<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 30, 1998
SONAT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 001-07179 63-0647939
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
1900 FIFTH AVENUE NORTH
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 325-3800
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<PAGE> 2
SONAT INC.
TABLE OF CONTENTS
FOR
CURRENT REPORT ON FORM 8-K
Page
----
Item 5. Acquisition or Disposition of Assets.........................2
Item 7. Financial Statements and Exhibits............................2
Signature .............................................................4
<PAGE> 3
ITEM 5. ACQUISITION OR DISPOSITION OF ASSETS.
On November 23, 1997, Sonat Inc. ("Sonat") announced that it and
Zilkha Energy Company ("Zilkha") had entered into an Agreement and Plan of
Merger, dated as of November 22, 1997, pursuant to which a newly formed, wholly
owned subsidiary of Sonat would merge into Zilkha ("Merger"). The Merger
transaction is described in Sonat's Proxy Statement/Prospectus dated December
29, 1997 ("Proxy Statement") comprising a part of Sonat's Registration Statement
on Form S-4, as amended (File No. 333-41851), that was declared effective by the
Securities and Exchange Commission on December 29, 1997 ("Registration
Statement"). The Proxy Statement was used to solicit proxies for use by Sonat's
Board of Directors at a special meeting of Sonat stockholders held on January
30, 1998 ("Special Meeting"), for the purpose of considering and voting on a
proposal ("Proposal") to approve the issuance of shares of Common Stock, $1.00
par value, of Sonat ("Common Stock") in the Merger, as required by the
regulations of the New York Stock Exchange. Of the 85,857,047 shares of Common
Stock entitled to vote at the Special Meeting, 64,791,737 shares (75.5%) were
present in person or by proxy and 64,094,347 shares (98.9%), 427,775 shares
(0.7%) and 269,615 shares (0.4%) voted for, voted against and abstained from
voting on the Proposal, respectively. Accordingly, the Proposal was approved,
and the Merger was consummated following the Special Meeting. In the Merger,
Zilkha became a wholly owned subsidiary of Sonat and changed its name to Sonat
Exploration GOM Inc.
Pursuant to the Merger, the Company issued 24,158,380 shares of its
Common Stock, of which 8,594,305 shares, 14,429,037 shares and 1,135,038 shares
were issued to Michael Zilkha, the Selim K. Zilkha Trust and the Selim K. Zilkha
(1996) Annuity Trust, respectively. Sonat now has approximately 110 million
shares of Common Stock outstanding, of which Michael Zilkha, the Selim K. Zilkha
Trust and the Selim K. Zilkha (1996) Annuity Trust own approximately 7.8%, 13.1%
and 1.0%, respectively. Immediately following the Merger, Selim K. Zilkha and
his son, Michael Zilkha, became directors of Sonat.
Sonat will account for the Merger as a pooling of interests. The
Merger also qualifies as a tax-free reorganization.
The Merger involved the issuance of approximately $1.04 billion in
market value of Common Stock and the assumption of approximately $300 million in
debt and other liabilities.
A copy of Sonat's press release dated January 30, 1997 is filed as
Exhibit 99.1.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired
The financial statements of Zilkha appearing under
the caption "Index to Financial Statements - Zilkha Energy Company" on page F-1
are filed with this Current Report.
-2-
<PAGE> 4
(b) Pro forma financial information
The pro forma financial statements appearing under
the caption "Index to Financial Statements - Sonat Inc. and Zilkha Energy
Company" on page F-1 are filed with this Current Report.
(c) Exhibits
The following documents are filed as exhibits to this
Current Report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
*2.1 Agreement and Plan of Merger dated as of
November 22, 1997, between Zilkha and Sonat
(including Exhibits A through E and Exhibit
G thereto) (incorporated by reference to
Annex A to the Proxy Statement constituting
part of the Registration Statement)
**2.2 Approval of Merger Agreement dated as of
January 22, 1998, among Sonat, Sonat
Acquisition Corporation, a wholly owned
subsidiary of Sonat, and Zilkha
**4.1 Amendment No. 1 to Rights Agreement, dated
as of November 22, 1997, amending the Rights
Agreement between Sonat and ChemicalMellon
(now ChaseMellon) Stockholder Services,
L.L.C., dated as of January 8, 1996
**10.1 Registration Rights Agreement, dated as of
January 30, 1998, by and between Sonat,
Selim K. Zilkha, Michael Zilkha, the Selim
K. Zilkha Trust and the Selim K. Zilkha
(1996) Annuity Trust
**99.1 Press Release dated January 30, 1998
</TABLE>
- -----------------------
* Incorporated by reference
** Filed herewith
-3-
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONAT INC.
By: /s/ William A. Smith
------------------------------
William A. Smith
Title: Executive Vice President
Dated: February 4, 1998
-4-
<PAGE> 6
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> 7
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.
F-2
<PAGE> 8
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> 9
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> 10
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> 11
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. 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.
(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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
*2.1 Agreement and Plan of Merger dated as of November
22, 1997, between Zilkha and Sonat (including Exhibits A
through E and Exhibit G thereto) (incorporated by reference
to Annex A to the Proxy Statement constituting part of the
Registration Statement)
**2.2 Approval of Merger Agreement dated as of January 22, 1998,
among Sonat, Sonat Acquisition Corporation, a wholly owned
subsidiary of Sonat, and Zilkha
**4.1 Amendment No. 1 to Rights Agreement, dated as of
November 22, 1997, amending the Rights Agreement
between Sonat and ChemicalMellon (now ChaseMellon)
Stockholder Services, L.L.C., dated as of January 8, 1996
**10.1 Registration Rights Agreement, dated as of January 30,
1998, by and between Sonat, Selim K. Zilkha, Michael
Zilkha, the Selim K. Zilkha Trust and the Selim K.
Zilkha (1996) Annuity Trust
**99.1 Press Release dated January 30, 1998
</TABLE>
- -------------------------
* Incorporated by reference
** Filed herewith
<PAGE> 1
Exhibit 2.2
APPROVAL OF MERGER AGREEMENT
Sonat Acquisition Corporation ("SAC"), a Delaware corporation, a
wholly-owned subsidiary of Sonat Inc. ("Sonat") and one of the constituent
corporations to the merger to be effected pursuant to the Agreement and Plan of
Merger dated as of November 22, 1997 between Zilkha Energy Company and Sonat
(the "Merger Agreement"), together with Sonat and Zilkha Energy Company, have
caused this Approval of Merger Agreement to be signed as of the 22nd day of
January, 1998 in order to evidence (a) SAC's approval, adoption, certification,
execution and acknowledgment of the Merger Agreement to the same extent and
with the same force and effect as if SAC had been an original signatory to such
Merger Agreement and (b) SAC's agreement to be bound by the terms of the Merger
Agreement applicable to it.
SONAT ACQUISITION CORPORATION
By:/s/ William A. Smith
--------------------
Name: William A. Smith
Title: President
SONAT INC.
By:/s/ William A. Smith
--------------------
Name: William A. Smith
Title: Executive Vice President
ZILKHA ENERGY COMPANY
By:/s/ Joseph J. Romano
--------------------
Name: Joseph J. Romano
Title: Senior Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 4.1
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> 2
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> 3
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: /s/ Thomas W. Barker, Jr. By: /s/ William A. Smith
-------------------------------------------------- --------------------------------------------------
Name: Thomas W. Barker, Jr. Name: William A. Smith
Title: V.P. - Finance Title: Executive Vice President
CHEMICAL MELLON SHAREHOLDER
Attest: SERVICES, L.L.C., as Rights Agent
By: /s/ Thomas R. Watt By: /s/ Nathan L. Hill
-------------------------------------------------- --------------------------------------------------
Name: Thomas R. Watt Name: Nathan L. Hill
Title: Assistant Vice President Title: Assistant Vice President
AGREED:
/s/ Selim K. Zilkha
- -----------------------------------------------------
Selim K. Zilkha
/s/ Michael Zilkha
- -----------------------------------------------------
Michael Zilkha
SELIM K. ZILKHA TRUST
By: /s/ Selim K. Zilkha
--------------------------------------------------
Name: Selim K. Zilkha
Title: Trustee
SELIM K. ZILKHA (1996) ANNUITY
TRUST
By: /s/ Ezra K. Zilkha
--------------------------------------------------
Name: Ezra K. Zilkha
Title: Trustee
</TABLE>
3
<PAGE> 1
Exhibits 10.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of
January 30, 1998 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 November 22, 1997, as supplemented by the Approval of Merger
Agreement, dated as of January 22, 1998, among the Company, Sonat Acquisition
Corporation, a wholly owned subsidiary of the Company, and Zilkha
(collectively, 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.
<PAGE> 2
"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.
"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.
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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
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<PAGE> 4
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
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
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<PAGE> 5
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 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
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<PAGE> 6
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;
(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
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<PAGE> 7
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;
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<PAGE> 8
(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;
(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
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<PAGE> 9
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.
(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
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<PAGE> 10
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.
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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 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,
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<PAGE> 12
(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 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
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<PAGE> 13
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 fourth 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:
Two Houston Center
909 Fannin, Suite 2910
Houston, Texas 77010
Attention: [Insert Name of Purchaser]
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<PAGE> 14
(ii) if to the Company:
Sonat Inc.
1900 5th Avenue N.
Birmingham, Alabama 35203
Attention: William A. Smith
Telephone: (205) 325-7410
Facsimile: (205) 325-7444
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.
(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.
-14-
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
SONAT INC.
By:/s/ WILLIAM A. SMITH
--------------------------------------
Name: William A. Smith
Title: Executive Vice President
/s/ SELIM K. ZILKHA
-----------------------------------------
Selim K. Zilkha
/s/ MICHAEL ZILKHA
-----------------------------------------
Michael Zilkha
SELIM K. ZILKHA TRUST
By:/s/ SELIM K. ZILKHA
--------------------------------------
Name: Selim K. Zilkha
Title: Trustee
SELIM ZILKHA (1996) ANNUITY TRUST
By:/s/ EZRA ZILKHA
--------------------------------------
Name: Ezra Zilkha
Title: Trustee
-15-
<PAGE> 1
EXHIBIT 99.1
Bruce L. Connery FOR RELEASE: January 30, 1998
205 325 3898
Thomas W. Barker, Jr.
205 325 3586
SONAT ANNOUNCES CLOSING OF
ZILKHA ENERGY ACQUISITION
BIRMINGHAM, Ala. -- Ronald L. Kuehn, Jr., chairman, president and
chief executive officer of Sonat Inc. (NYSE: SNT), announced that at a special
meeting of its shareholders held today in Houston the shareholders approved the
issuance of approximately $1.04 billion of Sonat's common stock in connection
with its acquisition of Zilkha Energy Company. The acquisition was closed
immediately thereafter, and the company name was changed to Sonat Exploration
GOM Inc. Sonat issued a total of 24.2 million shares in the transaction and
assumed debt and other liabilities totaling approximately $300 million. The
shares were issued to the three former shareholders of Zilkha Energy Company:
Michael Zilkha, the Selim K. Zilkha Trust and the Selim K. Zilkha (1996)
Annuity Trust. This transaction, which will be accounted for as a pooling of
interests, increases the total number of Sonat shares outstanding to
approximately 110 million.
Selim K. Zilkha and his son, Michael Zilkha, have joined the Sonat
Board of Directors, bringing the number of directors to 14.
-more-
<PAGE> 2
-2-
Commenting on the acquisition, Kuehn said, "The addition of Zilkha
Energy's extensive unexplored acreage position in the Gulf of Mexico and its
talented staff is an important strategic step for Sonat's exploration and
production business, and it provides us with excellent exploration potential
for the future. The integration of the Zilkha organization with Sonat
Exploration Company is on schedule, and we have an active drilling program
under way for 1998."
Sonat, headquartered in Birmingham, is an integrated oil and natural
gas company engaged in exploration and production of oil and natural gas,
interstate transmission of natural gas, and energy services.
# # #
98-05
