any of the foregoing, a "Commitment") obligating the Company to issue
any additional shares of capital stock of the Company, or any other securities
convertible into or evidencing the right to subscribe for any shares of capital
stock of the Company.
(b) The authorized capital stock of the Subsidiary consists of 10,000
shares of common stock, par value $.01 per share ("Subsidiary Common Stock"), of
which 100 shares (the "Subsidiary Shares") are issued and outstanding. The
Subsidiary Shares are all of the issued and outstanding shares of capital stock
of the Subsidiary and are owned by the Company, free and clear of any Liens (as
defined in Section 10.16), and have been duly authorized and validly issued and
are fully paid and nonassessable and free of preemptive rights. There are not,
as of the date hereof, any Commitments obligating the Subsidiary to issue any
additional shares of capital stock of the Subsidiary, or any other securities
convertible into or evidencing the right to subscribe for any shares of capital
stock of the Subsidiary.
Section 3.3 Authorization. The Company has the requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated by this Agreement. The Company Stockholders and the
Board of Directors of the Company have by unanimous written consent (a)
determined that participating in the Merger is in the best interests of the
Company and its stockholders and (b) approved this Agreement and the Merger. No
other corporate proceedings on the part of the Company or the Company
Stockholders are necessary to authorize the execution and delivery of this
Agreement or the consummation by the Company of the transactions contemplated
hereby. This Agreement has been duly authorized, executed, and delivered by the
Company and constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to (x)
applicable bankruptcy, insolvency, reorganization, moratorium, and other similar
laws of general application with respect to creditors, (y) general principles of
equity, and (z) the power of a court to deny enforcement of remedies generally
based upon public policy.
Section 3.4 Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement by the Company, nor the consummation by the
Company of the transactions contemplated by this Agreement, will: (a) require
any consent, approval, authorization, or permit of, or filing with or
notification to, any Governmental Authority (as defined in Section 10.16),
except (i) the filing of a certificate of merger in accordance with Delaware
Law, (ii) in connection with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (iii) any regulatory approvals or routine
governmental consents normally acquired after the consummation of transactions
such as transactions of the nature contemplated by this Agreement, or (iv) where
the failure to obtain such consent, approval, authorization, or permit, or to
make such filing or notification, is not reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect or prevent
or delay, in any material respect, the consummation of the transactions
contemplated by this Agreement; (b) result in a default (or give rise to any
right of termination, cancellation, or acceleration) under any of the terms,
conditions, or provisions of any Material Contract (as hereinafter defined) of
the Company, except (i) as set forth on Schedule 3.4 or (ii) for such defaults
(or rights of termination, cancellation, or acceleration) as to which requisite
waivers or consents have been obtained or will be obtained prior to the
Effective Time or which are not reasonably expected to have, individually or in
the aggregate, a Company Material Adverse Effect or prevent or delay, in any
material respect, the consummation of the transactions contemplated by this
Agreement; or (c) assuming compliance with the matters referred to in Section
3.4(a), violate any order, writ, injunction, decree, statute, rule, or
regulation applicable to the Company, the Subsidiary, or any of their assets,
except for violations which are not reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect or prevent or delay, in any
material respect, the consummation of the transactions contemplated by this
Agreement.
Section 3.5 Financial Statements. Attached as Schedule 3.5 are (a) the
audited consolidated balance sheet, statement of income and statement of cash
flows of the Company and the Subsidiary as of and for the year ended December
31, 1996 and (b) the unaudited consolidated balance sheet, statement of income
and
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statement of cash flows of the Company and the Subsidiary as of and for the nine
months ended September 30, 1997 (the "Company Unaudited Financial Statements").
The audited consolidated balance sheet, statement of income and statement of
cash flows of the Company and the Subsidiary as of and for the years ended
December 31, 1994, 1995, and 1996 (the "Company Audited Financial Statements")
and the Company Unaudited Financial Statements present fairly the consolidated
financial position, results of operations, and changes in financial position of
the Company and the Subsidiary as of the respective dates or for the respective
periods to which they apply in accordance with United States generally accepted
accounting principles, consistently applied ("GAAP").
Section 3.6 Undisclosed Liabilities. Except as set forth on Schedule 3.6
or as reflected, reserved against, or otherwise disclosed in the Company
Unaudited Financial Statements, the Company did not have, at the date of the
unaudited balance sheet included in the Company Unaudited Financial Statements
(the "Company Unaudited Balance Sheet Date"), does not have, at the date hereof,
and will not have, at the Effective Time, any liabilities or obligations,
whether accrued, contingent, absolute, determined, determinable or otherwise,
that are reasonably expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
Section 3.7 Bank Account Information. Schedule 3.7 contains an accurate
list of the names and addresses of every bank and other financial institution in
which Company or the Subsidiary maintains an account (whether checking, savings
or otherwise), lock box, or safe deposit box, and the account numbers and
persons having signature authority or legal access thereto.
Section 3.8 Conduct of the Business Since Company Unaudited Balance Sheet
Date. Except as expressly contemplated by this Agreement, since the Company
Unaudited Balance Sheet Date, (a) the business and operations of the Company and
the Subsidiary have been conducted in the ordinary and usual course in all
material respects in accordance with past practices, (b) the Company has not
paid or declared any dividend on, or made any distribution with respect to, or
purchased or redeemed any of its capital stock and (c) no Company Material
Adverse Effect has occurred and is continuing.
Section 3.9 Litigation; Orders. Except as affects the oil and gas industry
generally or as set forth on Schedule 3.9, as of the date hereof, there are no
Actions (as defined in Section 10.16) pending or, to the Company's or the
Subsidiary's Knowledge (as defined in Section 10.16), threatened against the
Company or the Subsidiary that are reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect or that would prevent or
delay, in any material respect, the consummation of the transactions
contemplated by this Agreement. Except as affects the oil and gas industry
generally or as set forth on Schedule 3.9, as of the date hereof there are no
judgments or outstanding orders, injunctions, decrees, stipulations, or awards
(whether rendered by a court or administrative agency or by arbitration) against
the Company or the Subsidiary that are reasonably expected to have, individually
or in the aggregate, a Company Material Adverse Effect or that would prevent or
delay, in any material respect, the consummation of the transactions
contemplated by this Agreement.
Section 3.10 Licenses; Approvals. The Company and the Subsidiary, as
applicable, possess all material governmental licenses, permits, franchises, and
other authorizations of any Governmental Authority ("Licenses") that are
necessary to the ownership or operation of the Business (as defined in Section
10.16) as currently conducted, and all such Licenses are in full force and
effect, except where the failure to possess any License or the failure to be in
full force and effect is not reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect. No proceeding is pending or, to
the Company's or the Subsidiary's Knowledge, is threatened seeking the
revocation or limitation of any such License that is reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
Section 3.11 Labor Matters. There are no agreements with labor unions or
associations representing employees of the Company or the Subsidiary. No
material work stoppage against the Company or the Subsidiary is pending or, to
the Company's or the Subsidiary's Knowledge, threatened. Neither the Company nor
the Subsidiary is involved in or, to the Company's or the Subsidiary's
Knowledge, is threatened with any labor dispute, arbitration, lawsuit, or
administrative proceeding relating to labor matters involving the
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employees of the Company or the Subsidiary (excluding routine workers'
compensation claims) that is reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
Section 3.12 Compliance with Laws. The conduct of the Business by the
Company and the Subsidiary complies with all statutes, laws, regulations,
ordinances, rules, judgments, orders, or decrees applicable thereto (other than
Environmental Laws (as hereinafter defined) which are governed solely by Section
3.15), except for violations or failures so to comply, if any, that are not
reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
Section 3.13 Insurance. Schedule 3.13 sets forth a list of all insurance
policies issued in favor of the Company or the Subsidiary which relate to the
Business, and all such policies are currently in force and effect. True and
complete copies of all such policies will be delivered to Parent upon request.
Section 3.14 Material Contracts. (a) Except as set forth on Schedule 3.14,
as of the date hereof neither the Company nor the Subsidiary is a party to or
bound by any lease, agreement, or other contract or legally binding contractual
right or obligation of a type described below (collectively, "Material
Contracts"):
(i) any employment agreement;
(ii) any collective bargaining agreement with any labor union covering
the employees of the Company or the Subsidiary;
(iii) any agreement for the provision of operational consulting
services or technical consulting services that is not terminable on 30
calendar days' notice or less;
(iv) any agreement (other than an oil and gas lease) for capital
expenditures or the acquisition or construction of fixed assets which
requires aggregate future payments in excess of $2,500,000;
(v) any indenture, mortgage, loan, credit, sale-leaseback, or similar
agreement under which the Company or the Subsidiary has borrowed any money
or issued any note, bond, indenture, or other evidence of indebtedness for
borrowed money, sold and leased back assets, or guaranteed indebtedness for
money borrowed by others, (excluding hedge, swap, exchange, or similar
agreements entered into in the ordinary course of business);
(vi) any gas, crude oil, or liquids sales agreement, gas, crude oil,
or liquids purchase agreement, or gas, crude oil, or liquids marketing
agreement, under which the Company or the Subsidiary is a seller, that (A)
cannot be terminated by the Company or the Subsidiary, as the case may be,
without penalty upon not more than 30 calendar days' notice and (B)
provides for a price less than the market value price that would be
received pursuant to an arm's-length agreement for the same term with an
unaffiliated third party purchaser;
(vii) any agreement for, or that contemplates, the sale of any Working
Interests (as defined in Section 10.16) in any Property (as defined in
Section 10.16), or the sale of any other asset (other than sales of oil and
gas production in the ordinary course of business), which involves payment
to the Company or the Subsidiary in excess of $5,000,000;
(viii) any agreement that constitutes a lease (other than an oil and
gas lease) under which the Company or the Subsidiary is the lessor or
lessee of real or personal property, that (A) cannot be terminated by the
Company or the Subsidiary, as the case may be, without penalty upon not
more than 30 calendar day's notice and (B) involves an annual base rental
in excess of $250,000;
(ix) (A) any agreement for the future acquisition of 3-D seismic data
that requires aggregate future payments in excess of $2,500,000 and (B) any
other material 3-D seismic data license;
(x) any hydrocarbon or financial hedge, swap, exchange, or similar
agreement; and
(xi) any other agreement not referenced in subsections (i) through (x)
of this Section 3.14(a) that (A) requires future payment by the Company or
the Subsidiary in excess of $2,500,000 and is not an oil and gas lease or
an interest therein, (B) creates or imposes confidentiality obligations on
the Company, or (C) creates an area of mutual interest.
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(b) Except as set forth on Schedule 3.14, each Material Contract listed on
Schedule 3.14 is a valid and binding obligation of the Company or the
Subsidiary, as the case may be, enforceable against the Company or the
Subsidiary, as the case may be, in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and other similar
laws of general application with respect to creditors, (ii) general principles
of equity, and (iii) the power of a court to deny enforcement of remedies
generally based upon public policy. Except as set forth on Schedule 3.14, the
Company and the Subsidiary have performed all obligations required to be
performed by them through the date hereof under the Material Contracts listed on
Schedule 3.14, other than any such obligations the failure of which to perform
are not reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect, and are not (with or without the lapse of time or the
giving of notice, or both) in breach or default in any respect thereunder,
except in any such case for such breaches or defaults that are not reasonably
expected to have, individually or in the aggregate, a Company Material Adverse
Effect.
(c) Except as set forth on Schedule 3.14, no purchaser under any gas sales
agreement has, since the Company Unaudited Balance Sheet Date, notified the
Company or the Subsidiary (or, to the Company's or the Subsidiary's Knowledge,
the operator of any Property), of its intent to cancel, terminate, or
renegotiate any gas sales agreement or otherwise to fail and refuse to take and
pay for gas in the quantities and at the price set out in any gas sales
agreement, whether such failure or refusal was pursuant to any force majeure,
market out, or similar provisions contained in the gas sales agreement, or
otherwise, except in any such case where such cancellation, termination,
renegotiation, failure, or refusal is not reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect. Except as
set forth on Schedule 3.14, neither the Company nor the Subsidiary is obligated
under any gas sales agreement by virtue of (i) any prepayment arrangement, (ii)
a take-or-pay or similar provision, or (iii) a production payment, or any other
arrangements, to deliver hydrocarbons produced from the Properties at some
future time without then or thereafter receiving a fair market value payment
therefor.
Section 3.15 Environmental Matters. Other than violations that are not
reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect, the Properties have been operated in compliance with
all applicable Environmental Laws. Without limitation of the foregoing, there
are no existing, pending or, to the Company's or the Subsidiary's Knowledge,
threatened actions, suits, investigations, inquiries, proceedings or clean-up
obligations by any Governmental Authority relating to any Environmental Laws
with respect to the Properties, except for actions, suits, investigations,
inquiries, proceedings, and obligations that are not reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect. All
notices, permits, or similar authorizations, if any, required to be obtained or
filed in connection with the operation of the Properties by the Company or the
Subsidiary, including, without limitation, treatment, storage, disposal, or
release of a hazardous substance or solid waste into the environment, have been
duly obtained or filed, other than any such notices, permits, or similar
authorizations the failure of which to obtain or file is not reasonably expected
to have, individually or in the aggregate, a Company Material Adverse Effect.
The term "release" has the meaning specified in CERCLA (as hereinafter defined),
and the term "disposal" (or "disposed") has the meaning specified in RCRA (as
hereinafter defined). For the purposes hereof, "Environmental Laws" shall mean
any and all laws, statutes, ordinances, rules, regulations, orders, or
determinations of any Governmental Authority pertaining to the environment in
effect on the date of this Agreement and in effect at such time in any and all
jurisdictions in which the Properties are operated, including, without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act, as amended ("CERCLA"), the Federal
Water Pollution Control Act, as amended, the Resource Conservation and Recovery
Act, as amended ("RCRA"), the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, comparable state and local laws and other
material environmental protection laws in effect on the date of this Agreement.
Section 3.16 Condemnation. There are, at the date hereof, no pending or,
to the Company's or the Subsidiary's Knowledge, threatened condemnation or
eminent domain proceedings, or contemplated sales in lieu thereof, involving a
partial or total taking of any of the Properties, other than proceedings or
sales in lieu thereof that are not reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect.
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Section 3.17 Taxes. (a) (i) Except as set forth on Schedule 3.17, the
Company and the Subsidiary have filed when due all material Company Returns (as
defined in Section 10.16) in connection with and in respect of the Business, and
have, except for Taxes that are being contested in good faith and set forth on
Schedule 3.17, timely paid and discharged all Tax obligations shown thereon,
(ii) the Company Returns correctly and accurately reflect the facts regarding
the income, business and assets, operations, activities, status, or other
matters of the Company and the Subsidiary, and any other information required to
be shown thereon, and are not subject to penalties under Section 6662 of the
Code, relating to accuracy-related penalties, or any corresponding provision of
applicable state, local, or foreign Tax law or any predecessor provision of law,
and (iii) neither the Company nor the Subsidiary has received any notice of any
Tax deficiency outstanding, proposed, or assessed against or allocable to it,
nor has either of them executed any waiver of any statute of limitations on the
assessment or collection of any Tax, or executed or filed with the Internal
Revenue Service or any other governmental body any agreement now in effect
extending the period for assessment or collection of any Taxes against the
Company or the Subsidiary. For purposes of this Agreement, "Tax" or "Taxes"
means taxes of any kind, levies, or other like assessments, customs, duties,
imposts, charges, or fees, including, without limitation, income, gross
receipts, ad valorem, value added, excise, real or personal property, asset,
sales, use, license, payroll, transaction, capital, net worth and franchise
taxes, estimated taxes, withholding, employment, social security, workers
compensation, utility, severance, production, unemployment compensation,
occupation, premium, windfall profits, transfer, and gains taxes or other
governmental taxes imposed or payable to the United States, or any state,
county, local, or foreign government or subdivision or agency thereof, and in
each instance such term shall include any interest, penalties, or additions to
tax attributable to any such Tax, including penalties for the failure to file
any Tax return or report. Federal or state royalty payments shall not be Taxes
for purposes of this Agreement.
(b) Except for the group of which the Company is currently the parent,
neither the Company nor the Subsidiary has ever been a member of an affiliated
group of corporations, within the meaning of Section 1504 of the Code, other
than as a common parent corporation.
(c) None of the assets of the Company or the Subsidiary is property that
the Company is required to treat as being owned by any other Person pursuant to
the "safe harbor lease" provisions of former Section 168(f)(8) of the Code.
(d) None of the assets of the Company or the Subsidiary directly or
indirectly secures any debt the interest on which is tax-exempt under Section
103(a) of the Code.
(e) None of the assets of the Company or the Subsidiary is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(f) Neither the Company nor the Subsidiary has agreed to make, nor is
either of them required to make, any adjustment under Section 481(a) of the Code
by reason of a change in accounting method or otherwise.
(g) Neither the Company nor the Subsidiary has participated in, nor will
either of them participate in, an international boycott within the meaning of
Section 999 of the Code.
(h) Neither the Company nor the Subsidiary has or had a permanent
establishment in any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country.
(i) Neither the Company nor the Subsidiary has filed a consent pursuant to
the collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local, or foreign income tax law) or agreed to
have Section 341(f)(2) of the Code (or any corresponding provision of state,
local, or foreign income tax law) apply to any disposition of any asset owned by
it.
Section 3.18 Employee Benefit Plans. (a) Schedule 3.18 contains a list of
all "employee pension benefit plans" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes
referred to herein as "Company Pension Plans"), "employee welfare benefit plans"
(as defined in Section 3(l) of ERISA, hereinafter a "Company Welfare Plan"),
stock option, stock purchase, incentive, deferred compensation plans or
arrangements, vacation, change in control, stay-on
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bonus plans or arrangements, and other material employee compensation and fringe
benefit plans or agreements, maintained, contributed to, or pursuant to which
the Company or the Subsidiary has any liability (all the foregoing being herein
called "Company Benefit Plans"). The Company has made available to Parent true,
complete, and correct copies of (i) each Company Benefit Plan and any
subsequently adopted amendments thereto (or, in the case of unwritten Company
Benefit Plans, descriptions thereof), (ii) the most recent annual report on Form
5500 filed with respect to each Company Benefit Plan (if any such report was
required), (iii) the most recent summary plan description for each Company
Benefit Plan for which such a summary plan description is required (with all
summaries of material modifications provided after the most recent summary plan
description was distributed), (iv) each trust agreement and group annuity
contract relating to any Company Benefit Plan and (v) each favorable
determination letter from the Internal Revenue Service with respect to each
Company Benefit Plan that is intended to be qualified under Section 401(a) of
the Code.
(b) All Company Benefit Plans are and have been administered in material
compliance with their terms and all applicable laws, including, without
limitation, ERISA and the Code, except where the failure to so administer the
Company Benefit Plans or to comply with such laws is not reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect. There
are no pending or, to the Company's or the Subsidiary's Knowledge, threatened
investigations by any governmental entity, termination proceedings, or other
claims (except claims for benefits payable in the normal operation of the
Company Benefit Plans), suits or proceedings against or involving any Company
Benefit Plan or asserting any rights or claims to benefits under any Company
Benefit Plan that are reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
(c) All contributions to, and payments from, the Company Benefit Plans
required to be made in accordance with the Company Benefit Plans have been
timely made, other than contributions or payments the failure of which to make
are not reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(d) No Company Benefit Plan is subject to Section 302 or Title IV of ERISA
or Section 412 of the Code or is a "multiemployer plan" within the meaning of
Section 4001(a)(3) of ERISA.
(e) (i) No "prohibited transaction" (under Section 4975 of the Code or
Section 406 of ERISA) has occurred with respect to any Company Benefit Plan and
(ii) there has been no breach of any fiduciary duty with respect to any Company
Benefit Plan, other than, in the case of (i) and (ii), those that are not
reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(f) Neither the Company nor the Subsidiary maintains or contributes to any
Company Welfare Plan which could not be terminated by the Company or the
Subsidiary without material liability.
Section 3.19 Reserve Report. (a) The Company has delivered to Parent a
copy of the oil and gas reserve report for the Company prepared by William M.
Cobb & Associates, Inc. as of July 1, 1997 (the "Reserve Report"). Neither the
Company nor the Subsidiary has Knowledge of any facts that would make the
factual information provided by the Company and the Subsidiary to William M.
Cobb & Associates, Inc., and on which the Reserve Report was based, inaccurate
in any material respect at the time provided.
(b) OTHER THAN AS EXPRESSLY SET FORTH ABOVE IN THIS SECTION 3.19, THE
COMPANY MAKES NO REPRESENTATION OR WARRANTY, AND HEREBY DISCLAIMS ANY
REPRESENTATION OR WARRANTY, THAT THE RESERVE ESTIMATES, COST AND CASH FLOW
ESTIMATES, PRICE ESTIMATES, OR PRODUCTION OR FLOW RATE ESTIMATES CONTAINED IN
THE RESERVE REPORT, OR IN ANY SUPPLEMENT THERETO OR UPDATE THEREOF, ARE IN ANY
WAY COMPLETE, ACCURATE OR NOT MISLEADING, THE SAME BEING PREDICTIONS AS TO
FUTURE EVENTS WHICH ARE INHERENTLY SUBJECT TO INCOMPLETENESS AND INACCURACY.
Section 3.20 Title. The Company or the Subsidiary, as the case may be, has
Defensible Title (as defined in Section 10.16) to the Leases and Wells (as such
terms are defined in Section 10.16), except as to
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those matters set forth in Schedule 3.20 and except where the failure to have
Defensible Title is not reasonably expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
Section 3.21 Financial and Commodity Hedging. Schedule 3.21 sets forth the
outstanding hydrocarbon and financial hedging positions of the Company and the
Subsidiary (including fixed price controls, collars, swaps, caps, hedges, and
puts) as of November 22, 1997.
Section 3.22 Production and Pipeline Imbalances and Penalties. Schedule
3.22 sets forth all Company and Subsidiary pipeline and production imbalances
and penalties as of July 31, 1997 arising with respect to the Properties.
Section 3.23 Preference Rights. Schedule 3.23 sets forth all Preference
Rights (as defined in Section 10.16) arising from the consummation of the
transactions contemplated by this Agreement, other than those Preference Rights
that are not reasonably expected to have, individually or in the aggregate, a
Company Material Adverse Effect.
Section 3.24 Brokerage Fees and Commissions. Except as set forth on
Schedule 3.24, the Company has not incurred any obligation or entered into any
agreement for any investment banking, brokerage or finder's fee, or commission
in respect of the transactions contemplated by this Agreement for which Parent
or the Company shall incur any liability.
Section 3.25 Tax Treatment and Pooling of Interests. Neither the Company
nor, to the Company's Knowledge, any of its affiliates has taken, has agreed or
failed to take, or intends to take any action or has any Knowledge of any fact
or circumstance that would prevent the Merger from (a) qualifying as a
reorganization within the meaning of Section 368 of the Code (a "368
Reorganization") or (b) being treated for financial accounting purposes as a
"pooling of interests" (a "Pooling Transaction") in accordance with GAAP and the
rules, regulations and interpretations of the Securities and Exchange Commission
("SEC") if consummated in accordance with this Agreement.
Section 3.26 Registration Statement and Proxy Statement. None of the
information to be supplied by the Company or the Subsidiary for inclusion in (a)
the Registration Statement on Form S-4 to be filed under the Securities Act of
1933, as amended (the "1933 Act") with the SEC by Parent in connection with the
Merger for the purpose of registering the shares of Parent Common Stock to be
issued in the Merger (the "Registration Statement") or (b) the proxy statement
to be distributed in connection with the Parent Stockholders' Meeting (as
hereinafter defined) to vote upon this Agreement and the transactions
contemplated hereby (the "Proxy Statement" and, together with the prospectus
included in the Registration Statement, the "Proxy Statement/Prospectus") will,
in the case of the Proxy Statement or any amendments thereof or supplements
thereto, at the time of the mailing of the Proxy Statement and any amendments or
supplements thereto, and at the time of the Parent Stockholders' Meeting, or, in
the case of the Registration Statement, as amended or supplemented, at the time
it becomes effective and at the time of the Parent Stockholders' Meeting,
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. No representation is made by the Company with respect to information
supplied by Parent or Merger Subsidiary for inclusion therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
Section 4.1 Organization and Qualification. Parent is, and at the
Effective Time, Merger Subsidiary will be, a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
and Parent has the requisite corporate power to carry on its business as it is
now conducted. Parent is duly qualified to conduct business as a foreign
corporation in each jurisdiction in which its ownership or lease of property or
the conduct of its business and operations makes such qualification necessary,
except for such jurisdictions in which the Parent's failure to be so qualified
is not reasonably expected to have,
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individually or in the aggregate, a Parent Material Adverse Effect (as defined
in Section 10.16). Parent has heretofore delivered to the Company true and
complete copies of the certificate of incorporation and bylaws of Parent as
currently in effect. From the date of its incorporation, the Merger Subsidiary
will not engage in any activities other than in connection with or as
contemplated by this Agreement.
Section 4.2 Capitalization. (a) The authorized capital stock of Parent
consists of 400,000,000 shares of Parent Common Stock, and 10,000,000 shares of
preferred stock, $1.00 par value. As of September 30, 1997, there were
outstanding 85,745,685 shares of Parent Common Stock (including 1,484,685 shares
of treasury stock) and options to purchase an aggregate of 3,727,069 shares of
Parent Common Stock. All outstanding shares of capital stock of Parent have been
duly authorized and validly issued and are fully paid and non-assessable and
free of preemptive rights. Parent has issued rights to the holders of Parent
Common Stock pursuant to the Rights Agreement (as hereinafter defined). Except
as set forth in this Section 4.2 and except for changes since September 30, 1997
resulting from the exercise of stock options outstanding as of September 30,
1997 or the grant of stock based compensation to directors or employees, there
are no outstanding (i) shares of capital stock or voting securities of Parent,
(ii) securities of Parent convertible into or exchangeable for shares of capital
stock or voting securities of Parent, or (iii) options or other rights to
acquire from Parent or other obligation of Parent to issue, any capital stock,
voting securities, or securities convertible into or exchangeable for capital
stock or voting securities of Parent. There are no outstanding obligations of
Parent or any of its subsidiaries to repurchase, redeem, or otherwise acquire
any securities referred to in clauses (i), (ii), or (iii) above.
(b) The shares of Parent Common Stock to be issued as part of the Merger
Consideration have been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will have been validly issued and
will be fully paid and non-assessable, and the issuance thereof is not subject
to any preemptive or other similar right.
Section 4.3 Authorization. The execution, delivery and performance by
Parent of this Agreement, and the consummation by Parent and the Merger
Subsidiary of the transactions contemplated hereby, are within the corporate
powers of Parent and the Merger Subsidiary and, subject to Parent Stockholders'
Approval (as hereinafter defined), have been duly authorized by all necessary
corporate action. This Agreement has been duly executed and delivered by Parent
and constitutes the valid and binding obligation of Parent enforceable against
Parent in accordance with its terms, subject to (a) applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws of general
application with respect to creditors, (b) general principles of equity, and (c)
the power of a court to deny enforcement of remedies generally based upon public
policy.
Section 4.4 Consents and Approval; No Violation. Neither the execution and
delivery of this Agreement by Parent, nor the consummation by Parent of the
transactions contemplated by this Agreement, will: (a) require any consent,
approval, authorization, or permit of, or filing with or notification to, any
Governmental Authority, except (i) the filing of a certificate of merger in
accordance with Delaware Law, (ii) compliance with any applicable requirements
of the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934
Act"), and foreign or state securities or Blue Sky laws, (iii) in connection
with the HSR Act, (iv) any regulatory approvals or routine governmental consents
normally acquired after the consummation of transactions such as transactions of
the nature contemplated by this Agreement, or (v) where the failure to obtain
such consent, approval, authorization, or permit, or to make such filing or
notification, is not reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect or prevent or delay, in any material
respect, the consummation of the transactions contemplated by this Agreement;
(b) result in a default (or give rise to any right of termination, cancellation,
or acceleration) under any of the terms, conditions, or provisions of any
agreement or other instrument binding upon Parent or any of its subsidiaries,
except for such defaults (or rights of termination, cancellation, or
acceleration) as to which requisite waivers or consents have been obtained or
will be obtained prior to the Effective Time or which are not reasonably
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect or prevent or delay, in any material respect, the consummation of the
transactions contemplated by this Agreement; or (c) assuming compliance with the
matters referred to in Section 4.4(a) and assuming Parent Stockholders' Approval
is obtained, violate any order, writ, injunction, decree, statute, rule, or
regulation applicable to Parent or any of its subsidiaries or any of their
assets, except for violations which are not reasonably expected to have,
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individually or in the aggregate, a Parent Material Adverse Effect or prevent or
delay, in any material respect, the consummation of the transactions
contemplated by this Agreement.
Section 4.5 SEC Filings. (a) Parent has delivered to the Company (i)
Parent's annual report on Form 10-K for the fiscal year ended December 31, 1996
("Parent 10-K"), (ii) its quarterly reports on Form 10-Q for its fiscal quarters
ended after December 31, 1996, (iii) its proxy or information statements
relating to meetings of or actions taken without a meeting by Parent's
stockholders held since December 31, 1996, and (iv) all of its other reports,
statements, schedules, and registration statements filed with the SEC since
December 31, 1996 (the documents referred to in this Section 4.5(a) being
referred to collectively as the "Parent SEC Filings"). The Parent's quarterly
report on Form 10-Q for its fiscal quarter ended September 30, 1997 is referred
to herein as the "Parent 10-Q."
(b) As of its filing date, each Parent SEC Filing complied as to form in
all material respects with the applicable requirements of the 1933 Act and the
1934 Act.
(c) As of its filing date, each Parent SEC Filing filed pursuant to the
1934 Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) Each such registration statement as amended or supplemented, if
applicable, filed pursuant to the 1933 Act did not, as of the date such
statement or amendment became effective, 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.
Section 4.6 Financial Statements. The audited consolidated financial
statements and the unaudited interim consolidated financial statements of Parent
included in the Parent SEC Filings present fairly the consolidated financial
position, results of operations, and changes in financial position of Parent and
its subsidiaries as of the respective dates or for the respective periods to
which they apply in accordance with GAAP. For purposes of this Agreement,
"Parent Unaudited Balance Sheet" means the consolidated balance sheet of Parent
as of September 30, 1997 set forth in the Parent 10-Q and "Parent Unaudited
Balance Sheet Date" means September 30, 1997.
Section 4.7 Undisclosed Liabilities. Except as set forth in the Parent SEC
Filings or as reflected, reserved against, or otherwise disclosed in the Parent
Unaudited Balance Sheet, Parent did not have, at the Parent Unaudited Balance
Sheet Date, does not have, at the date hereof, and will not have, at the
Effective Time, any liabilities or obligations, whether accrued, contingent,
absolute, determined, determinable or otherwise, that are reasonably expected to
have, individually or in the aggregate, a Parent Material Adverse Effect.
Section 4.8 Conduct of the Business Since Parent Unaudited Balance Sheet
Date. Except as expressly contemplated by this Agreement, since the Parent
Unaudited Balance Sheet Date, (a) the business and operations of Parent and its
subsidiaries have been conducted in the ordinary and usual course in all
material respects in accordance with past practices, (b) Parent has not paid or
declared any dividend on, or made any distribution with respect to, or purchased
or redeemed any of its capital stock, except for quarterly cash dividends by
Parent and stock repurchases by Parent for stock based compensation plans, in
each case not in excess of historical amounts, and (c) no Parent Material
Adverse Effect has occurred and is continuing.
Section 4.9 Litigation; Orders. Except as affects the oil and gas industry
generally or as set forth in the Parent SEC Filings, as of the date hereof,
there are no Actions pending or, to Parent's Knowledge, threatened against
Parent or any of its subsidiaries that are reasonably expected to have,
individually or in the aggregate, a Parent Material Adverse Effect or that would
prevent or delay, in any material respect, the consummation of the transactions
contemplated by this Agreement. Except as affects the oil and gas industry
generally or as set forth in the Parent SEC Filings, as of the date hereof there
are no judgments or outstanding orders, injunctions, decrees, stipulations, or
awards (whether rendered by a court or administrative agency or by arbitration)
against Parent or any of its subsidiaries that are reasonably expected to have,
individually or in the aggregate, a Parent Material Adverse Effect or that would
prevent or delay, in any material respect, the consummation of the transactions
contemplated by this Agreement.
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Section 4.10 Licenses; Approvals. Parent and its subsidiaries possess all
Licenses that are necessary to the ownership or operation of their business as
currently conducted, and all such Licenses are in full force and effect, except
where the failure to possess any License or the failure to be in full force and
effect is not reasonably expected to have, individually or in the aggregate, a
Parent Material Adverse Effect. No proceeding is pending or, to Parent's
Knowledge, threatened seeking the revocation or limitation of any such License
that is reasonably expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
Section 4.11 Labor Matters. Except as set forth in the Parent SEC Filings,
there are no agreements with labor unions or associations representing employees
of Parent or any of its subsidiaries. No material work stoppage against Parent
or any of its subsidiaries is pending or, to Parent's Knowledge, threatened.
Neither Parent nor any of its subsidiaries is involved in or, to Parent's
Knowledge, is threatened with any labor dispute, arbitration, lawsuit, or
administrative proceeding relating to labor matters involving the employees of
Parent or any of its subsidiaries (excluding routine workers' compensation
claims) that is reasonably expected to have, individually or in the aggregate, a
Parent Material Adverse Effect.
Section 4.12 Compliance with Laws. Parent and its subsidiaries have
conducted their business in compliance with all statutes, laws, regulations,
ordinances, rules, judgments, orders, or decrees applicable thereto (other than
Environmental Laws which are governed solely by Section 4.13), except as set
forth in the Parent SEC Filings and except for violations or failures so to
comply, if any, that are not reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect.
Section 4.13 Environmental Matters. Except as set forth in the Parent SEC
Filings prior to the date hereof and other than violations that are not
reasonably expected to have, individually or in the aggregate, a Parent Material
Adverse Effect, the properties of Parent and its subsidiaries have been operated
in compliance with all applicable Environmental Laws. Without limitation of the
foregoing, there are no existing, pending or, to Parent's Knowledge, threatened
actions, suits, investigations, inquiries, proceedings or clean-up obligations
by any Governmental Authority relating to any Environmental Laws with respect to
the properties of Parent and its subsidiaries, except for actions, suits,
investigations, inquiries, proceedings, and obligations that are set forth in
the Parent SEC Filings prior to the date hereof or are not reasonably expected
to have, individually or in the aggregate, a Parent Material Adverse Effect. All
notices, permits, or similar authorizations, if any, required to be obtained or
filed in connection with the operation by the Parent or any of its subsidiaries
of their properties, including, without limitation, treatment, storage,
disposal, or release of a hazardous substance or solid waste into the
environment, have been duly obtained or filed, other than any such notices,
permits, or similar authorizations the failure of which to obtain or file is not
reasonably expected to have, individually or in the aggregate, a Parent Material
Adverse Effect.
Section 4.14 Taxes. (a) (i) Except as set forth on Schedule 4.14, Parent
and its subsidiaries have filed when due all material Parent Returns (as defined
in Section 10.16) in connection with and in respect of their business, and have,
except for Taxes that are being contested in good faith and set forth on
Schedule 4.14, timely paid and discharged all Tax obligations shown thereon,
(ii) the Parent Returns correctly and accurately reflect the facts regarding the
income, business and assets, operations, activities, status, or other matters of
Parent and its subsidiaries, and any other information required to be shown
thereon, and are not subject to penalties under Section 6662 of the Code,
relating to accuracy-related penalties, or any corresponding provision of
applicable state, local, or foreign Tax law or any predecessor provision of law,
(iii) neither Parent nor any of its subsidiaries has received any notice of any
Tax deficiency outstanding, proposed, or assessed against or allocable to it,
nor has Parent nor any of its subsidiaries executed any waiver of any statute of
limitations on the assessment or collection of any Tax, or executed or filed
with the Internal Revenue Service or any other governmental body any agreement
now in effect extending the period for assessment or collection of any Taxes
against Parent, (iv) Parent and its subsidiaries have made provision for all
Taxes payable by Parent and its subsidiaries for which no Parent Return has yet
been filed, (v) the charges, accruals, and reserves for Taxes with respect to
Parent and its subsidiaries reflected on the Parent Unaudited Balance Sheet are
adequate under GAAP to cover the Tax liabilities accruing through the date
thereof, (vi) there is no action, suit, proceeding, audit, or claim now proposed
or pending against or with respect to Parent or any of its subsidiaries in
respect of any Tax where there is a reasonable possibility of an adverse
determination, and
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(vii) neither Parent nor any of its subsidiaries has been a member of an
affiliated, consolidated, combined or unitary group other than one of which
Parent was the common parent.
Section 4.15 Employee Benefit Plans. (a) Each Parent Employee Plan, as
hereinafter defined, has been funded and maintained in compliance with its terms
and with the requirements prescribed by any and all statutes, orders, rules, and
regulations (including, but not limited to ERISA and the Code) which are
applicable to such Plan, except where failure to so comply would not be
reasonably expected to have, individually or in the aggregate, a Parent Material
Adverse Effect. For purposes of this Agreement, "Parent Employee Plan" shall
mean each material "employee benefit plan" as defined in Section 3(3) of ERISA,
each employment, severance, or similar contract, plan, arrangement, or policy
and each plan or arrangement (written or oral), providing for compensation,
bonuses, profit-sharing, stock option, or other stock related rights or other
forms of incentive or deferred compensation, vacation benefits, insurance
coverage (including any self-insured arrangements), health or medical benefits,
disability benefits, workers' compensation, supplemental unemployment benefits,
severance benefits and post-employment or retirement benefits (including
compensation, pension, health, medical, or life insurance benefits) which is
maintained, administered, or contributed to by Parent or any affiliate of Parent
and covers any employee or former employee of Parent or any affiliate of Parent
or under which Parent or any affiliate of Parent has any liability.
(b) Each Parent Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code.
Section 4.16 Tax Treatment and Pooling of Interests. Neither Parent nor,
to Parent's Knowledge, any of its affiliates has taken, has agreed or failed to
take, or intends to take any action or has any Knowledge of any fact or
circumstance that would prevent the Merger from (a) qualifying as a 368
Reorganization or (b) being treated as a Pooling Transaction if consummated in
accordance with this Agreement.
Section 4.17 Registration Statement and Proxy Statement. None of the
information to be supplied by Parent or its subsidiaries for inclusion in (a)
the Registration Statement or (b) the Proxy Statement will, in the case of the
Proxy Statement or any amendments thereof or supplements thereto, at the time of
the mailing of the Proxy Statement and any amendments or supplements thereto,
and at the time of the Parent Stockholders' Meeting, or, in the case of the
Registration Statement, as amended or supplemented, at the time it becomes
effective and at the time of the Parent Stockholders' Meeting, 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. The Proxy
Statement/Prospectus will, as of its mailing date, comply as to form in all
material respects with all applicable laws, including the provisions of the 1933
Act and the 1934 Act and the rules and regulations promulgated thereunder,
except that no representation is made by Parent or Merger Subsidiary with
respect to information supplied by the Company or the Company Stockholders for
inclusion therein.
Section 4.18 Parent Stockholders' Approval. The affirmative vote of
stockholders of Parent required for the issuance of Parent Common Stock in the
Merger as required by the regulations of the NYSE, is a majority of the shares
of Parent Common Stock present in person or by proxy at a meeting of such
stockholders and entitled to vote thereat.
Section 4.19 Opinion of Financial Advisor. The financial advisor of
Parent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, has rendered a
written opinion to Parent to the effect that the Merger Consideration is fair
from a financial point of view to Parent.
Section 4.20 Amendment of Rights Agreement. Prior to the execution of this
Agreement by Parent and the Company, Parent has signed Amendment No. 1 dated as
of November 22, 1997 ("Amendment") to the Rights Agreement between Parent and
Chemical Mellon Stockholder Services, L.L.C., as Rights Agent ("Rights Agent"),
dated as of January 8, 1996 (the "Rights Agreement") in the form attached as
Exhibit G hereto. Parent agrees to transmit promptly the Amendment to the Rights
Agent for execution by it. The Amendment reflects all action that must be taken
by Parent to except each of Selim K. Zilkha and the Company Stockholders from
the definition of Acquiring Person (as defined in the Rights Agreement) with
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respect to the execution of this Agreement and the consummation of the Merger.
To the extent that the execution of this Agreement by Parent and the Company
prior to the execution of the Amendment by the Rights Agent results in the
characterization of each of Selim K. Zilkha and the Company Stockholders as an
Acquiring Person under the Rights Agreement, Parent has determined that
execution of the Amendment by the Rights Agent in due course will not result in
an amendment to the Rights Agreement in a manner that adversely affects the
interests of the holders of the Rights (as defined in the Rights Agreement).
ARTICLE V
COVENANTS OF THE COMPANY
Section 5.1 Conduct of Business. From the date hereof until the Effective
Time, except as set forth on Schedule 5.1 or otherwise expressly contemplated by
this Agreement, or, except as consented to or approved by Parent in writing, the
Company covenants and agrees that it will and will cause the Subsidiary to:
(a) operate the Business (including the making of capital expenditures) in
the ordinary and usual course in all material respects in accordance with past
practices;
(b) not make any change or amendment in their respective certificate of
incorporation or bylaws;
(c) not issue, sell, or agree to issue or sell (i) any shares of its
capital stock or (ii) any securities convertible into, or options with respect
to, or warrants to purchase or rights to subscribe for, any shares of its
capital stock;
(d) except in the ordinary course of business and consistent with past
practices, or as required by law or contractual obligations or other policies,
benefit proposals, understandings, or arrangements existing on the date hereof,
not (i) increase in any manner the base compensation of, or enter into any new
bonus or incentive agreement or arrangement with, any of its directors,
officers, or other employees; (ii) pay or agree to pay any pension, retirement
allowance, or other employee benefit to any such director, officer, or employee,
whether past or present; (iii) enter into any new employment, severance,
consulting or other compensation agreement with any existing director, officer,
or employee; or (iv) commit itself to any additional pension, profit-sharing,
deferred compensation, group insurance, severance pay, retirement, or other
employee benefit plan, fund, or similar arrangement or amend or commit itself to
amend any of such plans, funds, or similar arrangements in existence on the date
hereof;
(e) not (i) sell, transfer, or otherwise dispose of any of its assets,
except in the ordinary course of business and consistent with past practices,
(ii) create or permit to exist any new material Lien on its assets, other than
Permitted Encumbrances (as defined in Section 10.16), (iii) enter into any
material joint venture, partnership, or other similar arrangement or form any
other new material arrangement for the conduct of the Business, (iv) purchase
any material assets or securities of any Person, (v) enter into any agreement
for the forward sale of production of oil, gas, or liquids or other hedging
transaction, or (vi) except in the ordinary course of business and consistent
with past practices, enter into any other material agreement;
(f) not pay or declare any dividend on, or make any distribution with
respect to, or purchase or redeem any of its capital stock; and
(g) not take any action that would make any representation and warranty of
the Company hereunder materially inaccurate in any respect at, or as of any time
prior to, the Effective Time.
Section 5.2 Financial Reporting Matters. (a) The Company agrees that it
will (i) to the maximum extent permitted by GAAP, expense in 1997 all of the
expenses related to the Merger and (ii) with respect to its 1997 financial
results and all prior year financial results, use its reasonable best efforts to
convert from the "full cost" to the "successful efforts" method of accounting.
(b) The Company agrees to use its reasonable best efforts to negotiate (i)
the payment by the Company of a specific amount to be paid in 1998 for the
buy-down of the premium on the Company's indebtedness under the First Amended
and Restated Note Purchase Agreement dated October 30, 1996 between the Company
and Joint Energy Development Investments Limited Partnership, (ii) the payment
by the Company
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of a specific amount to be paid in 1998 for the right to transfer pursuant to
the Merger the right to use the Company's seismic data and (iii) the payment by
the Company of the minimum investment banking fee to be paid at the earlier of
the Effective Time or the termination of this Agreement.
ARTICLE VI
COVENANTS OF PARENT
Section 6.1 Conduct of Business. From the date hereof until the Effective
Time, except as provided for in, or contemplated by, this Agreement, or, except
as consented to or approved by the Company in writing, Parent covenants and
agrees that it will and will cause each of its subsidiaries to:
(a) operate their businesses (including the making of capital expenditures)
in the ordinary and usual course in all material respects in accordance with
past practices;
(b) not make any change or amendment in their respective articles of
incorporation or bylaws that would have a material adverse effect on the Company
or the Company Stockholders;
(c) not issue, sell, or agree to issue or sell (i) any shares of their
capital stock or (ii) any securities convertible into, or options with respect
to, or warrants to purchase or rights to subscribe for, any shares of their
capital stock, except that (A) Parent may issue shares upon conversion of
convertible securities and exercise of options and as otherwise described in
Section 4.2 and (B) Parent may issue options with an exercise price per share of
Parent Common Stock no less than the fair market value of a share of Parent
Common Stock on the date of grant thereof (and shares upon exercise of such
options) pursuant to its employee stock option plans in effect on the date
hereof;
(d) except in the ordinary course of business and consistent with past
practices, not (i) sell, transfer, or otherwise dispose of any of its assets,
(ii) create or permit to exist any new material Lien on its assets, other than
Permitted Encumbrances, or (iii) enter into any material joint venture,
partnership, or other similar arrangement;
(e) not pay or declare any dividend on, or make any distribution with
respect to, or purchase or redeem any of their capital stock, except for
quarterly cash dividends by Parent and stock repurchases by Parent for stock
based compensation plans, in each case not in excess of historical amounts, and
dividends by wholly-owned subsidiaries; and
(f) not take any action that would make any representation and warranty of
Parent hereunder materially inaccurate in any respect at, or as of any time
prior to, the Effective Time.
Section 6.2 Obligations of Merger Subsidiary. Parent will take all action
necessary to create Merger Subsidiary and to cause it to perform its obligations
under this Agreement and to consummate the Merger on the terms and conditions
set forth in this Agreement.
Section 6.3 Registration Statement and Proxy Statement. Parent shall
promptly prepare and file with the SEC the Registration Statement and the Proxy
Statement and shall use its reasonable best efforts to cause the Registration
Statement to be declared effective by the SEC as promptly as practicable. Parent
shall promptly take any action required to be taken under foreign or state
securities or Blue Sky laws in connection with the issuance of Parent Common
Stock in the Merger.
Section 6.4 Parent Stockholders' Approvals. Parent shall, as promptly as
practicable, submit the issuance of Parent Common Stock in the Merger as
required by the NYSE for the approval of its stockholders at a meeting of its
stockholders (the "Parent Stockholders' Meeting") and shall, subject to the
fiduciary duties of the Board of Directors of Parent under Delaware Law, use its
reasonable best efforts to obtain stockholder approval thereof (the "Parent
Stockholders' Approval"). Parent shall, through its Board of Directors (i)
subject to the fiduciary duties of the members thereof under Delaware Law,
recommend to its stockholders approval of the issuance of Parent Common Stock in
the Merger as required by the NYSE and (ii) authorize and cause an officer of
Parent to vote Parent's shares of common stock of the Merger Subsidiary for
approval and adoption of this Agreement and the transactions contemplated hereby
and shall take all additional actions
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as the sole stockholder of the Merger Subsidiary necessary to approve and adopt
this Agreement and the transactions contemplated hereby.
Section 6.5 Stock Exchange Listing. Parent shall use its reasonable best
efforts to cause the shares of Parent Common Stock to be issued in connection
with the Merger to be listed on the NYSE, subject to official notice of
issuance.
Section 6.6 Employee Benefits. At or immediately following Closing, Buyer
shall make or cause the Company to make all payments due under the Stay-On Bonus
Program and under the Long Term Unit Value Plan III. From and after the
Effective Time, Parent (a) shall provide the employees of the Surviving
Corporation with compensation and benefits on the same basis as Parent provides
compensation and benefits to similarly situated employees of Parent and its
affiliates, and shall credit each person who is an employee of the Company at
the Effective Time with such employee's service that is recognized as of the
Effective Time under the Company's Benefit Plans (including industry service for
vacation purposes) for all purposes under Parent's plans or programs, except for
the accrual of benefits under a defined benefit plan, (b) shall waive any
exclusion or limitation with respect to pre-existing conditions under Parent's
group health plan and shall provide that any out-of-pocket health expenses
incurred by a Company employee or his or her covered dependants prior to the
Effective Time shall be taken into account under Parent's group health plan for
purposes of satisfying applicable deductible, coinsurance and maximum covered
health benefit claims for services rendered on and after the Effective Time, and
(c) shall not permit the Surviving Corporation to amend, revise or terminate (i)
the Severance Plan, (ii) the Incentive Pool Plan or the Amended and Restated
Incentive Pool Plan in a manner that would adversely affect the interest of any
participant in such plans (who is a participant in such plans as of the date of
this Agreement) in any prospect that has been designated or assigned prior to
the Effective Time or, with respect to properties owned by the Company as of the
Effective Time, designated or assigned within three years following the
Effective Time, in each case pursuant to Articles II and III of the Incentive
Pool Plan or Articles II and III of the Amended and Restated Incentive Pool
Plan, or (iii) the Retirement Savings Plan in a manner that would adversely
affect the vesting of the participants thereunder.
Section 6.7 Corporate Name; Trademark Rights. (a) Upon or immediately
following the Effective Time, Parent will cause the Surviving Corporation and
the Subsidiary shall cease to use the name "Zilkha," or any similar name, and
Parent will take all action, including causing the Surviving Corporation and the
Subsidiary to file all documents, necessary to change the name of the Surviving
Corporation and the Subsidiary to a name that does not use the name "Zilkha."
(b) Parent understands and agrees that nothing in this Agreement confers
upon Parent or the Surviving Corporation any rights to or under any trademarks,
service marks, logos, or trade names of the Company or any of its affiliates
("Marks"). Parent agrees that, upon the Effective Time, Parent will cause the
Surviving Corporation and the Subsidiary to cease all use of the Marks,
including, without limitation, any name including the word "Zilkha," the "Zilkha
logo," and all marks, names, and trade styles confusingly similar to such word
and symbol. Parent further agrees that it will, as promptly as practicable and
in any event within 90 calendar days following the Effective Time cause the
Surviving Corporation and the Subsidiary to remove all references to and
representations of any of the Marks from the Properties.
Section 6.8 Registration Rights Agreement. Parent will enter into a
Registration Rights Agreement at the Effective Time in the form attached hereto
as Exhibit A.
Section 6.9 Post-Merger Combined Financial Statements. Parent will issue,
in a manner satisfying the requirements of SEC Accounting Series Release No.
135, an earnings statement containing at least 30 days of post-Merger combined
financial results of Parent and the Company as soon as reasonably practicable
following the Effective Time but in no event later than 30 days following such
30-day period.
Section 6.10 Stockholder Loan. If the promissory note in favor of the
Selim K. Zilkha Trust has not been paid in full prior to the Effective Time,
Parent will immediately cause the Surviving Corporation to pay in full all of
the outstanding principal of and unpaid interest on such promissory note.
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Section 6.11 Rights Agreement Amendment. Parent will not take, or permit
to be taken, any action that would make the representation set forth in Section
4.20 inaccurate in any material respect at any time, whether at or prior to the
Effective Time or thereafter.
ARTICLE VII
COVENANTS OF PARENT AND THE COMPANY
Section 7.1 Reasonable Best Efforts. Subject to the terms and conditions
of this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement.
Section 7.2 Certain Filings. (a) The Company and Parent shall cooperate
with one another (i) in connection with the preparation of the Registration
Statement and the Proxy Statement, (ii) in determining whether any action by or
in respect of, or filing with, any Governmental Authority is required, or any
actions, consents, approvals, or waivers are required to be obtained from
parties to any material agreements, in connection with the consummation of the
transactions contemplated by this Agreement, and (iii) in taking such actions or
making such filings, furnishing information required in connection therewith or
with the Registration Statement and seeking timely to obtain such actions,
consents, approvals, or waivers.
(b) If not previously filed by Parent and the Company, within ten Business
Days (as defined in Section 10.16) after the date hereof Parent and the Company
will make such filings as may be required by the HSR Act with respect to the
consummation of the transactions contemplated by this Agreement and will use all
reasonable efforts to obtain early termination of any waiting period under the
HSR Act. Parent and the Company will file or cause to be filed as promptly as
practicable with the United States Federal Trade Commission ("FTC") and the
United States Department of Justice ("Justice Department") any supplemental
information which may be requested pursuant to the HSR Act. All filings referred
to in this Section 7.2(b) will comply in all material respects with the
requirements of the respective laws pursuant to which they are made.
(c) Without limiting the generality or effect of Section 7.2(b), and
notwithstanding any provision herein to the contrary, each of the parties will
(i) use reasonable efforts to comply as expeditiously as possible with all
lawful requests of Governmental Authorities for additional information and
documents pursuant to the HSR Act, (ii) not (A) extend any waiting period under
the HSR Act or (B) enter into any voluntary agreement with any Governmental
Authorities not to consummate the transactions contemplated by this Agreement,
except with the prior consent of the other, and (iii) cooperate with each other
and use reasonable efforts to obtain the requisite approval of the FTC and
Justice Department, including, without limitation, (A) the execution, delivery,
and performance by the appropriate entity of such divestiture agreements or
other actions, as the case may be, as may be necessary to secure the expiration
or termination of the applicable waiting periods under the HSR Act, (B) the
removal, dissolution, stay, or dismissal of any temporary restraining order,
preliminary injunction or other judicial or administrative order which prevents
the consummation of the transactions contemplated by this Agreement or requires
as a condition thereto that all or any part of the Business be held separate, or
(C) the pursuit of necessary litigation or administrative proceedings
(including, if necessary, participation in proceedings through the trial court
level).
Section 7.3 Public Announcements. Without the prior consent of the other,
which consent shall not be unreasonably withheld, neither Parent nor the Company
will issue, or permit any agent or affiliate to issue, any press releases or
otherwise make or permit any agent or affiliate to make, any public statements
with respect to this Agreement or the transactions contemplated by this
Agreement.
Section 7.4 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments, or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect, or confirm of record or otherwise in the
Surviving Corporation any and all right, title, and interest in, to, and under
any of
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the rights, properties, or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger.
Section 7.5 Notices of Certain Events. Each of the Company and Parent
shall promptly notify the other party hereto of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any Governmental Authority in
connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced or,
to its Knowledge, threatened against, relating to, or involving or otherwise
affecting such party that, if pending on the date of this Agreement, would have
been required to have been disclosed pursuant to Sections 3.9, 3.12, 3.15, 4.9,
4.12, or 4.13 (as the case may be) or that relate to the consummation of the
transactions contemplated by this Agreement; and
(d) (i) the discovery by such party that any representation or warranty
contained in this Agreement is untrue or inaccurate in any material respect,
(ii) the occurrence or failure to occur of any event which occurrence or failure
to occur would be likely to cause any of the representations or warranties in
this Agreement to be untrue or incorrect in any material respect at the
Effective Time, except for representations and warranties that speak as of a
specified date, which need only be true and correct as of the specified date,
and (iii) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 7.5(d) shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 7.6 Tax-Free Reorganization and Pooling. Prior to the Effective
Time, each party shall use its best efforts to cause the Merger to qualify as a
368 Reorganization and to be treated as a Pooling Transaction, and in each case
will not take or fail to take any action reasonably likely to cause the Merger
not to so qualify or to be so treated.
Section 7.7 Affiliates. (a) The Persons named on Exhibit B-1 are, to the
Company's Knowledge, the only Persons who may be deemed affiliates of the
Company under Rule 145 of the 1933 Act. Each Person named on Exhibit B-1 has
executed a written agreement substantially in the form of Exhibit B-1.
(b) At least 30 days prior to the Effective Time, Parent shall deliver to
the Company a list of names and addresses of those Persons who were, in Parent's
reasonable judgment, at the record date for the Parent Stockholders' Meeting,
affiliates (each such person, a "Parent Affiliate") of Parent within the meaning
of Rule 145 of the 1933 Act. Parent shall use all reasonable efforts to deliver
or cause to be delivered to the Company, prior to the Effective Time, from each
of the Parent Affiliates identified in the foregoing list, a written agreement
substantially in the form of Exhibit B-2.
Section 7.8 Access to Information; Confidentiality. (a) From the date
hereof until the Effective Time, the Company and Parent will give to the other
party, its counsel, financial advisors, auditors, and other authorized
representatives reasonable access to the offices, properties, books, and records
of such party, furnish to the other party and its representatives such financial
and other data and information as such party and its representatives may
reasonably request and instruct its own employees and representatives to
cooperate with the other party in its investigations; provided, however, that
any such access may be denied which, in the reasonable judgment of the party
asserting such denial, could operate to cause the waiver of any attorney-client,
work product, or other privilege or result in the violation of an obligation or
agreement of confidentiality. Any investigation pursuant to this Section 7.8
shall be conducted in such manner as not to interfere unreasonably with the
conduct of the business of the Company and Parent, as the case may be. No
investigation pursuant to this Section 7.8 shall affect any representation or
warranty made by any party hereunder.
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(b) All information obtained by Parent or the Company pursuant to this
Section 7.8 shall be kept confidential in accordance with, and shall otherwise
be subject to the terms of, the Confidentiality Agreements dated September 10,
1997 and November 20, 1997 between Parent and the Company (the "Confidentiality
Agreements").
Section 7.9 Registration Statement and Proxy Statement. Parent and the
Company shall promptly furnish to each other all information, and take such
other actions, as may reasonably be requested in connection with any action by
any of them in connection with the preparation and filing of the Registration
Statement and the Proxy Statement. The information provided and to be provided
by Parent and the Company, respectively, for use in the Proxy
Statement/Prospectus shall be true and correct in all material respects without
omission of any material fact which is required to make such information not
false or misleading as of the date thereof and in light of the circumstances
under which given or made.
ARTICLE VIII
CONDITIONS TO THE MERGER
Section 8.1 Conditions to the Obligations of Each Party. The obligations
of the Company, Parent and Merger Subsidiary to consummate the Merger are
subject to the satisfaction of the following conditions:
(a) this Agreement shall have been approved and adopted by the stockholders
of Parent in accordance with applicable NYSE listing requirements;
(b) any applicable waiting period under the HSR Act relating to the Merger
shall have expired or been terminated;
(c) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger;
(d) the shares of Parent Common Stock to be issued in the Merger shall have
been approved for listing on the NYSE, subject to official notice of issuance;
(e) Ernst & Young LLP, certified public accountants for Parent, shall have
delivered a letter dated the day of the Effective Time, addressed to Parent, in
form and substance reasonably satisfactory to Parent, to the effect that the
Merger will qualify as a Pooling Transaction if consummated in accordance with
this Agreement; and
(f) KPMG Peat Marwick LLP, certified public accountants for the Company,
shall have delivered a letter dated the day of the Effective Time, addressed to
the Company, in form and substance reasonably satisfactory to the Company, to
the effect that the Company has met the requirements of a Pooling Transaction.
Section 8.2 Conditions to the Obligations of Parent and Merger
Subsidiary. The obligations of Parent and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following further conditions:
(a) The (i) representations and warranties of the Company contained in
Article III, shall not, as of the Effective Time, be untrue or incorrect in any
respect that fails to correctly state facts in existence at the Effective Time
that, individually or in the aggregate, constitute a Company Material Adverse
Effect, except for representations and warranties that speak as of a specified
date, which need only be true and correct as of the specified date, and (ii)
covenants and agreements of the Company contained in this Agreement to be
performed on or before the Effective Time in accordance with this Agreement
shall have been duly performed in all material respects; and Parent shall have
received at the Effective Time a certificate(s), dated the day of the Effective
Time and validly executed by or on behalf of the Company, to the effect that the
conditions set forth in clauses (i) and (ii) above have been so satisfied;
(b) Parent shall have received an opinion of Bracewell & Patterson, L.L.P.
in form and substance reasonably satisfactory to Parent, on the basis of certain
facts, representations, and assumptions set forth in
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such opinion, dated the Effective Time, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization qualifying under the
provisions of Section 368(a) of the Code. In rendering such opinion, such
counsel shall be entitled to rely upon representations of the Company
Stockholders substantially in the form of Exhibit C hereto and the officers of
the Parent and the Company substantially in the form of Exhibits D and E hereto;
(c) the Closing Price as computed pursuant to Section 1.2(a) shall not be
less than $39.00 (the "Floor Amount"); provided, however, if the Company
notifies Parent of the Company's agreement to fix the Closing Price at the Floor
Amount this condition shall be deemed to be satisfied. The Floor Amount is
subject to appropriate adjustment in the event of any change in the Parent
Common Stock during the period between the date of this Agreement and the
Effective Time, including by reason of any reclassification, recapitalization,
stock split or combination, exchange or readjustment of shares, or any stock
dividend thereon with a record date during such period; and
(d) either (i) the Registration Statement shall have been declared
effective and no stop order suspending the effectiveness of the Registration
Statement shall be in effect and no proceedings for such purpose shall be
pending before or threatened by the SEC or (ii) the issuance of the Parent
Common Stock in the Merger shall be exempt from the registration requirements of
the 1933 Act.
Section 8.3 Conditions to the Obligations of the Company. The obligations
of the Company to consummate the Merger are subject to the satisfaction of the
following further conditions:
(a) The (i) representations and warranties of Parent contained in Article
IV, shall not, as of the Effective Time, be untrue or incorrect in any respect
that fails to correctly state facts in existence at the Effective Time that
constitute, individually or in the aggregate, a Parent Material Adverse Effect,
except for representations and warranties that speak as of a specified date,
which need only be true and correct as of the specified date, and (ii) covenants
and agreements of Parent and the Merger Subsidiary contained in this Agreement
to be performed on or before the Effective Time in accordance with this
Agreement shall have been duly performed in all material respects; and Parent
shall have received at the Effective Time a certificate(s), dated the day of the
Effective Time and validly executed by or on behalf of Parent, to the effect
that the conditions set forth in clauses (i) and (ii) above have been so
satisfied;
(b) the Company shall have received an opinion of Andrews & Kurth L.L.P.,
in form and substance reasonably satisfactory to the Company, on the basis of
certain facts, representations, and assumptions set forth in such opinion, dated
the Effective Time, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization qualifying under the provisions of
Section 368(a) of the Code. In rendering such opinion, such counsel shall be
entitled to rely upon representations of the Company Stockholders substantially
in the form of Exhibit C hereto and the officers of Parent and the Company
substantially in the form of Exhibits D and E hereto; and
(c) the Registration Statement shall have been declared effective and no
stop order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the SEC.
ARTICLE IX
TERMINATION
Section 9.1 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time (notwithstanding any
approval of this Agreement by the Board of Directors of the Company or Parent or
the stockholders of the Company or Parent):
(a) by mutual written agreement of the Company and Parent; or
(b) by either the Company or Parent, if
(i) the Merger has not been consummated on or before May 31, 1998;
provided that the right to terminate this Agreement pursuant to this
Section 9.1(b)(i) shall not be available to any party whose
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breach of any covenant, agreement or other obligation contained in this
Agreement results in the failure of the Merger to be consummated by such
time;
(ii) there shall be any law or regulation that makes consummation of
the Merger illegal or otherwise prohibited or if any judgment, injunction,
order, or decree enjoining any party from consummating the Merger is
entered and such judgment, injunction, order, or decree shall have become
final and non-appealable; or
(iii) this Agreement shall not have been approved and adopted by the
stockholders of Parent in accordance with applicable NYSE listing
requirements after the matter shall have been presented to them for a vote
at the Parent Stockholders' Meeting (including any adjournment thereof).
The party desiring to terminate this Agreement pursuant to this Section 9.1
(other than pursuant to Section 9.1(a)) shall give notice of such termination to
the other party.
Section 9.2 Effect of Termination. If this Agreement is terminated
pursuant to Section 9.1, this Agreement shall become void and of no effect with
no liability on the part of any party hereto, except that (i) the agreements
contained in Sections 7.8(b), 10.2, 10.4, 10.12, and 10.13 shall survive the
termination of this Agreement and (ii) such termination shall not relieve any
party hereto of any liability for any breach by that party of its covenants,
agreements or other obligations under this Agreement occurring prior to such
termination.
ARTICLE X
MISCELLANEOUS
Section 10.1 Representations, Warranties and Agreements. All
representations and warranties of the parties, or any authorized representative
thereof, contained in this Agreement, or in any certificate, document or other
instrument delivered in connection herewith, shall terminate and cease to be of
further force and effect as of the Effective Time. Each of Parent and the
Company covenant never to institute, directly or indirectly, any action or
proceeding of any kind against the other based on or arising out of, or in any
manner related to, the breach of a representation or warranty contained in this
Agreement. The agreements contained herein and in any certificate or other
writing delivered pursuant hereto shall not survive the Effective Time except
for the agreements set forth in Sections 2.3(b), 2.3(c), 6.6, 6.7, 6.9, 6.10,
6.11, 10.2, 10.12, and 10.13.
Section 10.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of Texas without reference to
the choice of law principles thereof.
Section 10.3 Entire Agreement. This Agreement, together with the Schedules
and Exhibits hereto, and the Confidentiality Agreements constitute the entire
agreement between the parties with respect to the subject matter hereof and
there are no agreements, understandings, representations or warranties between
the parties other than those set forth or referred to herein.
Section 10.4 Expenses and Fees. (a) Except as otherwise provided in this
Section 10.4, all costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such cost or expense.
(b) With respect to litigation in connection with Section 7.2(c)(iii), all
expenses incurred by Parent and the Company contemplated by such litigation will
be shared equally between Parent and the Company.
(c) Parent agrees to pay the Company in immediately available funds by wire
transfer an amount equal to $25,000,000 (the "Termination Fee") in the event
that this Agreement is terminated (i) by Parent pursuant to Section 9.1(b) (i)
at a time when the condition set forth in Section 8.2(c) has not been satisfied,
(ii) by Parent pursuant to Section 9.1(b)(i) prior to approval and adoption of
this Agreement by the stockholders of Parent at the Parent Stockholders' Meeting
or (iii) by the Company or Parent pursuant to Section 9.1(b)(iii), in each case
at a time when the Company was not in material breach of its representations and
warranties or covenants contained in this Agreement; provided, however, that if
this Agreement has been terminated by the Company or Parent pursuant to Section
9.1(b)(iii) and the Board of Directors of Parent
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shall have withdrawn or modified in a manner adverse to the Company its
recommendation of the Parent Stockholders' Approval the Termination Fee shall be
$50,000,000. The Termination Fee payable as provided in this Section 10.4(c)
shall be in lieu of any other damages arising out of such termination. Any
amounts payable pursuant to this Section 10.4(c) shall be paid promptly, but in
no event later than two Business Days, after the date of such termination.
(d) In the event that the Merger does not occur, Parent agrees to reimburse
the Company for any payments made by the Company as contemplated by Section
5.2(b).
Section 10.5 Notices. All notices hereunder shall be sufficient upon
receipt for all purposes hereunder if in writing and delivered personally, sent
by documented overnight delivery service or, to the extent receipt is confirmed,
telecopy, telefax, or other electronic transmission service to the appropriate
address or number as set forth below.
If to Parent or Merger Subsidiary, to:
Sonat Inc.
Amsouth-Sonat Tower
Birmingham, Alabama 35203
Attention: William A. Smith
with a copy to:
Bracewell & Patterson, L.L.P.
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Attention: Edgar J. Marston III
if to the Company, to:
Zilkha Energy Company
1201 Louisiana, Suite 3200
Houston, Texas 77002
Attention: Joseph J. Romano
with a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002-3090
Attention: William N. Finnegan, IV
Section 10.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that no party may assign, delegate, or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of each other party hereto, except the Parent or Merger Subsidiary may
transfer or assign, in whole or from time to time in part, to one or more of
their affiliates, the right to enter into the transactions contemplated by this
Agreement, but any such transfer or assignment will not relieve Parent or Merger
Subsidiary of its obligations hereunder.
Section 10.7 Headings; Definitions. The Section and Article headings
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated. All capitalized terms defined herein are
equally applicable to both the singular and plural forms of such terms.
Section 10.8 Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing, waive compliance by any
other party hereto with any term or provision of this Agreement on the part of
such other
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party hereto to be performed or complied with. The waiver by any party hereto of
a breach of any term or provision of this Agreement shall not be construed as a
waiver of any subsequent breach.
Section 10.9 Construction of Certain Provisions. It is understood and
agreed that the specification of any dollar amount in the representations and
warranties contained in this Agreement or the inclusion of any specific item in
the Schedules or Exhibits is not intended to imply that such amounts or higher
or lower amounts, or the items so included or other items, are or are not
material, and no party shall use the fact of the setting of such amounts or the
fact of the inclusion of any such item in the Schedules in any dispute or
controversy between the parties as to whether any obligation, item, or matter
not described herein or included in a Schedule or Exhibit is or is not material
for purposes of this Agreement.
Section 10.10 Agreement for the Parties' Benefit. This Agreement is not
intended to confer upon any Person not a party hereto (other than the Merger
Subsidiary and the Zilkhas) any rights or remedies hereunder, and no Person
other than the parties hereto or such Persons described above is entitled to
rely on any representation, warranty, or covenant contained herein.
Section 10.11 Severability. If any term or other provision of this
Agreement is invalid, illegal, or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal, or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated by this
Agreement are fulfilled to the extent possible.
Section 10.12 Jurisdiction. Any legal action, suit, or proceeding in law
or equity arising out of or relating to this Agreement and transactions
contemplated by this Agreement may be instituted in any state or federal court
in Harris County, Houston, Texas, and each party agrees not to assert, by way of
motion, as a defense, or otherwise, in any such action, suit, or proceeding, any
claim that it is not subject personally to the jurisdiction of such court, that
its property is exempt or immune from attachment or execution, that the action,
suit, or proceeding is brought in an inconvenient forum, that the venue of the
action, suit, or proceeding is improper or that this Agreement, or the subject
matter hereof or thereof may not be enforced in or by such court. Each party
further irrevocably submits to the jurisdiction of any such court in any such
action, suit, or proceeding. Any and all service of process and any other notice
in any such action, suit, or proceeding shall be effective against any party if
given by registered or certified mail, return receipt requested, or by any other
means of mail which requires a signed receipt, postage prepaid, mailed to such
party at the address listed in Section 10.5. Nothing herein contained shall be
deemed to affect the right of any party to serve process in any manner permitted
by law or to commence legal proceedings or otherwise proceed against any other
party in any jurisdiction other than Texas.
Section 10.13 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
Section 10.14 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof in addition to any other
remedy to which they are entitled at law or in equity.
Section 10.15 Counterparts; Effectiveness. This Agreement may be executed
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 party. In making proof
of this Agreement, it shall not be necessary to produce or account for more than
one such counterpart.
Section 10.16 Definitions and Usage. For the purposes of this Agreement:
"368 Reorganization" shall have the meaning specified in Section 3.25.
"1933 Act" shall have the meaning specified in Section 3.26.
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"1934 Act" shall have the meaning specified in Section 4.4.
"Action" shall mean any action, suit, arbitration, inquiry, proceeding, or
investigation by or before any Governmental Authority.
"Adjusted Purchase Price" means the Purchase Price reduced by the Reserve
Adjustment Amount as provided in Section 1.3.
"affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such Person.
"Agreement" shall have the meaning specified in the introductory paragraph
of this Agreement and Plan of Merger.
"Amended and Restated Incentive Pool Plan" shall mean that certain Amended
and Restated Incentive Pool Plan adopted by the Company effective November 1,
1992.
"Amendment" shall have the meaning specified in Section 4.20.
"Business" shall mean all oil and gas exploration and all operations
related thereto, including, without limitation, (a) the acquisition, purchase,
sale, development, operation, maintenance, and abandonment of oil, gas, and
mineral leases and related interests, (b) the drilling, reworking, production,
purchase, sale, transportation, storage, processing, treating, manufacture, and
disposal of or for oil, gas, natural gas liquids, and other hydrocarbon gases
and liquids, and associated byproducts and wastes, and (c) the acquisition,
construction, installation, maintenance, and operation of related plants,
platforms, pipelines, gathering lines, compressors, facilities, storage
facilities, and equipment.
"Business Day" shall mean any day other than a Saturday, Sunday, or legal
holiday recognized by banking institutions in the State of Texas.
"Ceiling Amount" shall have the meaning specified in Section 1.2(a).
"CERCLA" shall have the meaning specified in Section 3.15.
"Certificates" shall have the meaning specified in Section 1.4.
"Certificate of Merger" shall have the meaning specified in Section 1.1(b).
"Closing Price" shall have the meaning specified in Section 1.2(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor thereto.
"Commitment" shall have the meaning specified in Section 3.2(a).
"Company" shall have the meaning specified in the introductory paragraph of
this Agreement.
"Company Audited Financial Statements" shall have the meaning specified in
Section 3.5.
"Company Benefit Plans" shall have the meaning specified in Section
3.18(a).
"Company Common Stock" shall have the meaning specified in Section 1.2(a).
"Company Material Adverse Effect" shall mean any fact, circumstance, event,
or condition which has or would have a materially adverse effect on the
business, condition (financial or otherwise), assets, or liabilities of the
Company and the Subsidiary, taken as a whole (after taking into account
insurance recoveries in respect thereof); provided, however, that any actual or
prospective change or changes relating to or resulting from any change or
changes in reserves (including, without limitation, any reclassification or
recalculation of reserves in the ordinary course of business) or in the prices
of oil, gas, natural gas liquids, or other hydrocarbon products, natural
declines in well performance, general economic conditions, or local, regional,
national, or international industry conditions (including, without limitation,
changes in applicable laws or regulations, and changes in financial or market
conditions) shall be deemed not to constitute a "Company Material Adverse
Effect;" and, provided, further, that (a) any change in the financial condition
of the Company resulting from or related to the Company's change of financial
reporting from "full cost" to "successful efforts" accounting, (b) the
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incurrence by the Company of the expenses as provided in Section 5.2(a) and (c)
the payments by the Company as contemplated by Section 5.2(b) shall be deemed
not to constitute a "Company Material Adverse Effect."
"Company Pension Plans" shall have the meaning specified in Section
3.18(a).
"Company Preferred Stock" shall have the meaning specified in Section
1.2(a).
"Company Returns" shall mean all returns, declarations, reports,
statements, and other documents required to be filed by the Company or the
Subsidiary in respect of Taxes, and the term "Company Return" means any one of
the foregoing Company Returns.
"Company Shares" shall have the meaning specified in Section 3.2(a).
"Company Stock" shall have the meaning specified in Section 1.2(a).
"Company Stockholders" shall have the meaning specified in Section 1.4.
"Company Unaudited Balance Sheet Date" shall have the meaning specified in
Section 3.6.
"Company Unaudited Financial Statements" shall have the meaning specified
in Section 3.5.
"Company Welfare Plan" shall have the meaning specified in Section 3.18(a).
"Confidentiality Agreements" shall have the meaning specified in Section
7.8(b).
"Delaware Law" shall have the meaning specified in Section 1.1(a).
"Defensible Title" shall mean, with respect to any Lease or Well, such
record and beneficial right, title, and interest in and to such Lease or Well
that, subject to Permitted Encumbrances:
(a) entitles the Company or the Subsidiary, as applicable, to a Net Revenue
Interest in such Lease or Well that is equal to or greater than the Net Revenue
Interest set forth on Exhibit F therefor, without reduction, suspension, or
diminution throughout the duration of the estate constituting such Property,
except as shown on Exhibit F and except for changes or adjustments that result
from the establishment of units, changes in existing units (or the participating
areas therein), or the entry into of pooling or unitization agreements after the
date hereof or result from or are incidental to operations conducted as
permitted or required by Section 5.1; and
(b) subjects the Company or the Subsidiary, as applicable, to a Working
Interest in such Lease or Well that is no greater than the record title or
operating rights interest set forth on Exhibit F therefor, without increase
throughout the duration of the estate constituting such Property, except as
shown on Exhibit F and except for changes or adjustments that result from the
establishment of units, changes in existing units (or the participating areas
therein), or the entry into of pooling or unitization agreements after the date
hereof or result from or are incidental to operations conducted as permitted or
required by Section 5.1.
In evaluating the significance of any fact, circumstance, or condition for
purposes of determining Defensible Title, due consideration shall be given to
the length of time that the particular Property has been producing hydrocarbons
and whether such fact, circumstance, or condition is of the type expected to be
encountered in the area involved and is usual and customarily acceptable to
reasonable and prudent operators, interest owners, and/or purchasers engaged in
the business of the ownership, development, and operation of oil and gas
properties with knowledge of such facts and appreciation of their legal
significance.
"disposal" or "disposed" shall have the meaning specified in Section 3.15.
"Effective Time" shall have the meaning specified in Section 1.1(b).
"Environmental Laws" shall have the meaning specified in Section 3.15.
"Equipment" shall mean all equipment, fixtures, physical facilities, tank
batteries, surface and subsurface machinery, inventory, spare parts, supplies,
tools, and other tangible personal property owned or leased by the Company or
the Subsidiary on the date hereof, including, without limitation, casing,
tubing, tubular goods,
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rods, pumping units and engines, Christmas trees, derricks, platforms,
separators, compressors, gun barrels, gathering lines, flow lines, tanks, and
communication systems and equipment.
"ERISA" shall have the meaning specified in Section 3.18(a).
"Floor Amount" shall have the meaning specified in Section 8.2(c).
"FTC" shall have the meaning specified in Section 7.2(b).
"GAAP" shall have the meaning specified in Section 3.5.
"Governmental Authority" shall mean (a) the United States of America, (b)
any state, county, municipality, or other governmental subdivision within the
United States of America, and (c) any court or any governmental department,
commission, board, bureau, agency, or other instrumentality of the United States
of America or of any state, county, municipality, water rights, taxing, or
zoning authority, or other governmental subdivision within the United States of
America.
"HSR Act" shall have the meaning specified in Section 3.4.
"Incentive Pool Plan" shall mean that certain Incentive Pool Plan adopted
by the Company effective July 1, 1997.
"Justice Department" shall have the meaning specified in Section 7.2(b).
"Knowledge" when used in relation to any Person shall mean the actual (but
not constructive) knowledge of such Person's officers after reasonable inquiry
and when used in relation to the Company shall mean the actual (but not
constructive) knowledge of Selim K. Zilkha, Michael Zilkha, John B. Holmes, Jr.,
John B. Juneau, Joseph J. Romano, and Elizabeth B. Patterson, after reasonable
inquiry.
"Leases" shall mean the fee mineral interests, oil, gas and mineral
leasehold interests and other leasehold interests, subleases, mineral
servitudes, licenses, concessions, working interests, farmout or farmin rights,
royalty, overriding royalty or other non-working or carried interests, operating
rights, or other rights and interests described or referred to in Exhibit F.
"Licenses" shall have the meaning specified in Section 3.10.
"Liens" shall mean all liens, mortgages, security interests, pledges,
claims, options, and other encumbrances of any kind.
"Long Term Unit Value Plan III" shall mean collectively, those certain Long
Term Unit Value Plan III agreements executed December 15, 1995, but effective
January 1, 1995, between the Company and each of John B. Holmes, Jr., Michael
Zilkha, John B. Juneau, and Joseph J. Romano.
"Marks" shall have the meaning specified in Section 6.7(b).
"Material Contracts" shall have the meaning specified in Section 3.14(a).
"Merger" shall have the meaning specified in Section 1.1(a).
"Merger Consideration" shall have the meaning specified in Section 1.2(a).
"Merger Subsidiary" shall have the meaning specified in Section 1.1(a).
"Net Revenue Interest" means an overall interest in hydrocarbons produced
from or attributable to the Leases and Wells, after deducting all lessors'
royalties, overriding royalties, production payments, and other interests or
burdens on hydrocarbons produced therefrom.
"NYSE" shall have the meaning specified in Section 1.2(a).
"officer" means in the case of Parent and the Company, any executive
officer of Parent or the Company, as applicable, within the meaning of Rule 3b-7
of the 1934 Act.
"Parent" shall have the meaning specified in the introductory paragraph of
this Agreement.
"Parent 10-K" shall have the meaning specified in Section 4.5(a).
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"Parent 10-Q" shall have the meaning specified in Section 4.5(a).
"Parent Affiliate" shall have the meaning specified in Section 7.7(b).
"Parent Common Stock" shall have the meaning specified in Section 1.2(a).
"Parent Employee Plan" shall have the meaning specified in Section 4.15(a).
"Parent Material Adverse Effect" shall mean any fact, circumstance, event,
or condition which has or would have a materially adverse effect on the
business, condition (financial or otherwise), assets, or liabilities of Parent
and its subsidiaries, taken as a whole (after taking into account insurance
recoveries in respect thereof); provided, however, that any actual or
prospective change or changes relating to or resulting from any change or
changes in reserves (including, without limitation, any reclassification or
recalculation of reserves in the ordinary course of business) or in the prices
of oil, gas, natural gas liquids, or other hydrocarbon products, natural
declines in well performance, general economic conditions, or local, regional,
national, or international industry conditions (including, without limitation,
changes in applicable laws or regulations, and changes in financial or market
conditions) shall be deemed not to constitute a "Parent Material Adverse
Effect."
"Parent Returns" shall mean all returns, declarations, reports, statements,
and other documents required to be filed by parent or any of its subsidiaries in
respect of Taxes, and the term "Parent Return" means any one of the foregoing
Parent Returns.
"Parent SEC Filings" shall have the meaning specified in Section 4.5(a).
"Parent Stockholders' Approval" shall have the meaning specified in Section
6.4.
"Parent Stockholders' Meeting" shall have the meaning specified in Section
6.4.
"Parent Unaudited Balance Sheet" shall have the meaning specified in
Section 4.6.
"Parent Unaudited Balance Sheet Date" shall have the meaning specified in
Section 4.6.
"Permitted Encumbrances" shall mean:
(a) lessor's royalties, overriding royalties, nonparticipating
royalties, net profits interests, carried interests, production payments,
reversionary interests, and other burdens, if the net cumulative effect of
such burdens does not operate to reduce the Net Revenue Interest of the
Company or the Subsidiary, as applicable, in any Property to an amount less
than the Net Revenue Interest for such Property set forth on Exhibit F;
(b) easements, rights-of-way, servitudes, permits, licenses, surface
leases, and other rights in respect of surface operations, pipelines,
grazing, logging, canals, ditches, reservoirs or the like; conditions,
covenants or other restrictions; and easements for streets, alleys,
highways, pipelines, telephone lines, power lines, railways, and other
easements and rights-of-way on, over, or in respect of any Property which
will not materially interfere with the operation or use of any of the
affected Properties;
(c) farmout and farmin agreements, participation agreements, joint
operating agreements, division orders, pooling agreements, unitization
orders or agreements, and hydrocarbon sales agreements entered into in the
ordinary course of business;
(d) calls on production, in effect as of the date hereof, which
entitle the Company or the Subsidiary, as the case may be, to receive a
current market price for such production;
(e) Liens for taxes or assessments, to the extent not yet delinquent
or, if delinquent, to the extent being contested in good faith by
appropriate proceedings;
(f) any materialman's, mechanics', repairman's, employees',
contractors', operators', or other similar liens, security interests, or
charges for liquidated amounts arising in the ordinary course of business
incidental to construction, maintenance, drilling, development, production,
or operation of the Properties, or the production, gathering, transporting,
treating, separating, or processing of hydrocarbons
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therefrom, that are not delinquent or, if delinquent, are being contested
in good faith by appropriate proceedings;
(g) all Liens, contracts, agreements, instruments, obligations,
defects, and irregularities affecting the Properties that, individually, or
in the aggregate, are not such as to materially and adversely interfere
with the operation or use of any of Properties, do not prevent the Company
or the Subsidiary, as applicable, from receiving the proceeds of production
from any of the Properties, do not reduce the Net Revenue Interest of the
Company or the Subsidiary, as applicable, for such Property below that set
forth on Exhibit F, and do not obligate the Company or the Subsidiary to
bear costs and expenses relating to the maintenance, development, and
operation of any Properties in an amount greater than the Working Interest
of the Company or the Subsidiary, as applicable, for such Property as set
forth on Exhibit F (unless the actual Net Revenue Interest for such
Property is greater than the Net Revenue Interest set forth on Exhibit F in
the same proportion as any increase in such Working Interest);
(h) any Liens created by law or reserved in oil, gas, and/or mineral
leases for royalty, bonus, or rental, or securing compliance with the terms
of such leases;
(i) all Preference Rights and Transfer Requirements;
(j) all agreements, instruments, documents, Liens, and other matters
described or referred to in Schedule I or in any other Schedule attached
hereto, or which are waived by Parent;
(k) traditional rights of reassignment requiring notice and/or the
reassignment (or granting an opportunity to receive a reassignment) of a
leasehold interest to the holders of such reassignment rights prior to
surrendering or releasing such leasehold interest or operating right;
(l) rights reserved to or vested in any municipality or governmental,
statutory, or public authority to control or regulate any Property in any
manner, and all applicable laws, rules, and orders of a Governmental
Authority; and
(m) any defect, irregularity, deficiencies in title, or other matter
that a reasonable and prudent operator, experienced and knowledgeable in
the offshore Gulf of Mexico oil and gas business, would not consider a
material impairment of the Company's or the Subsidiary's title.
"Person" shall mean an individual, partnership, corporation, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, Governmental Authority or other legal entity of
any kind.
"Pooling Transaction" shall have the meaning specified in Section 3.25.
"Preference Rights" shall mean any right or agreement that purports to
enable any Person to purchase, acquire, or otherwise encumber any Company Common
Stock, Company Preferred Stock, Subsidiary Common Stock, or Property, or any
interest therein or in a portion thereof, as a result of or in connection with
any sale, assignment, encumbrance, or other transfer of any Company Common
Stock, Company Preferred Stock, Subsidiary Common Stock or Property, or any
interest therein.
"Property" or "Properties" shall mean the Leases, Wells and Equipment.
"Proved Reserves" means those oil and gas reserves defined as Proved Oil
and Gas Reserves in the Reserve Report.
"Proxy Statement" shall have the meaning specified in Section 3.26.
"Proxy Statement/Prospectus" shall have the meaning specified in Section
3.26.
"Purchase Price" means $1,044,850,000.
"RCRA" shall have the meaning specified in Section 3.15.
"Registration Statement" shall have the meaning specified in Section 3.26.
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"release" shall have the meaning specified in Section 3.15.
"Reserve Adjustment Amount" shall have the meaning specified in Section
1.3.
"Reserve Engineer" means William M. Cobb & Associates, Inc.
"Reserve Loss Amount" means, for any Reserve Report Field, the difference
between (i) the estimated future net revenues, discounted at 10%, of the Proved
Reserves shown in the Reserve Report for such Reserve Report Field and (ii) the
estimated future net revenues, discounted at 10%, of such Reserve Report Field,
as redetermined by the Reserve Engineer under Section 1.3.
"Reserve Report" shall have the meaning specified in Section 3.19(a).
"Reserve Report Field" means each producing oil or gas field or area shown
in the Reserve Report and to which the Reserve Engineer has assigned Proved
Reserves.
"Retirement Savings Plan" shall mean that certain Retirement Savings Plan
adopted by the Company effective January 1, 1989, and amended effective October
9, 1997.
"Rights Agreement" shall have the meaning specified in Section 4.20.
"Rights Agent" shall have the meaning specified in Section 4.20.
"SEC" shall have the meaning specified in Section 3.25.
"Severance Plan" shall mean that certain Severance Plan adopted by the
Company effective October 9, 1997.
"Stay-On Bonus Program" shall mean that certain Stay-On Bonus Program
adopted by the Company effective September 1, 1997, and amended effective
November 20, 1997.
"Subsidiary" shall have the meaning specified in Section 3.1.
"subsidiary" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other Persons performing similar functions
are at any time directly or indirectly owned by such Person.
"Subsidiary Common Stock" shall have the meaning specified in Section
3.2(b).
"Subsidiary Shares" shall have the meaning specified in Section 3.2(b).
"Surviving Corporation" shall have the meaning specified in Section 1.1(a).
"Tax" or "Taxes" shall have the meaning specified in Section 3.17(a).
"Termination Fee" shall have the meaning specified in Section 10.4(c).
"Transfer Requirements" shall mean any consent, approval, authorization, or
permit of, or filing with or notification to, any Person which is required to be
obtained, made, given or complied with for or in connection with any sale,
assignment, encumbrance, or other transfer of any Company Common Stock, Company
Preferred Stock, Subsidiary Common Stock or Property, or any interest therein.
"Wells" shall mean those oil, condensate, or natural gas wells, water
source wells, and water and other types of injection or disposal wells
identified in Exhibit F.
"Working Interest" shall mean that share of all of the costs, expenses,
burdens, and obligations of any type or nature attributable to the Company's or
the Subsidiary's, as applicable, interest in any Lease or Well.
"Zilkhas" shall have the meaning specified in Section 2.3(b).
A reference in this Agreement to any statute shall be to such statute as
amended from time to time, and the rules and regulations promulgated thereunder.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
ZILKHA ENERGY COMPANY
By: /s/ JOHN B. HOLMES, JR.
----------------------------------
Name: John B. Holmes, Jr.
Title: President
SONAT INC.
By: /s/ WILLIAM A. SMITH
----------------------------------
Name: William A. Smith
Title: Executive Vice President
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EXHIBIT A
TO THE MERGER
AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of ,
by and among Sonat Inc., a Delaware corporation (the "Company"), and
Selim K. Zilkha, Michael Zilkha, Selim K. Zilkha Trust and Selim K. Zilkha
(1996) Annuity Trust (collectively, the "Zilkha Entities"). Capitalized terms
not otherwise defined herein have the meaning ascribed to them in the Merger
Agreement (as hereinafter defined).
WHEREAS, the Company and Zilkha Energy Company, a Delaware corporation
("Zilkha"), have entered into an Agreement and Plan of Merger, dated as of
, 1997 (the "Merger Agreement"), that provides, subject to the terms
and conditions thereof, for the merger (the "Merger") of Zilkha with a wholly
owned subsidiary of the Company.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto hereby agree as follows:
Section 1. Definitions. As used in this Agreement, the following
capitalized terms shall have the following meanings:
"Affiliate" of any Person means any Person that controls, is controlled by,
or is under common control with such Person.
"Common Stock" means the common stock, $1.00 par value per share, of the
Company.
"Effective Time" shall have the meaning specified in the Merger Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"NASD" means The National Association of Securities Dealers, Inc. or any
successor entity.
"Participating Purchasers" means with respect to any Registration
Statement, any Purchasers holding any Registrable Securities covered by such
Registration Statement.
"Person" means an individual, partnership, corporation, limited liability
company, trust, unincorporated organization or other entity, or a government or
agency or political subdivision thereto.
"Prospectus" means the prospectus included in any Registration Statement,
as amended or supplemented by any prospectus supplement with respect to the
terms of the offering or any portion of the Registrable Securities covered by
such Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
"Purchaser(s)" shall mean, collectively, as the context may require the
Zilkha Entities, and shall also include any Affiliate of any Zilkha Entities.
"Registrable Securities" means (a) any of the Securities, and (b) any
securities (of the Company or any other Person) issued or issuable with respect
to any of the Securities by way of stock dividend or stock split, a dividend or
other distribution, in connection with a combination of shares,
recapitalization, reclassification, merger, consolidation or other
reorganization or otherwise. Any Registrable Security will cease to be a
Registrable Security when (i) a registration statement covering such Registrable
Security has been declared effective by the SEC and the Registrable Security has
been disposed of pursuant to such effective registration statement, or (ii) the
Registrable Security is sold under circumstances in which all of the applicable
conditions of Rule 144 (or any similar provision then in force) under the
Securities Act are met.
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"Registration Statement" means the Registration Statement of the Company
that covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus included therein, all amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement.
"Requesting Purchaser(s)" means any one or more Purchasers holding
Registrable Securities representing in the aggregate not less than 50% of the
aggregate Registrable Securities then outstanding.
"SEC" means the Securities and Exchange Commission or any successor entity.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Securities" means any of the Common Stock held by Zilkha Entities as of
the Effective Time.
"Underwritten Registration" or "Underwritten Offering" means a registration
in which securities of the Company are sold to an underwriter for re-offering to
the public.
Section 2. Registration Rights.
(a) Demand Registration.
(i) At any time during the five-year period following the Effective
Time, one or more Requesting Purchasers may make a written request (the
"Demand Notice") for registration under the Securities Act (a "Demand
Registration") of any Registrable Securities (such securities are herein
referred to as "Demand Securities") held by such Requesting Purchasers.
The Demand Notice will specify the number of Demand Securities proposed
to be sold and will also specify the intended method of disposition
thereof. Once given, a Demand Notice will be irrevocable. Following
receipt of a Demand Notice from such Requesting Purchasers, the Company
promptly will give written notice of the requested registration to all
other Purchasers, and will thereafter file a registration statement on
any appropriate form which will cover (1) the Demand Securities that the
Company has been so requested to register by such Requesting Purchasers,
(2) all other Demand Securities that the Company has been requested to
registered by any other Purchasers by written request given to the
Company within 15 days after the Company's giving of written notice of
the Requesting Purchasers' requested registration and (3) any other
securities the Company determines to register for its own account.
(ii) Unless the Requesting Purchasers shall consent in writing, no
party (other than the Company or any other Purchaser) shall be permitted
to offer securities under any such Demand Registration. The Company
shall not be required to effect more than three Demand Registrations
under this Section 2(a). A registration requested pursuant to this
Section 2(a) will not be deemed to have been effected (and it shall not
count as one of the three Demand Registrations) unless the Registration
Statement relating thereto has become effective under the Securities
Act; provided, however, that if, after such Registration Statement has
become effective, the offering of the Demand Securities pursuant to such
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 it shall
not count as one of the three Demand Registrations).
(iii) If the Requesting Purchasers so elect, the offering of Demand
Securities pursuant to such registration shall be in the form of an
Underwritten Offering. If the managing underwriter or underwriters of
such offering advise the Company and the Participating Purchasers that
in their view the number of Demand Securities requested to be included
in such offering is sufficiently large so as to materially and adversely
affect the success of such offering, the Company will include in such
registration the aggregate number of Demand Securities which in the view
of such managing underwriter or underwriters can be sold without any
such material adverse effect; provided, however, that no Demand
Securities may be excluded before all securities proposed to be sold by
the Company and any other Person have been excluded. If any Demand
Securities are excluded, such registration shall not count as one of the
three Demand Registrations. If any Demand Securities are required to be
excluded pursuant to this Section 2(a), the number of Demand Securities
of each
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Participating Purchaser to be included in such registration shall be
reduced pro rate (according to the total number of Demand Securities
beneficially owned by each such holder), to the extent necessary to
reduce the total number of Demand Securities to be included in the
offering to the number recommended by such managing underwriter or
underwriters.
(iv) Notwithstanding anything in this Agreement to the contrary,
the Company may postpone the filing, effectiveness, supplementing or
amending of a Registration Statement (a "Demand Suspension Notice") for
up to 90 days if, in the good faith judgment of the Company's Board of
Directors, the registration or sale of the Demand Securities would
adversely affect a material financing, acquisition, disposition of
assets or stock, merger or other comparable transaction or would require
the Company to make public disclosure of information the public
disclosure of which would have a material adverse effect upon the
Company; provided further, however that the Company may not give more
than one Demand Suspension Notice in any 12 month period. If the Company
shall deliver any Demand Suspension Notice with respect to any Demand
Registration, such Demand Registration shall not be counted in
determining whether the Company is required to file more than three
Demand Registrations pursuant to this Agreement.
(b) Incidental Registration. If at any time during the five year
period following the Effective Time, the Company proposes to file a
registration statement under the Securities Act (other than in connection
with a Demand Registration or a Registration Statement on Form S-4 or S-8,
or any form that is substituting therefor or is a successor thereto) with
respect to an offering of any Common Stock for its own account, then the
Company shall give written notice of such proposed filing to all Purchasers
as soon as practicable (but in no event less than three business days
before the anticipated filing date), and such notice shall (i) offer each
Purchaser the opportunity to register such number of Registrable Securities
as it may request and (ii) describe such securities and specifying the form
and manner and other relevant facts involved in such proposed registration
(including, without limitation, whether or not such registration will be in
connection with an Underwritten Offering and, if so, the identity of the
managing underwriter and whether such Underwritten Offering will be
pursuant to a "best efforts" or "firm commitment" underwriting). Each
Purchaser shall advise the Company in writing within two business days
after the date of receipt of such notice from the Company of the number of
Registrable Securities for which registration is requested. The Company
shall include in such Registration Statement all such Registrable
Securities so requested to be included therein, and, if such registration
is an Underwritten Registration, the Company shall use its best efforts to
cause the managing underwriter or underwriters to permit the Registrable
Securities requested to be included in the registration statement for such
offering to be included (on the same terms and conditions as similar
securities of the Company included therein to the extent appropriate);
provided, however, that if in the view of the managing underwriter or
underwriters of such offering the success of the offering would be
materially and adversely affected by inclusion of the Registrable
Securities requested to be included, then (I) the amount of securities to
be offered for the account of each Participating Purchaser and other
holders registering securities of the Company pursuant to similar
incidental registration rights shall be reduced pro rata (according to the
Registrable Securities beneficially owned by each such holder) to the
extent necessary to reduce the total amount of securities to be included in
such offering to the amount recommended by such managing underwriter or
underwriters; and (II) if the actions described in clause (I) would, in the
reasonable good faith judgment of the managing underwriter, be insufficient
to substantially eliminate the adverse effect that inclusion of the
Registrable Securities requested to be included would have on such
offering, such Registration Securities will be excluded from such offering.
Nothing in this Agreement shall prevent the Company from granting any other
Person or Persons any incidental registration rights on offerings by or on
behalf of the Company from time to time.
Section 3. Hold-Back Agreements. Each Purchaser agrees, if reasonably
requested by the managing underwriters in an Underwritten Offering to which the
provisions of Section 2(b) apply, not to effect any public sale or public
distribution of securities of the Company of the same class as the securities
included in the Registration Statement relating to such Underwritten Offering,
including a sale pursuant to Rule 144 under the Securities Act (except as part
of such Underwritten Offering), during the 10-day period prior to the
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filing of such Registration Statement, and during the 90-day period beginning on
the closing date of each Underwritten Offering made pursuant to such
Registration Statement, to the extent timely notified in writing by the Company
or the managing underwriters.
Section 4. Registration Procedures.
(a) In connection with the Company's registration obligations pursuant
to Section 2 hereof, the Company will use its best efforts to effect such
registration to permit the sale of such Registrable Securities in
accordance with the intended method or methods of distribution thereof, and
pursuant thereto, the Company will use its best efforts to as expeditiously
as possible:
(i) prepare and file with the SEC, as soon as practicable, and in
any event within 60 days from the date of request (unless a shorter
period is expressly set forth herein), a Registration Statement relating
to the applicable registration on any appropriate form under the
Securities Act, which forms shall be available for the sale of the
Registrable Securities in accordance with the intended method or methods
of distribution thereof and shall include all financial statements of
the Company, and use its best efforts to cause such Registration
Statement to become effective; provided that before filing a
Registration Statement or Prospectus or any amendments or supplements
thereto, including documents incorporated by reference after the initial
filing of the Registration Statement, the Company will furnish each
Participating Purchaser and the underwriters, if any, copies of all such
documents proposed to be filed, which documents will be subject to the
review of the Participating Purchasers and the underwriters, if any, and
the Company will not file any Registration Statement or amendment
thereto or any Prospectus or any supplement thereto (including such
documents incorporated by reference) to which Participating Purchasers
holding in the aggregate in excess of 50% of the Registrable Securities
covered by such Registration Statement or the underwriters, if any,
shall reasonably object;
(ii) prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for the
applicable period, or such shorter period which will terminate when all
Registrable Securities included in such Registration Statement have been
sold; cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of all
securities included in such Registration Statement during the applicable
period in accordance with the intended method or methods of distribution
by the sellers thereof set forth in such Registration Statement or
supplement to the Prospectus; the Company shall not be deemed to have
used best efforts to keep a Registration Statement effective during the
applicable period if it voluntarily takes any action that would result
in any Participating Purchaser not being able to sell its Registrable
Securities during that period unless such action is required under
applicable law;
(iii) notify each Participating Purchase and the managing
underwriters, if any, promptly, and (if requested by any such Person)
confirm such advice in writing, (1) when the Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and,
with respect to the Registration Statement or any post-effective
amendment, when the same has become effective, (2) of any request by the
SEC for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (3) of the issuance by the SEC
of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, (4) if
at any time the representations and warranties of the Company
contemplated by Section 4(a)(xiv) cease to be true and correct, (5) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Securities for sale
in any jurisdiction or the initiation or threatening of any proceeding
for such purpose and (6) of the happening of any event which makes any
statement made in the Registration Statement, the Prospectus or any
document incorporated therein by reference untrue or which requires the
making of any changes in the Registration Statement, the Prospectus or
any document incorporated therein by reference in order to make the
statements therein not misleading;
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(iv) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Registration Statement at the
earliest possible moment;
(v) if reasonably requested by the managing underwriter or
underwriters or by Participating Purchasers holding in the aggregate in
excess of 50% of the Registrable Securities covered by the Registration
Statement, promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters
and such Participating Purchasers agree should be included therein
relating to the sale of the Registrable Securities, including, without
limitation, information with respect to the number of Registrable
Securities being sold to such underwriters, the purchase price being
paid therefor by such underwriters and with respect to any other terms
of the Underwritten Offering of the Registrable Securities to be sold in
such offering; and make all required filing of such Prospectus
supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or
post-effective amendment;
(vi) prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the
Prospectus (after initial filing of the Registration Statement), make
available representatives of the Company for discussion of such document
and make such changes in such document prior to the filing thereof as
any Participating Purchaser or the underwriters, if any, may reasonable
request;
(vii) furnish to each Participating Purchaser and each managing
underwriter, if any, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto,
including financial statements and schedules, all documents incorporated
therein by reference and all exhibits (including those incorporated by
reference);
(viii) deliver to each Participating Purchaser and the
underwriters, if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement
thereto as such Persons may reasonable request; the Company consents to
the use of the Prospectus or any amendment or supplement thereto by any
such Purchasers and the underwriters, if any, in connection with the
offering and sale of the Registrable Securities covered by the
Prospectus or any amendment or supplement thereto;
(ix) prior to any public offering of Registrable Securities,
register or qualify or cooperate with each Participating Purchaser, the
underwriters, if any, and their respective counsel in connection with
the registration or qualification of such Registrable Securities for
offer and sale under the securities or blue sky laws of such
jurisdictions as any Participating Purchaser or any underwriter
reasonably requests in writing and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by the Registration Statement;
(x) cooperate with the Participating Purchasers and the managing
underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriters may request at least two (2) business days prior to any
sale of Registrable Securities to the underwriters;
(xi) cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable each
Participating Purchaser or the underwriters, if any, to consummate the
disposition of such Registrable Securities;
(xii) upon the occurrence of any event contemplated by Section
4(a)(iii)(6) hereof, prepare a supplement or post-effective amendment to
the Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to Purchasers of the Registrable
Securities, the Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
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(xiii) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
(xiv) enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith in
order to expedite or facilitate the disposition of such Registrable
Securities and in connection therewith, whether or not an underwriting
agreement is entered into and whether or not the registration is an
Underwritten Registration, (1) make such representations and warranties
to each Participating Purchaser and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters
in primary underwritten offerings; (2) obtain opinions of counsel to the
Company and updates thereof (which counsel and opinions, in form, scope
and substance) shall be reasonably satisfactory to each Participating
Purchaser and the managing underwriters, if any, covering the matters
customarily covered in opinions requested in Underwritten Offerings and
such other matters as may be reasonably requested by any Participating
Purchaser and the underwriters, if any; (3) obtain "cold comfort"
letters and updates thereof from the Company's independent certified
public accountants addressed to each Participating Purchaser and the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters in connection with primary underwritten offerings; (4) if
an underwriting agreement is entered into, the same shall set forth in
full the indemnification provisions and procedures of Section 6 hereof
with respect to all parties to be indemnified pursuant to said
underwriting agreement; and (5) deliver such documents and certificates
as may be requested by any Participating Purchaser and the managing
underwriters, if any, to evidence compliance with clause (1) above and
with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Company. The above shall be done at
each closing under such underwriting or similar agreement or as and to
the extent required thereunder;
(xv) make available for inspection by a representative of any
Participating Purchaser, any underwriter participating in any
disposition pursuant to such registration, and any attorney or
accountant retained by any Participating Purchaser or any underwriter,
all financial and other records, pertinent corporate documents and
properties of the Company and cause the Company's officers, directors
and employees to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with
such registration; provided that any records, information or documents
that are designated by the Company in writing as confidential shall be
kept confidential by such Persons unless disclosure of such records,
information or documents is required by court or administrative order;
(xvi) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable, an earnings statement
covering a period of twelve (12) months, beginning within three months
after the effective date of the Registration Statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(xvii) cooperate with the Participating Purchasers and each
underwriter participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings
required to be made with the NASD;
(xviii) in the case of any Demand Registration which is an
Underwritten Offering, participate in customary "roadshow" and similar
marketing presentations as reasonably requested by the underwriters (it
being agreed that representatives of the Zilkha Entities may participate
in such roadshows to the extent the underwriters determine it is
advisable for them to do so); and
(xix) take such other actions as reasonably may be requested by the
Participating Purchasers in order to effect the applicable registration.
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(b) The Company may require each Purchaser to furnish to the Company
such information regarding the distribution of Registrable Securities as
the Company may from time to time reasonably request in writing.
(c) Each Purchaser agrees by acquisition of the Registrable Securities
that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 4(a)(iii)(6) hereof, such Purchaser
will forthwith discontinue disposition of Registrable Securities until such
Purchaser's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(a)(xii) hereof, 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 Purchaser will deliver to the Company (at Company's
expense), all copies, other than permanent file copies then in such
Purchaser's possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice. In the event the
Company shall give any such notice, the time periods regarding the
effectiveness of Registration Statements set forth in Section 2 hereof and
Section 4(b) hereof shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 4(a)(iii)(6) hereof to the date when such Purchaser shall receive
copies of the supplemented or amended Prospectus contemplated by Section
4(a)(xii) hereof or the Advice, as applicable.
Section 5. Registration Expenses. All expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation:
all registration and filing fees; fees with respect to filings required to be
made with the NASD; fees and expenses of compliance with securities or blue sky
laws (including fees and disbursements of counsel for the underwriters or the
Purchasers in connection with blue sky qualifications of the Registrable
Securities and determination of their eligibility for investment under the laws
of such jurisdictions as the managing underwriters and Purchasers may
designate); printing expenses, messenger, telephone and delivery expenses; fees
and disbursements of counsel for the Company, for the underwriters and for one
counsel for the Participating Purchasers and fees and expenses for independent
certified public accountants retained by the Company (including the expenses of
any comfort letters or costs associated with the delivery by independent
certified public accountants of a comfort letter or comfort letters requested
pursuant to Section 4(a)(xiv) hereof); securities acts liability insurance, if
the Company so desires; all internal expenses of the Company (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties); the expense of any annual audit; the fees and
expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which similar securities issued by the
Company are then listed; and the fees and expenses of any Person, including
special experts, retained by the Company (all such expenses being herein called
"Registration Expenses") will be borne by the Company regardless of whether the
Registration Statement becomes effective. The Company shall not have any
obligation to pay any underwriting fees, discounts or commissions attributable
to the sale of Registrable Securities.
Section 6. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless the Zilkha Entities and each Purchaser and their
respective partners, officers, directors, employees and agents, and each
Person who controls any such Persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) against all losses,
claims, damages, liabilities and expenses arising out of or based upon any
untrue or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by the Zilkha Entities or
such Purchaser, as the case may be, expressly for use therein. The Company
will also indemnify underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the
distribution, their officers and directors and each Person who controls
such Persons (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) to the same extent as provided above with
respect to the indemnification of the
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Zilkha Entities and each Purchaser, if requested, and shall otherwise
entered in such indemnification and contribution agreements with such
underwriters, selling brokers, dealer managers and similar securities
industry professionals as are then customary.
(b) Indemnification By Holder of Registrable Securities. Each
Purchaser, severally and not jointly, agrees to indemnify and hold harmless
the Company and its directors, officers, employees and agents, and each
Person who controls the Company (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue
statement of a material fact or any omission of a material fact required to
be stated in the Registration Statement or Prospectus or preliminary
prospectus or necessary to make the statements therein not misleading, to
the extent, but only to the extent, that such untrue statement or omission
is contained in any information furnished by such Purchaser to the Company
specifically for inclusion in such Registration Statement or Prospectus.
The Company shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as
provided above with respect to information so furnished in writing by such
Persons specifically for inclusion in any Prospectus or Registration
Statement.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying
party of any claim with respect to which it seeks indemnification (although
the failure to give prompt notice shall not relieve any indemnifying party
of any obligation hereunder except to the extent such indemnifying party is
actually prejudiced by such failure) and (ii) 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 (1) the indemnifying party has agreed to pay each fees or expenses,
(2) the indemnifying party shall have failed to assume the defense of such
claim and employ counsel reasonably satisfactory to such Person or (3)
based upon written advice of counsel to such Person, there shall exist
conflicts of interest pursuant to applicable rules of professional conduct
between such Person and the indemnifying party, in which case the fees and
expenses of one counsel to the indemnified parties shall be at the expense
of the indemnifying party. The indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent
will not be unreasonably withheld), but if settled with its written
consent, or if there be a final judgment for the plaintiff in any such
action or proceeding, the indemnifying party shall indemnify and hold
harmless the indemnified parties from and against any loss or liability (to
the extent stated above) by reason of such settlement or judgment.
(d) Contribution. If for any reason the indemnification provided for
in the preceding clauses (a) and (b) is unavailable to an indemnified party
or insufficient to hold it harmless in respect of any loss, claim, damage,
liability or expense as contemplated by the preceding clauses (a) and (b),
then the indemnifying party shall contribute to the amount paid or payable
by the indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect not only the
relative benefits received by the indemnified party and the indemnifying
party, but also the relative benefits received by the indemnified party and
the indemnifying party, but also the relative fault of the indemnified
party and the indemnifying party, as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and of
Purchasers on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 10(f) of the Securities Act) shall be
entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentations.
Section 7. Rule 144. The Company hereby agrees that, for a period of five
years from the Effective Time, it will file the reports required to be filed by
it under the Securities Act and the Exchange Act and the
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rules and regulations adopted by the SEC thereunder (or, if Company is not
required to file such reports, it will, upon the request of any Purchaser, make
publicly available other information so long as necessary to permit sales
pursuant to Rule 144 under the Securities Act), and it will take such further
action as any Purchaser may reasonably request, all to the extent required from
time to time to enable each Purchaser to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (b) any similar rule or regulation hereafter adopted by
the SEC.
Section 8. Participation in Underwritten Registrations.
(a) If any of the Registrable Securities are to be sold in an
Underwritten Offering, whether pursuant to a Demand Registration or
otherwise, the investment banker or investment bankers and manager or
managers that will administer the offering will be selected by the Company.
In the case of any Underwritten Offering or Underwritten Registration, the
underwriting agreement will provide that the underwriters will use their
best efforts to cause such Underwritten Offering to be widely distributed.
(b) No Person may participate in any Underwritten Registration
hereunder unless such Person completes and executes all customary and
reasonably requested questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of
such underwriting arrangements. Nothing in this Section 8 shall be
construed to create any additional rights regarding the registration of
Registrable Securities in any Person otherwise than as set forth herein.
Section 9. Miscellaneous.
(a) Remedies. Each party hereto, in addition to being entitled to
exercise all rights provided herein or granted by law, including recovery
of damages, will be entitled to specific performance of its rights under
this Agreement to the extent available under applicable law. Each party
hereto agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may only be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may only be given, with the written consent of the Company and the
holders of a majority of the Registrable Securities.
(c) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telecopier, or air courier guaranteeing overnight
delivery:
(i) if to any of Purchasers:
(ii) if to the Company:
and thereafter at such other address as may be designated from time to time
by notice given in accordance with the provisions of this Section 9(c).
(d) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties.
Except for the indemnification and contribution rights under this Agreement
(which are intended to and shall create third party beneficiary rights),
the provisions of this Agreement are solely for the benefit of the parties
and are not intended to confer upon any Person except the parties any
rights or remedies hereunder, and there are no third party beneficiaries of
this Agreement.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
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(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO, SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF DELAWARE,
WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS.
(h) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
(i) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
SONAT INC.
By:
----------------------------------
Name:
Title:
------------------------------------
Selim K. Zilkha
------------------------------------
Michael Zilkha
SELIM K. ZILKHA TRUST
By:
----------------------------------
Name:
Title:
SELIM ZILKHA (1996) ANNUITY TRUST
By:
----------------------------------
Name:
Title:
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EXHIBIT B-1
TO THE MERGER
AGREEMENT
COMPANY AFFILIATES
Michael Zilkha
Selim K. Zilkha
Selim K. Zilkha Trust
Selim K. Zilkha (1996) Annuity Trust
<PAGE> 135
ZILKHA ENERGY COMPANY AFFILIATE LETTER
November 22, 1997
Zilkha Energy Company
1201 Louisiana, Suite 3200
Houston, Texas 77002
Sonat Inc.
Amsouth-Sonat Tower
Birmingham, Alabama 35203
Gentlemen:
The undersigned has been advised that as of the date of this letter the
undersigned may be deemed to be an "affiliate" of Zilkha Energy Company, a
Delaware corporation (the "Company"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended (the "Act"). Pursuant to the terms
of the Agreement and Plan of Merger dated as of November 22, 1997 (the
"Agreement"), between the Company and Sonat Inc., a Delaware corporation
("Parent"), a newly formed wholly owned subsidiary of Parent ("Merger
Subsidiary") will be merged with and into the Company with the Company to be the
surviving corporation in the merger (the "Merger").
As a result of the Merger, the undersigned will receive shares of Common
Stock, par value $1.00 per share, of Parent (the "Parent Common Stock") in
exchange for shares of Common Stock, par value $1.00 per share, of the Company
(the "Company Common Stock") owned by the undersigned.
The undersigned agrees that the undersigned will not revoke or otherwise
rescind its approval of the Merger. It is understood that the foregoing
agreement shall not affect the rights of the Company under the Agreement,
including the right of the Company to terminate the Agreement and the Merger as
provided therein.
The undersigned represents, warrants and covenants to Parent and the
Company that in the event the undersigned receives any Parent Common Stock as a
result of the Merger:
A. The undersigned shall not make any sale, transfer or other disposition
of the Parent Common Stock in violation of the Act or the Rules and Regulations.
B. The undersigned has carefully read this letter and the Agreement and
discussed the requirements of such documents and other applicable limitations
upon the undersigned's ability to sell, transfer or otherwise dispose of the
Parent Common Stock to the extent the undersigned felt necessary with the
undersigned's counsel or counsel for the Company.
C. The undersigned has been advised that the issuance of Parent Common
Stock to the undersigned pursuant to the Merger will be registered with the SEC
under the Act on a Registration Statement on Form S-4. However, the undersigned
has also been advised that, since at the time the Merger is submitted for a vote
of the stockholders of Company, the undersigned may be deemed to be an affiliate
of the Company, the undersigned may not sell, transfer or otherwise dispose of
the Parent Common Stock issued to the undersigned in the Merger unless (i) such
sale, transfer or other disposition has been registered under the Act, (ii) such
sale, transfer or other disposition is made in conformity with Rule 145
promulgated by the SEC under the Act, or (iii) in the opinion of counsel
reasonably acceptable to Parent, or pursuant to a "no action" letter obtained by
the undersigned from the staff of the SEC, such sale, transfer or other
disposition is otherwise exempt from registration under the Act.
D. From and after the date that is 30 days prior to the Effective Time (as
defined in the Agreement) the undersigned shall not offer to sell, sell or
otherwise dispose of, or in any other way reduce the undersigned's risk relative
to, any shares of Parent Common Stock or Company Common Stock (other than by way
of conversion into shares of Parent Common Stock pursuant to the Merger) in any
case until an earnings
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<PAGE> 136
statement containing at least 30 days of post-Merger combined financial results
of Parent and the Company have been issued in a manner satisfying the
requirements of SEC Accounting Release No. 135.
E. The undersigned will not take or fail to take any action reasonably
likely to cause the Merger not to qualify as a 368 Reorganization (as defined in
the Agreement) or to be treated as a Pooling Transaction (as defined in the
Agreement).
F. The undersigned understands and agrees that this letter agreement shall
apply to all shares of the capital stock of Parent and the Company that are
deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
G. The undersigned understands that, as an affiliate of the Company, the
undersigned possesses information about the Company which may be considered
confidential and agrees to keep all such information confidential after the
Merger.
H. The undersigned further understands and agrees that the representations,
warranties, covenants and agreements of the undersigned set forth herein are for
the benefit of Parent, Company and the Surviving Corporation (as defined in the
Agreement) and will be relied upon by such entities and their respective counsel
and accountants.
Execution of this letter should not be considered an admission on the part
of the undersigned that the undersigned is an "affiliate" of the Company as
described in the first paragraph of this letter or as a waiver of any rights the
undersigned may have to object to any claim that the undersigned is such an
affiliate on or after the date of this letter.
Very truly yours,
------------------------------------
Signature
------------------------------------
Print Name
Accepted this day of
, 1997
ZILKHA ENERGY COMPANY
By:
--------------------------------
Name:
Title:
Dated:
SONAT INC.
By:
-----------------------------------------------------
Name:
Title:
Dated:
2
<PAGE> 137
EXHIBIT B-2
TO THE MERGER AGREEMENT
SONAT INC. AFFILIATE LETTER
, 1997
Zilkha Energy Company
1201 Louisiana, Suite 3200
Houston, Texas 77002
Gentlemen:
The undersigned has been advised that as of the date of this letter the
undersigned may be deemed to be an "affiliate" of Sonat Inc., a Delaware
corporation ("Parent"), as the term "affiliate" is defined for purposes of
paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger dated as of November 22, 1997 (the "Agreement"),
between Parent and Zilkha Energy Company, a Delaware corporation (the
"Company"), a newly formed wholly owned subsidiary of Parent ("Merger
Subsidiary") will be merged with and into the Company with the Company to be the
surviving corporation in the merger (the "Merger").
The undersigned represents, warrants and covenants to Parent and the
Company that:
A. From and after the date that is 30 days prior to the Effective Time (as
defined in the Agreement) the undersigned shall not offer to sell, sell or
otherwise dispose of, or in any other way reduce the undersigned's risk relative
to, any shares of Parent Common Stock in any case until an earnings statement
containing at least 30 days of post-Merger combined financial results of Parent
and the Company have been issued in a manner satisfying the requirements of SEC
Accounting Release No. 135.
B. The undersigned will not take or fail to take any action reasonably
likely to cause the Merger not to qualify as a 368 Reorganization (as defined in
the Agreement) or to be treated as a Pooling Transaction (as defined in the
Agreement).
C. The undersigned further understands and agrees that the representations,
warranties, covenants and agreements of the undersigned set forth herein are for
the benefit of Parent, Company and the Surviving Corporation (as defined in the
Agreement) and will be relied upon by such entities and their respective counsel
and accountants.
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Execution of this letter should not be considered an admission on the part
of the undersigned that the undersigned is an "affiliate" of Parent as described
in the first paragraph of this letter or as a waiver of any rights the
undersigned may have to object to any claim that the undersigned is such an
affiliate on or after the date of this letter.
Very truly yours,
------------------------------------
Signature
------------------------------------
Print Name
ACCEPTED:
ZILKHA ENERGY COMPANY
By:
------------------------------------
Name:
Title:
Dated:
SONAT INC.
By:
----------------------------------------------------
Name:
Title:
Dated:
2
<PAGE> 139
EXHIBIT C
TO THE MERGER AGREEMENT
ZILKHA ENERGY COMPANY
1201 Louisiana, 32nd Floor
Houston, Texas 77002
Gentlemen:
The undersigned, being a prospective holder of stock in Sonat, Inc., a
Delaware corporation ("Sonat"), by reason of the merger (the "Merger") of Zilkha
Energy Company, a Delaware corporation ("Zilkha"), with and into Merger
Subsidiary, a Delaware corporation and wholly-owned subsidiary of Sonat, does
hereby represent to you and the other stockholders of Zilkha as follows:
The undersigned has, and at the time of the closing of the Merger the
undersigned will have, no plan or intention to sell, exchange or otherwise
dispose of (including by gift) any shares of the common stock, par value $1.00
per share, of Sonat ("Sonat Common Stock") received by the undersigned, directly
or indirectly, in the Merger that would reduce my ownership of Sonat Common
Stock to a number of shares having a value, as of the Effective Time, of less
than fifty percent (50%) of the total value of the common stock, par value $1.00
per share, of Zilkha and 11% cumulative preferred stock, no par value, of Zilkha
owned by the undersigned immediately prior to the Effective Time.
The undersigned agrees that should the facts or circumstances on which any
of the foregoing representations are based change between the date of this
letter and the closing of the Merger, the undersigned will immediately notify
Zilkha, at the above address, of the changed facts and circumstances.
The undersigned agrees that the foregoing representations may be relied on
(i) by Zilkha and Sonat, and their respective legal counsel, in connection with
opinions as to the tax consequences of the Merger to be rendered by such
counsel, and as more fully described in the Proxy Statement/Prospectus
distributed by Sonat in connection with the approval of the Merger, and (ii) by
the boards of directors of Zilkha and Sonat in proceeding with the Merger.
Very truly yours,
Signature:
------------------------------------
Printed Name:
------------------------------------
Date:
------------------------------------
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<PAGE> 140
EXHIBIT D
TO THE MERGER AGREEMENT
SONAT INC.
November , 1997
Bracewell & Patterson L.L.P.
2900 South Tower Pennzoil Place
Houston, Texas 77002
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
600 Travis
Houston, TX 77002
Ladies and Gentlemen:
In connection with the opinion to be delivered pursuant to Sections 8.2(b)
and 8.3(b) of the Agreement and Plan of Merger (the "Agreement") dated as of
November 22, 1997, between Zilkha Energy Company, a Delaware corporation
("Company") and Sonat Inc., a Delaware corporation ("Parent"), the undersigned
officers of Parent and Merger Subsidiary (as defined in the Agreement) hereby
certify and represent as to Parent and Merger Subsidiary that the facts relating
to the merger (the "Merger") of Merger Subsidiary with and into Company pursuant
to the Agreement, and as described in the Company Proxy Statement dated
(the "Proxy Statement") are true, correct and complete in all
respects at the Effective Time and that:
1. The consideration to be received in the Merger by holders of common
stock, $1.00 par value, of the Company ("Company Common Stock") and 11%
cumulative preferred stock, no par value, of the Company ("Company Preferred
Stock" and, together with the Company Common Stock, "Company Stock") was
determined by arm's length negotiations between the managements of Parent and
Company. In connection with the Merger, no holder of Company Stock will receive
in exchange for such stock, directly or indirectly, any consideration other than
Parent Common Stock (as defined in the Agreement) and, in lieu of fractional
shares of Parent Common Stock, cash.
2. To the knowledge of the management of Parent and Merger Subsidiary,
there is no plan or intention on the part of the holders of Company Stock to
sell, exchange, transfer or otherwise dispose (including by transactions such as
a short sale or an equity swap which would have the economic effect of a
disposition) of a number of shares of Parent Common Stock to be received by them
in connection with the Merger that would reduce the Company stockholders'
ownership of Parent Common Stock to a number of shares having a value, as of the
Effective Time, of less than 50% of the total value of all of the formerly
outstanding capital stock of Company immediately prior to the Effective Time.
For purposes of this representation, shares of Company Stock exchanged for cash
or other property or exchanged for cash in lieu of fractional shares of Parent
Common Stock are treated as outstanding shares of Company Stock at the Effective
Time. Moreover, shares of Company Stock that are sold, redeemed or disposed of
prior to the Merger and in contemplation or as part of the Merger, and shares of
Parent Common Stock that are held by holders of Company Stock at or prior to the
Effective Time and that are otherwise sold, redeemed, or disposed of subsequent
to the Merger will be taken into account for purposes of this representation.
3. After the Merger, to the knowledge of the management of Parent, Company
will hold at least 90% of the fair market value of the net assets and at least
70% of the fair market value of the gross assets held by Merger Subsidiary
immediately prior to the Merger, and at least 90% of the fair market value of
the net assets and at least 70% of the fair market value of the gross assets
held by Company immediately prior to the Merger. For purposes of this
representation, assets of Merger Subsidiary or Company held immediately prior
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<PAGE> 141
to the Merger include amounts paid or incurred by Merger Subsidiary or Company
in connection with the Merger, including amounts used to pay reorganization
expenses and all payments, redemptions and distributions made in contemplation
or as part of the Merger. Any dispositions in contemplation or as part of the
Merger of assets held by Merger Subsidiary prior to the Merger will be for fair
market value.
4. Prior to the Merger, Parent will be in control of Merger Subsidiary
within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as
amended (the "Code"). Merger Subsidiary has been formed solely in order to
consummate the Merger, and at no time has or will Merger Subsidiary conduct any
business activities or other operations of any kind other than the issuance of
its stock to Parent prior to the Effective Time.
5. Following the Merger, Company has no plan or intention to issue and
Parent has no plan or intention to cause Company to issue additional shares of
capital stock that would result in Parent losing control of Company within the
meaning of Section 368(c) of the Code.
6. Neither Parent nor any corporation affiliated with Parent has any plan
or intention to purchase, redeem or otherwise acquire any of the Parent Stock
issued pursuant to the Merger.
7. Parent has no plan or intention to liquidate Company, to merge Company
with or into another corporation, to sell, exchange, transfer or otherwise
dispose of any stock of Company or to cause Company to sell, exchange, transfer
or otherwise dispose of any of its assets or of any assets acquired from Merger
Subsidiary in the Merger, except for (i) dispositions made in the ordinary
course of business, (ii) transfers described in Section 368(a)(2)(C) of the
Code, or (iii) asset dispositions to the extent that all such dispositions,
sale, transfer or exchange of assets will not, in the aggregate, violate
paragraph 3 of this letter.
8. In the Merger, Merger Subsidiary will have no liabilities assumed by
Company and will not transfer to Company any assets subject to liabilities.
9. Following the Merger, Company will continue (and Parent will cause
Company to continue) its historic business or use a significant portion of its
historic business assets in a business.
10. Parent and Merger Subsidiary each will pay its or their own expenses,
if any, incurred in connection with or as part of the Merger or related
transactions. Neither Parent nor Merger Subsidiary has paid or will pay,
directly or indirectly, any expenses (including transfer taxes) incurred by any
holder of Company Stock in connection with or as part of the Merger or any
related transactions. Neither Parent nor Merger Subsidiary has agreed to assume,
nor will it directly or indirectly assume, any expense or other liability,
whether fixed or contingent, of any holder of Company Stock.
11. There is no intercorporate indebtedness existing between Parent and
Company or between Merger Subsidiary and Company that was issued, acquired or
will be settled at a discount.
12. All shares of Parent Common Stock into which shares of Company Stock
will be converted pursuant to the Merger will be newly issued or treasury
shares, and will be issued by Parent directly to holders of Company Stock
pursuant to the Merger.
13. In the Merger, shares of Company Stock representing control of Company,
as defined in Section 368(c) of the Code, will be exchanged solely for voting
stock of Parent. For purposes of this representation, any shares of Company
Stock exchanged for cash or other property will be treated as outstanding
Company Stock at the Effective Time.
14. In the Merger, no liabilities of stockholders of Company will be
assumed by Parent, and none of the Company Stock acquired by Parent will be
subject to liabilities. Furthermore, there is no plan or intention for Parent to
assume any liabilities of Company.
15. Neither Parent nor Merger Subsidiary is an "investment company" within
the meaning of Section 368(a)(2)(F) of the Code.
16. The payment of cash in lieu of fractional shares of Parent Common Stock
to holders of Company Stock is solely for the purpose of avoiding the expense
and inconvenience to Parent of issuing fractional shares
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<PAGE> 142
and does not represent separately bargained for consideration. The total cash
consideration that will be paid in the Merger to the holders of Company Stock
instead of issuing fractional shares of Parent Common Stock will not exceed one
percent of the total consideration that will be issued in the Merger to the
holders of Company Stock with respect to their shares of Company Stock. The
fractional share interests in Parent of each holder of Company Stock will be
aggregated, and no holder of Company Stock will receive cash in an amount equal
to or greater than the value of one full share of Parent Common Stock.
17. None of the employee compensation received by any stockholder-employees
of Company is or will be separate consideration for, or allocable to, any of
their shares of Company Stock to be surrendered in the Merger. None of the
shares of Parent Common Stock to be received by any stockholder-employee of
Company in the Merger is or will be separate consideration for, or allocable to,
any employment, consulting or similar arrangement. Any compensation paid or to
be paid to any stockholder of Company who will be an employee of or perform
advisory services for Parent, Merger Subsidiary, Company, or any affiliate
thereof after the Merger, will be determined by bargaining at arm's length.
18. During the past 5 years, neither Parent nor any subsidiary thereof has
owned or owns, beneficially or of record, any class of stock of Company or any
securities of Company or any instrument giving the holder the right to acquire
any such stock or securities.
19. The Merger is being effected for bona fide business reasons and will be
carried out strictly in accordance with the Agreement, as amended by the
Amendment, and as described in the Proxy Statement, and none of the material
terms and conditions therein have been or will be waived or modified.
20. The Agreement, as amended by the Amendment, and the documents described
in the Agreement, as amended by the Amendment, represent the entire
understanding of Parent, Merger Subsidiary, and Company with respect to the
Merger.
21. Neither Parent nor Merger Subsidiary will take any position on any
Federal, state or local income or franchise tax return, or take any other tax
reporting position, that is inconsistent with the treatment of the Merger as a
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by a "determination" (as defined in Section 1313(a)(1) of the
Code) or by applicable state or local income or franchise tax law.
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<PAGE> 143
We understand that Bracewell & Patterson L.L.P. and Andrews & Kurth L.L.P.
will rely on this Certificate in rendering their opinions as to certain United
States Federal income tax consequences of the Merger and we will promptly and
timely inform them if, after signing this Certificate, we have reason to believe
that any of the facts described herein or in the Proxy Statement or any of the
representations made in this Certificate are untrue, incorrect or incomplete in
any respect.
Very truly yours,
SONAT INC.
By:
----------------------------------
Title:
---------------------------------
[MERGER SUBSIDIARY]
By:
----------------------------------
Title:
---------------------------------
4
<PAGE> 144
EXHIBIT E
TO THE MERGER
AGREEMENT
ZILKHA ENERGY COMPANY
1201 LOUISIANA, 32ND FLOOR
HOUSTON, TEXAS 77002
November , 1997
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
600 Travis
Houston, Texas 77002
Bracewell & Patterson L.L.P.
2900 South Tower Pennzoil Place
Houston, Texas 77002
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to Sections 8.2(b)
and 8.3(b) of the Agreement and Plan of Merger (the "Agreement") dated as of
November 22, 1997, between Zilkha Energy Company, a Delaware corporation
("Company") and Sonat Inc., a Delaware corporation ("Parent"), the undersigned
officer of Company hereby certifies and represents as to Company that the facts
relating to the merger (the "Merger") of Merger Subsidiary (as defined in the
Agreement) with and into Company pursuant to the Agreement, are true, correct
and complete in all respects at the Effective Time and that:
1. The consideration to be received in the Merger by holders of common
stock, $1.00 par value, of the Company ("Company Common Stock") and 11%
cumulative preferred stock, no par value, of the Company ("Company Preferred
Stock" and, together with the Company Common Stock "Company Stock") was
determined by arm's length negotiations between the managements of Parent and
Company. In connection with the Merger, no holder of Company Stock will receive
in exchange for such stock, directly or indirectly, any consideration other than
Parent Common Stock (as defined in the Agreement) and, in lieu of fractional
shares of Parent Common Stock, cash.
2. There is no plan or intention by any of the holders of Company Stock who
own 1% or more of the Company Stock, and to the knowledge of the management of
Company, there is no plan or intention on the part of the remaining holders of
Company Stock to sell, exchange, transfer or otherwise dispose (including by
transactions such as a short sale or an equity swap which would have the
economic effect of a disposition) of a number of shares of Parent Common Stock
to be received by them in connection with the Merger that would reduce the
Company stockholders' ownership of Parent Common Stock to a number of shares
having a value, as of the Effective Time, of less than 50% of the total value of
all of the formerly outstanding capital stock of Company immediately prior to
the Effective Time. For purposes of this representation, shares of Company Stock
exchanged for cash or other property or exchanged for cash in lieu of fractional
shares of Parent Common Stock are treated as outstanding shares of Company Stock
at the Effective Time. Moreover, shares of Company Stock that are sold, redeemed
or disposed of prior to the Merger and in contemplation or as part of the
Merger, and shares of Parent Common Stock that are held by holders of Company
Stock at or prior to the Effective Time and that are otherwise sold, redeemed or
disposed of subsequent to the Merger will be taken into account for purposes of
this representation.
3. After the Merger, to the knowledge of the management of Company, Company
will hold at least 90% of the fair market value of the net assets and at least
70% of the fair market value of the gross assets held by Merger Subsidiary
immediately prior to the Merger and at least 90% of the fair market value of the
net assets and at least 70% of the fair market value of the gross assets held by
Company immediately prior to the
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<PAGE> 145
Merger. For purposes of this representation, assets of Merger Subsidiary or
Company held immediately prior to the Merger include amounts paid or incurred by
Merger Subsidiary or Company in connection with the Merger, including amounts
used to pay Company's reorganization expenses and all payments, redemptions and
distributions (except for regular, normal dividends, if any) made in
contemplation or as part of the Merger. Any dispositions in contemplation or as
part of the Merger of assets held by Company prior to the Merger will be for
fair market value.
4. The Company has no plan or intention to issue additional shares of its
capital stock that would result in Parent losing control (within the meaning of
Section 368(c) of the Code) of the Company.
5. No assets of Company have been sold, transferred or otherwise disposed
of which would prevent Parent from continuing the historic business of Company
or from using a significant portion of Company's historic business assets in a
business following the Merger, and Company intends to continue its historic
business or use a significant portion of its historic business assets in a
business.
6. Company and the holders of Company Stock each will pay its or their own
expenses, if any, incurred in connection with or as part of the Merger or
related transactions. Company has not paid or will not pay, directly or
indirectly, any expenses (including transfer taxes) incurred by any holder of
Company Stock in connection with or as part of the Merger or any related
transactions. Company has not agreed to assume, nor will it directly or
indirectly assume, any expense or other liability, whether fixed or contingent,
of any holder of Company Stock.
7. There is no intercorporate indebtedness existing between Parent and
Company or between Merger Subsidiary and Company that was issued, acquired or
will be settled at a discount.
8. Company has no authorized stock other than Company Common Stock and
Company Preferred Stock. At the date hereof, the only capital stock of Company
issued and outstanding is Company Stock.
9. In the Merger, Company Stock representing control of Company, as defined
in Section 368(c) of the Code, will be exchanged solely for voting stock of
Parent. For purposes of this representation, any shares of Company Stock
exchanged for cash or other property will be treated as outstanding Company
Stock at the Effective Time.
10. There exist no options, warrants, convertible securities or other
rights to acquire Company Stock, including rights pursuant to employee stock
options and employee stock purchase plans in existence as of the date of the
Agreement, that if exercised or converted would affect Parent's acquisition or
retention of control of Company as defined in Section 368(c) of the Code.
11. In the Merger, no liabilities of the stockholders of Company will be
assumed by Parent and none of the Company Stock acquired by Parent will be
subject to liabilities. Furthermore, to the knowledge of the management of
Company, there is no plan or intention for Parent to assume any liabilities of
Company.
12. Company is not an "investment company" within the meaning of Section
368(a)(2)(F) of the Code.
13. Company is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
14. At the Effective Time, the total fair market value of the assets of
Company exceeds the total liabilities of Company assumed, including the amount
of any liabilities to which the assets of Company are subject.
15. The payment of cash in lieu of fractional shares of Parent Common Stock
to holders of Company Stock is solely for the purpose of avoiding the expense
and inconvenience to Parent of issuing fractional shares and does not represent
separately bargained for consideration. The total cash consideration that will
be paid in the Merger to the holders of Company Stock instead of issuing
fractional shares of Parent Common Stock will not exceed one percent of the
total consideration that will be issued in the Merger to the holders of Company
Stock with respect to their shares of Company Stock. The fractional share
interests in Parent of each holder of Company Stock will be aggregated, and no
holder of Company Stock will receive cash in an amount equal to or greater than
the value of one full share of Parent Common Stock.
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<PAGE> 146
16. None of the employee compensation received by any stockholder-employees
of Company is or will be separate consideration for, or allocable to, any of
their shares of Company Stock to be surrendered in the Merger. None of the
shares of Parent Common Stock received by any stockholder-employee of Company in
the Merger is or will be separate consideration for, or allocable to, any
employment, consulting or similar arrangement. Any compensation paid or to be
paid to any stockholder of Company who will be an employee of or perform
advisory services for Parent, Merger Subsidiary, Company, or any affiliate
thereof after the Merger, will be determined by bargaining at arm's length.
17. Since the date of the Agreement, except for the issuance of Company
Stock pursuant to the rights described in paragraph 10 hereof, Company has not
issued any additional shares of Company Stock.
18. No holders of Company Stock have dissenters' rights with respect to the
Merger under applicable laws.
19. Except as disclosed in the Exhibit A hereto, Company has not redeemed
any of its stock, made any distributions with respect to its stock, or disposed
of any of its assets in contemplation or as part of the Merger, excluding for
purposes of this representation regular, normal dividends and Company Stock
acquired in the ordinary course of business in connection with employee
incentive and benefit programs, or other programs or arrangements in existence
on the date hereof.
20. The Merger is being effected for bona fide business reasons and will be
carried out strictly in accordance with the Agreement, as amended by the
Amendment, and none of the material terms and conditions therein have been or
will be waived or modified.
21. Company will not take any position on any Federal, state or local
income or franchise tax return, or take any other tax reporting position that is
inconsistent with the treatment of the Merger as a reorganization within the
meaning of Section 368(a) of the Code, unless otherwise required by a
"determination" (as defined in Section 1313(a)(1) of the Code) or by applicable
state or local income or franchise tax law.
We understand that Andrews & Kurth L.L.P. and Bracewell & Patterson L.L.P.
will rely on this Certificate in rendering their opinions as to certain United
States Federal income tax consequences of the Merger and we will promptly and
timely inform them if, after signing this Certificate, we have reason to believe
that any of the facts described herein or in the Proxy Statement or any of the
representations made in this Certificate are untrue, incorrect or incomplete in
any respect.
Very truly yours,
ZILKHA ENERGY COMPANY
By:
----------------------------------
Title: President
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<PAGE> 147
EXHIBIT G
TO THE MERGER
AGREEMENT
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
AMENDMENT, dated as of November 22, 1997, to the Rights Agreement between
Sonat Inc., a Delaware corporation (the "Company"), and Chemical Mellon
Stockholder Services, L.L.C., as Rights Agent (the "Rights Agent"), dated as of
January 8, 1996 (the "Rights Agreement").
Pursuant to Section 27 of the Rights Agreement, the Company and the Rights
Agent may from time to time supplement or amend the Rights Agreement in
accordance with the provisions of said Section 27 subject to the terms and
conditions thereof. All acts and things necessary to make this Amendment a valid
agreement, enforceable according to its terms have been done and performed, and
the execution and delivery of this Amendment by the Company and the Rights Agent
have been in all respects duly authorized by the Company and the Rights Agent.
In consideration of the foregoing and the mutual agreements set forth
herein, the parties hereto agree as follows:
1. Effective as of the consummation of the Merger (as defined in the
Agreement and Plan of Merger, dated as of the date hereof, by and among the
Company and Zilkha Energy Company, a Delaware corporation), Section 1(a) of the
Rights Agreement is hereby amended by inserting the following at the end of such
section:
Notwithstanding anything in this Agreement to the contrary, no Zilkha
Entity (as defined below) shall be deemed to be an "Acquiring Person"
solely as a result of the acquisition of the Common Shares pursuant to
the Agreement and Plan of Merger, dated as of November 22, 1997, by and
among the Company and Zilkha Energy Company, a Delaware corporation (the
"Merger Agreement"), as long as (a) all Zilkha Entities, all affiliates
and associates of any Zilkha Entity and all persons acting in concert
with any of the foregoing (collectively, the "Zilkha Group") do not
beneficially own in the aggregate a number of Common Shares representing
in excess of the lesser of (i) the percentage of the Common Shares
issued in the aggregate to the Zilkha Entities pursuant to the Merger
Agreement, or (ii) any percentage of the Common Shares beneficially
owned by the members of the Zilkha Entities in the aggregate at any time
after the consummation of the transactions contemplated by the Merger
Agreement (the lesser of clause (i) or (ii), the "Permitted
Percentage"), and (b) no member of the Zilkha Group has or acquires
beneficial ownership of any Common Shares other than the Common Shares
issued pursuant to the Merger Agreement.
In addition, no Zilkha Entity shall be come an "Acquiring Person" solely
as the result of an acquisition of Common Shares by the Company which,
by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by the Zilkha Entities
in the aggregate to the then applicable Permitted Percentage or more of
the Common Shares of the Company then outstanding; provided, however,
that if any member of the Zilkha Group shall thereafter become the
Beneficial Owner of any additional Common Shares of the Company, then
the members of the Zilkha Group shall be deemed to be an "Acquiring
Person."
Further, no Zilkha Entity shall be deemed to beneficially own any Common
Shares that are acquired directly (other than in connection with the
transactions contemplated by the Merger Agreement) from, and in a
transaction involving, the Company, unless such Common Shares are
acquired as a result of a stock split, stock dividend or other dividend
or distribution made generally to all holders of Common Shares.
If the Board of Directors of the Company determines in good faith that a
Zilkha Entity who would otherwise be an "Acquiring Person" has become
such inadvertently, and such Zilkha Entity immediately divests a
sufficient number of Common Shares so that such Zilkha Entity would no
1
<PAGE> 148
longer be an "Acquiring Person," then such Zilkha Entity shall not be
deemed to be an "Acquiring Person" for any purposes of this Agreement.
The term "Zilkha Entity" shall mean each of Selim K. Zilkha and Michael
Zilkha (collectively, the "Initial Holders"), each member of the
immediate family of any of the Initial Holders, and any trust holding
Common Shares solely for the benefit of the Initial Holders or the
members of their immediate families.
2. Effective as of the date hereof, Section 1(a) of the Rights Agreement is
hereby amended by inserting the following at the end of such section:
Notwithstanding anything in this Agreement to the contrary, no Person
shall become or be deemed to be an "Acquiring Person" solely as a result
of the execution and delivery of the Agreement and Plan of Merger, dated
as of November 22, 1997, by and between the Company and Zilkha Energy
Company, a Delaware corporation (the "Merger Agreement").
3. This Amendment to the Rights Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware and for all
purposes shall be governed by and construed in accordance with the laws of such
State applicable to contracts to be made and performed entirely within such
State.
4. This Amendment to the Rights Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument. Terms not defined herein shall,
unless the context otherwise requires, have the meanings assigned to such terms
in the Rights Agreement, as previously amended. Nothing in this Amendment, and
no beneficial ownership by any member of the Zilkha Group, shall prevent any
future or additional amendment to the Rights Agreement, and each Initial Holder
on behalf of itself and each Zilkha Entity hereby expressly affirms the
foregoing.
5. In all respects not inconsistent with the terms and provisions of this
Amendment to the Rights Agreement, the Rights Agreement is hereby ratified,
adopted, approved and confirmed. In executing and delivering this Amendment, the
Rights Agent shall be entitled to all the privileges and immunities afforded to
the Rights Agent under the terms and conditions of the Rights Agreement.
6. If any term, provision, covenant or restriction of this Amendment to the
Rights Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Amendment to the Rights Agreement, and of the
Rights Agreement, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
2
<PAGE> 149
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested, all as of the date and year first above written.
<TABLE>
<CAPTION>
<S> <C>
Attest: SONAT INC.
By: By:
-----------------------------------------------------
- ----------------------------------------------------- Name:
Name: Title:
Title:
CHEMICAL MELLON SHAREHOLDER
Attest: SERVICES, L.L.C., as Rights Agent
By: By:
- ----------------------------------------------------- -----------------------------------------------------
Name: Name:
Title: Title:
AGREED:
- -----------------------------------------------------
Selim K. Zilkha
- -----------------------------------------------------
Michael Zilkha
SELIM K. ZILKHA TRUST
By:
- -----------------------------------------------------
Name:
Title:
SELIM K. ZILKHA (1996) ANNUITY
TRUST
By:
- -----------------------------------------------------
Name:
Title:
</TABLE>
3
<PAGE> 150
APPENDIX B
[MERRILL LYNCH LETTERHEAD]
November 22, 1997
Board of Directors
Sonat Inc.
P.O. Box 2563
Birmingham, AL 35202
Members of the Board of Directors:
Zilkha Energy Company (the "Company") and Sonat Inc. (the "Acquiror")
propose to enter into an Agreement and Plan of Merger (the "Agreement") pursuant
to which the Company will be merged with a newly formed, wholly owned subsidiary
of the Acquiror in a transaction (the "Merger") in which all of the outstanding
shares of the Company's common stock and preferred stock (the "Company Shares"),
will be converted into the right to receive the number of shares of the common
stock of the Acquiror, par value $1.00 per share (the "Acquiror Shares"), equal
to the quotient of (i) $1,044,850,000 (the "Consideration") divided by (ii)
average closing price of the Acquiror Shares for the fifteen consecutive trading
days ending three days prior to the closing of the Merger; provided, however,
that in no event shall the number of Acquiror Shares be less than the quotient
of the Consideration divided by $51.00; and provided, further, that, unless
agreed by the Acquiror, the Acquiror may not be required to deliver Acquiror
Shares in excess of the quotient of the Consideration divided by $39.00.
You have asked us whether, in our opinion, the Consideration proposed to be
paid by the Acquiror is fair, from a financial point of view, to the Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Acquiror that we deemed to be
relevant, and, with respect to the Company, the information contained in
the Offering Memorandum;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror, furnished to us by the Acquiror,
and certain estimates of the Company's and the Acquiror's proved, probable
and possible reserves, the projected annual production of such reserves and
predicted exploration successes and related production of such reserves, as
well as a Reserve Report prepared by William M. Cobb & Associates, Inc. for
the Company and furnished to us by the Acquiror;
(3) Conducted discussions with members of senior management and
representatives of the Acquiror concerning the matters described in clauses
1 and 2 above, as well as the businesses and prospects of the Company and
the Acquiror before and after giving effect to the Merger;
(4) Reviewed the market prices and valuation multiples for the
Acquiror Shares and compared them with those of certain publicly traded
companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and the
Acquiror and compared them with those of certain publicly traded companies
that we deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial and
legal advisors;
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed a draft dated November 21, 1997 of the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
B-1
<PAGE> 151
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct, nor have we conducted, any physical inspection of the properties or
facilities of the Company or the Acquiror. With respect to the financial
forecast information (including the estimates of the timing and expense
associated with the Company's conversion from full cost accounting to successful
efforts accounting and other transaction costs and expenses), we have assumed
that they have been reasonably prepared and reflect the best currently available
estimates and judgments of the Company's or the Acquiror's management as to the
expected future financial performance of the Company or the Acquiror, as the
case may be, and we have relied upon the foregoing in preparing our opinion.
With respect to the reserve, predicted production and related information, and
estimates of predicted exploration successes and related information of the
Company and the Acquiror furnished to us by the Acquiror and discussed with us
by the Acquiror, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgments of the Company's or
the Acquiror's management as to the reserve, predicted production and predicted
exploration success and related information of the Company or the Acquiror, as
the case may be, and we have relied upon the foregoing in preparing our opinion.
We have further assumed that the Merger will be accounted for as a
pooling-of-interests under generally accepted accounting principles and that it
will qualify as a tax-free reorganization for U.S. federal income tax purposes.
In addition, we have assumed that the Acquiror will not deliver Acquiror shares
in excess of the quotient of the Consideration divided by $39.00. We have also
assumed that the final form of the Agreement will be substantially similar to
the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, the payment of
which is contingent upon the consummation of the Merger. In addition, the
Acquiror has agreed to indemnify us for certain liabilities arising out of our
engagement. We have, in the past, provided financial advisory and financing
services to the Acquiror and may continue to do so and have received, and may
receive, fees for the rendering of such services. In addition, in the ordinary
course of our business, we may actively trade the Acquiror Shares for our own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger and does not constitute a recommendation to
any stockholder of the Company or the Acquiror as to how such stockholder should
vote on the proposed Merger.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration proposed to be paid by the Acquiror is
fair, from a financial point of view, to the Acquiror.
Very truly yours,
/s/ MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
B-2
<PAGE> 152
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms that are not defined in this Part II have the meanings
assigned to them in the Proxy Statement/Prospectus included elsewhere in this
Registration Statement.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement in
connection with specified actions, suits, proceedings whether civil, criminal,
administrative, or investigative (other than action by or in the right of the
corporation -- a "derivative action"), if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, by-laws, disinterested director vote, stockholder vote, agreement, or
otherwise.
Section 14 of Sonat's Restated Certificate of Incorporation requires
indemnification to the full extent permitted under Delaware law as from time to
time in effect against expenses (including attorneys' fees) judgments, fines and
amounts paid in settlement actually and reasonably incurred by any person in
connection with any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was serving as a director or officer of Sonat, or is or was
serving at the request of Sonat as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust, or other
enterprise. Sonat's Restated Certificate of Incorporation also provides that
Sonat may, by action of its Board of Directors, provide indemnification to its
agents with the same scope and effect as the foregoing indemnification of
directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for: (i) any
breach of the director's duty of loyalty to the corporation or its stockholders;
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) payment of unlawful dividends or unlawful
stock purchases or redemptions; or (iv) any transaction from which the director
derived an improper personal benefit.
Section 14 of Sonat's Restated Certificate of Incorporation provides that
to the full extent that the DGCL, as it now exists or may hereafter be amended,
permits the limitation or elimination of the liability of directors, a director
of Sonat shall not be liable to Sonat or its stockholders for monetary damages
for breach of fiduciary duty as a director. Any amendment to or repeal of such
Article 14 shall not adversely affect any right or protection of a director of
Sonat for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
Sonat maintains directors' and officers' liability insurance which provides
for payment, on behalf of the directors and officers of Sonat and its
subsidiaries, of certain losses of such persons (other than matters uninsurable
under law) arising from claims, including claims arising under the Securities
Act, for acts or omissions by such persons while acting as directors or officers
of Sonat and/or its subsidiaries, as the case may be.
II-1
<PAGE> 153
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Set forth below is a list of the exhibits included as part of this
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 -- Agreement and Plan of Merger, dated as of November 22,
1997, between Sonat Inc. and Zilkha Energy Company
(included as Appendix A to the Proxy Statement/
Prospectus)
5.1 -- Opinion of Bracewell & Patterson, L.L.P.
*5.2 -- Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, financial advisor of Sonat Inc. (included
as Appendix B to the Proxy Statement/Prospectus)
8.1 -- Opinion of Bracewell & Patterson, L.L.P. regarding tax
matters
8.2 -- Opinion of Andrews & Kurth L.L.P. regarding tax matters
*10.1 -- Stay-on Bonus Program of Zilkha
*10.2 -- Amendment to Stay-On Bonus Program of Zilkha
*10.3 -- Form of Long-Term Unit Value Plan III Agreement of Zilkha
*10.4 -- Form of First Amendment to Long-Term Unit Value Plan III
Agreement of Zilkha
*10.5 -- Form of Second Amendment to Long-Term Unit Value Plan III
Agreement of Zilkha
*10.6 -- Severance Plan of Zilkha
*10.7 -- Incentive Pool Plan of Zilkha
*10.8 -- Amended and Restated Incentive Pool Plan of Zilkha
10.9 -- Form of Registration Rights Agreement, dated as of
, by and among Sonat Inc., Selim K. Zilkha,
Michael Zilkha, the Selim K. Zilkha Trust and the Selim
K. Zilkha (1996) Annuity Trust (included as Exhibit A to
Appendix A to the Proxy Statement/Prospectus)
10.10 -- Amendment, dated as of November 22, 1997, to the Rights
Agreement between Sonat Inc. and ChaseMellon Shareholder
Services, L.L.C. (as successor to Chemical Mellon
Stockholder Services L.L.C.) (included as Exhibit G to
Appendix A to the Proxy Statement/Prospectus)
*23.1 -- Consent of Ernst & Young LLP, independent auditors of
Sonat Inc.
23.2 -- Consent of KPMG Peat Marwick LLP, independent auditors of
Zilkha Energy Company
*23.3 -- Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated
*23.4 -- Consent of William M. Cobb & Associates, Inc.,
independent petroleum engineers
23.5 -- Consent of Bracewell & Patterson, L.L.P. regarding
Exhibit 5.1 opinion (included in Exhibit 5.1)
23.6 -- Consent of Bracewell and Patterson, L.L.P. regarding
Exhibit 8.1 tax opinion (included in Exhibit 8.1)
23.7 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
8.2)
24.1 -- Power of Attorney (included on the Signature Page of the
Registration Statement)
99.1 -- Form of Sonat Inc. Proxy
</TABLE>
- ---------------
* Previously filed.
(b) Financial Statement Schedules of Zilkha.
II-2
<PAGE> 154
All schedules of Zilkha have been omitted because they are not
required under the related instructions, are inapplicable, or the
information is included in the Consolidated Financial Statements of Zilkha.
ITEM 22. UNDERTAKINGS
Sonat hereby undertakes:
(1) That, for the purpose of determining any liability under the Securities
Act, each filing of Sonat's annual report pursuant to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(2) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request;
(3) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), Sonat undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form;
(4) That every prospectus (i) that is filed pursuant to paragraph (3)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective; and
(6) To deliver or cause to be delivered with the prospectus, to each person
to whom the prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Exchange Act; and to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information required to be presented by Article 3 of Regulation S-X.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of Sonat
pursuant to the foregoing provisions, or otherwise, Sonat has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by Sonat of expenses incurred or paid by a director, officer or
controlling person of Sonat in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Sonat will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 155
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Sonat Inc. has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on December 22, 1997.
SONAT INC.
By: /s/ WILLIAM A. SMITH
----------------------------------
William A. Smith
Executive Vice President and
General Counsel
II-4
<PAGE> 156
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED ON DECEMBER 22, 1997
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board, President and Chief
- ----------------------------------------------------- Executive Officer
Ronald L. Kuehn, Jr.
* Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Chief Accounting Officer)
James E. Moylan, Jr.
* Director
- -----------------------------------------------------
William O. Bourke
* Director
- -----------------------------------------------------
Robert J. Lanigan
* Director
- -----------------------------------------------------
Max L. Lukens
* Director
- -----------------------------------------------------
Charles Marshall
* Director
- -----------------------------------------------------
Benjamin F. Payton
* Director
- -----------------------------------------------------
John J. Phelan, Jr.
* Director
- -----------------------------------------------------
Jerome J. Richardson
* Director
- -----------------------------------------------------
Donald G. Russell
* Director
- -----------------------------------------------------
Adrian M. Tocklin
* Director
- -----------------------------------------------------
James B. Williams
* Director
- -----------------------------------------------------
Joe B. Wyatt
* /s/ WILLIAM A. SMITH
- -----------------------------------------------------
William A. Smith
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 157
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 -- Agreement and Plan of Merger, dated as of November 22,
1997, between Sonat Inc. and Zilkha Energy Company
(included as Appendix A to the Proxy Statement/
Prospectus)
5.1 -- Opinion of Bracewell & Patterson, L.L.P.
*5.2 -- Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, financial advisor of Sonat Inc. (included
as Appendix B to the Proxy Statement/Prospectus)
8.1 -- Opinion of Bracewell & Patterson, L.L.P. regarding tax
matters
8.2 -- Opinion of Andrews & Kurth L.L.P. regarding tax matters
*10.1 -- Stay-on Bonus Program of Zilkha
*10.2 -- Amendment to Stay-On Bonus Program of Zilkha
*10.3 -- Form of Long-Term Unit Value Plan III Agreement of Zilkha
*10.4 -- Form of First Amendment to Long-Term Unit Value Plan III
Agreement of Zilkha
*10.5 -- Form of Second Amendment to Long-Term Unit Value Plan III
Agreement of Zilkha
*10.6 -- Severance Plan of Zilkha
*10.7 -- Incentive Pool Plan of Zilkha
*10.8 -- Amended and Restated Incentive Pool Plan of Zilkha
10.9 -- Form of Registration Rights Agreement, dated as of
, by and among Sonat Inc., Selim K. Zilkha,
Michael Zilkha, the Selim K. Zilkha Trust and the Selim
K. Zilkha (1996) Annuity Trust (included as Exhibit A to
Appendix A to the Proxy Statement/Prospectus)
10.10 -- Amendment, dated as of November 22, 1997, to the Rights
Agreement between Sonat Inc. and ChaseMellon Shareholder
Services, L.L.C. (or succession to Chemical Mellon
Stockholder Services L.L.C.) (included as Exhibit G to
Appendix A to the Proxy Statement/Prospectus)
*23.1 -- Consent of Ernst & Young LLP, independent auditors of
Sonat Inc.
23.2 -- Consent of KPMG Peat Marwick LLP, independent auditors of
Zilkha Energy Company
*23.3 -- Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated
*23.4 -- Consent of William M. Cobb & Associates, Inc.,
independent petroleum engineers
23.5 -- Consent of Bracewell & Patterson, L.L.P. regarding
Exhibit 5.1 opinion (included in Exhibit 5.1)
23.6 -- Consent of Bracewell and Patterson, L.L.P. Regarding
Exhibit 8.1 for opinion (included in Exhibit 8.1)
23.7 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
8.2)
24.1 -- Power of Attorney (included on the Signature Page of the
Registration Statement)
99.1 -- Form of Sonat Inc. Proxy
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 5.1
[Letterhead of Bracewell & Patterson, L.L.P.]
December 22, 1997
Sonat Inc.
1900 Fifth Avenue North
Birmingham, Alabama 35203
Ladies and Gentlemen:
We are acting as counsel to Sonat Inc., a Delaware corporation ("Sonat"), in
connection with the Registration Statement on Form S-4 (Registration No.
333-41851), as amended (the "Registration Statement"), under the Securities Act
of 1933, as amended (the "Securities Act"), relating to the merger (the
"Merger") of a wholly-owned subsidiary of Sonat with and into Zilkha Energy
Company, a Delaware Corporation ("Zilkha"). Pursuant to the Agreement and Plan
of Merger dated as of November 22, 1997 between Zilkha and Sonat ("Merger
Agreement"), Sonat will issue to the holders of Zilkha Stock in the Merger
shares of Sonat's Common Stock, $1.00 par value, including associated
preference stock purchase rights ("Sonat Common Stock). Capitalized terms used
herein have the meanings set forth in the Registration Statement, unless
otherwise defined herein.
We have examined the originals, or certified, conformed or reproduction copies,
of all such records, agreements, instruments and documents as we have deemed
relevant or necessary as the basis for the opinion hereinafter expressed. In
all such examinations, we have assumed the genuineness of all signatures, the
authenticity of all original or certified copies submitted to us as conformed
or reproduction copies. We also have assumed, with respect to all parties to
agreements or instruments relevant hereto other than Sonat, that such parties
had the requisite power and authority (corporate or otherwise) to execute,
deliver and perform such agreements or instruments, that such agreements or
instruments have been duly authorized by all requisite action (corporate or
otherwise), executed and delivered by such parties and that such agreements or
instruments are the valid, binding and enforceable obligations of such parties.
As to various questions of fact relevant to such opinion, we have relied upon,
and have assumed the accuracy of, certificates and oral or written statements
and other information of or from public officials, officers or representatives
of Sonat, and others.
<PAGE> 2
Sonat Inc.
December 22, 1997
Page 2
Based upon the foregoing and such other considerations as we deem relevant and
assuming that all shares of Zilkha Stock are validly issued, fully paid and
nonassessable, it is our opinion that, when shares of Sonat Common Stock are
issued upon the consummation of the Merger in accordance with the terms of the
Merger Agreement, such shares will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Proxy Statement/Prospectus forming a part of the
Registration Statement as having passed upon the validity of the issuance of
the shares of Sonat Common Stock in the Merger. In giving this consent, we do
not hereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
Very truly yours,
/s/ Bracewell & Patterson, L.L.P.
<PAGE> 1
Exhibit 8.1
[Letterhead of Bracewell & Patterson, L.L.P.]
December 22, 1997
Sonat Inc.
1900 Fifth Avenue North
Birmingham, Alabama 35203
Ladies and Gentlemen:
We have acted as tax counsel to Sonat Inc., a Delaware corporation ("Sonat"),
in connection with the proposed merger (the "Merger") of Sonat Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of Sonat
("Newco"), with and into Zilkha Energy Company, a Delaware corporation
("Zilkha"), upon the terms and conditions set forth in the Agreement and Plan
of Merger (the "Merger Agreement") dated as of November 22, 1997 between Sonat
and Zilkha.
In so acting, we have examined the Merger Agreement, the Proxy
Statement/Prospectus constituting part of Amendment No. 1 to Sonat's
Registration Statement on Form S-4 (Registration No. 333-41851) (the
"Registration Statement") and the exhibits to each such document, and certain
statements and representations contained in certificates to be signed by the
stockholders of Zilkha and by certain officers of Sonat, Newco and Zilkha upon
consummation of the Merger.
Based upon and subject to the foregoing, we hereby confirm that the discussion
set forth in the Proxy Statement/Prospectus forming a part of the Registration
Statement under the caption "Certain U.S. Federal Income Tax Consequences of
the Merger," as it relates to the federal income tax consequences of the Merger
is our opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the captions
"Certain U.S. Federal Income Tax Consequences of the Merger" and "Legal
Matters" in the Proxy Statement/Prospectus forming a part of the Registration
Statement as having passed upon certain tax aspects of the Merger on behalf of
Sonat. In giving this consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
<PAGE> 2
Sonat Inc.
December 22, 1997
Page 2
We express no opinion as to the laws of any jurisdiction other than the federal
laws of the United States of America.
Very truly yours,
/s/ Bracewell & Patterson, L.L.P.
<PAGE> 1
EXHIBIT 8.2
[ANDREWS & KURTH L.L.P. LETTERHEAD]
December 22, 1997
Zilkha Energy Company
1201 Louisiana Street, Suite 3200
Houston, Texas 77002
TAX OPINION
Gentlemen:
We have acted as counsel for Zilkha Energy Company, a Delaware
corporation (the "Company"), in connection with the Agreement and Plan of
Merger, dated as of November 22, 1997 (the "Merger Agreement"), between Sonat
Inc., a Delaware corporation ("Parent"), and the Company, pursuant to which a
wholly owned subsidiary of Parent, will be merged with and into the Company.
All statements of legal conclusions contained in the
discussion under the caption "Certain U.S. Federal Income Tax Consequences of
the Merger" in the prospectus included in the Registration Statement on Form
S-4 of Sonat (Reg. No. 333-41851) reflect our opinion with respect to the
matters set forth therein.
We hereby consent to the references to our firm and this
opinion contained in the prospectus included in the Registration Statement.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Sole Director
Zilkha Energy Company:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Proxy Statement/Prospectus.
Our report, dated December 8, 1997 refers to a change from the full cost
method to the successful efforts method of accounting for oil and gas
properties.
KPMG PEAT MARWICK LLP
Houston, Texas
December 22, 1997
<PAGE> 1
EXHIBIT 99.1
[Front of Proxy Card]
SOLICITED BY THE BOARD OF DIRECTORS OF
SONAT INC.
SPECIAL MEETING OF STOCKHOLDERS
JANUARY 30, 1998
The undersigned hereby appoints Ronald L. Kuehn, Jr., Donald G. Russell and
William A. Smith, and each or any of them, with power of substitution, proxies
for the undersigned and authorizes them to represent and vote, as designated,
all of the shares of common stock, par value $1.00 per share ("Common Stock"),
of Sonat Inc. ("Sonat") held of record by the undersigned on December 26, 1997,
at the Special Meeting of Stockholders (the "Special Meeting") to be held at the
Four Seasons Hotel Houston, 1300 Lamar Street, Houston, Texas 77010 on January
30, 1998 at 11:00 a.m., local time, in connection with the approval of the
issuance of shares of Sonat Common Stock contemplated by the Agreement and Plan
of Merger, dated as of November 22, 1997 (the "Merger Agreement"), between Sonat
and Zilkha Energy Company, and at any adjournment(s) or postponement(s) of such
meeting for the purpose identified on the reverse side of this proxy and with
discretionary authority as to any other matters that may properly come before
the Special Meeting. This proxy when properly executed will be voted in the
manner directed herein by the undersigned stockholder. If this proxy is returned
without direction being given, this proxy will be voted FOR proposal 1.
SEE REVERSE SIDE (IMPORTANT -- TO BE SIGNED AND DATED ON REVERSE SIDE)
[Reverse of Proxy Card]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
1. APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK CONTEMPLATED BY THE MERGER
AGREEMENT. [ ] FOR [ ] AGAINST [ ] ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) OR POSTPONEMENT(S) THEREOF.
Please mark, sign, date and return this
proxy card promptly using the enclosed
envelope. Please sign exactly as your
name appears. If acting as attorney,
executor, trustee or in other
representative capacity, sign name and
title. If a corporation, please sign
with full corporation name by president
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person. If held
jointly, both parties must sign and
date.
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