-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WYK640monAexdbaq9RlhBBAsdhCey9NLbmwWNFJ5qFB5G3h4WIuxD7ycewTT6ofk rJEvDehux0FSoeXmXwCqtg== 0000899243-02-002941.txt : 20021114 0000899243-02-002941.hdr.sgml : 20021114 20021114120440 ACCESSION NUMBER: 0000899243-02-002941 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSION RESOURCES CORP CENTRAL INDEX KEY: 0000319459 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760437769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09498 FILM NUMBER: 02822968 BUSINESS ADDRESS: STREET 1: 1331 LAMAR STREET 2: SUITE 1455 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7134953000 MAIL ADDRESS: STREET 1: 1221 LAMAR STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010-3039 FORMER COMPANY: FORMER CONFORMED NAME: BELLWETHER EXPLORATION CO DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDING SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities -- Exchange Act of 1934 For the quarterly period ended September 30, 2002 or Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From _____ to _________ Commission file number: 0-9498 MISSION RESOURCES CORPORATION (Exact name of registrant as specified in its charter) Delaware 74-0437769 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code: (713) 495-3000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - As of November 7, 2002, 23,830,771 shares of common stock of Mission Resources Corporation were outstanding. MISSION RESOURCES CORPORATION INDEX
Page # ------ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets: September 30, 2002 (Unaudited) and December 31, 2001 ........................ 1 Condensed Consolidated Statements of Operations (Unaudited): Three months and nine months ended September 30, 2002 and 2001 .............. 3 Condensed Consolidated Statements of Cash Flows (Unaudited): Nine months ended September 30, 2002 and 2001 ............................... 4 Notes to Condensed Consolidated Financial Statements (Unaudited) .............. 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .................... 33 ITEM 4. Controls and Procedures ....................................................... 34 PART II. OTHER INFORMATION .............................................................. 35 ITEM 1. Legal Proceedings ............................................................. 35 ITEM 2. Change in Securities and Use of Proceeds ...................................... 35 ITEM 3. Defaults Upon Senior Securities ............................................... 35 ITEM 4. Submission of Matters to a Vote of Security Holders ........................... 35 ITEM 5. Other Information ............................................................. 35 ITEM 6. Exhibits and Reports on Form 8-K .............................................. 36
PART I. FINANCIAL INFORMATION MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ITEM I. FINANCIAL STATEMENTS
ASSETS ------ September 30, December 31, 2002 2001 ------------- ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents ....................................................................... $ 16,947 $ 603 Accounts receivable and accrued revenues ........................................................ 13,882 25,668 Current portion of interest rate swap ........................................................... --- 180 Commodity derivative asset ...................................................................... --- 8,359 Prepaid expenses and other ...................................................................... 3,406 3,879 --------- --------- Total current assets ........................................................................ 34,235 38,689 --------- --------- PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full cost): United States - Unproved properties of $10,412 and $15,530 excluded from depletion as of September 30, 2002 and December 31, 2001, respectively ............................................................................. 770,931 753,905 Accumulated depreciation, depletion and amortization--oil and gas ............................... (452,167) (374,167) --------- --------- Net property, plant and equipment ............................................................... 318,764 379,738 Leasehold, furniture and equipment .............................................................. 3,494 3,347 Accumulated depreciation ........................................................................ (1,320) (916) --------- --------- Net leasehold, furniture and equipment .......................................................... 2,174 2,431 --------- --------- LONG TERM RECEIVABLE ............................................................................ --- 899 GOODWILL & OTHER INTANGIBLES .................................................................... 14,612 15,436 OTHER ASSETS .................................................................................... 7,044 10,571 --------- --------- $ 376,829 $ 447,764 ========= =========
See accompanying notes to condensed consolidated financial statements MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (Amounts in thousands, except share information)
September 30, December 31, 2002 2001 ------------- ------------ (Unaudited) CURRENT LIABILITIES: Accounts payable and accrued liabilities ..................................................... $ 28,946 $ 38,584 Commodity derivative liabilities ............................................................. 5,621 --- Current portion of interest rate swap ........................................................ 594 --- --------- --------- Total current liabilities ................................................................ 35,161 38,584 --------- --------- LONG-TERM DEBT: Revolving credit facility .................................................................... 7,000 35,000 Subordinated notes due 2007 .................................................................. 225,000 225,000 Unamortized premium on issuance of $125 million subordinated notes ........................... 1,500 1,695 --------- --------- Total long-term debt .................................................................... 233,500 261,695 --------- --------- INTEREST RATE SWAP, excluding current portion ................................................ 1,906 4,248 COMMODITY DERIVATIVE LIABILITIES, excluding current portion .................................. 449 --- DEFERRED INCOME TAXES ........................................................................ 18,748 31,177 OTHER LIABILITIES ............................................................................ --- 1,820 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 5,000,000 shares authorized; none issued or outstanding at September 30, 2002 and December 31, 2001 .................................. --- --- Common stock, $0.01 par value, 60,000,000 shares authorized, 23,896,959 shares issued at September 30, 2002 and December 31, 2001, respectively ........................ 239 239 Additional paid-in capital ................................................................... 163,837 163,735 Retained deficit ............................................................................. (71,899) (54,115) Treasury stock, at cost, 311,000 shares ...................................................... (1,905) (1,905) Other comprehensive income (loss), net of taxes .............................................. (3,207) 2,286 --------- --------- Total stockholders' equity .............................................................. 87,065 110,240 --------- --------- $ 376,829 $ 447,764 ========= =========
See accompanying notes to condensed consolidated financial statements -2- MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share information)
Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ------------------------- 2002 2001 2002 2001 -------------------------------------------------------- REVENUES: Oil revenues .......................................... $ 16,606 $ 25,128 $ 55,614 $ 56,789 Gas revenues .......................................... 9,242 12,906 30,482 46,963 Gas plant revenues .................................... --- 1,152 --- 4,275 Interest and other income (expense) ................... 1,723 1,311 (7,959) 1,528 ------------------------ ------------------------ 27,571 40,497 78,137 109,555 ------------------------ ------------------------ COST AND EXPENSES: Production expenses and taxes ......................... 11,008 14,940 39,881 34,590 Transportation costs .................................. 73 10 211 60 Gas plant expenses .................................... --- 559 --- 1,971 Mining venture ........................................ --- 41 --- 907 Loss on sale of assets ................................ --- 381 2,719 11,602 Depreciation, depletion and amortization .............. 9,718 13,458 31,917 33,033 General and administrative expenses ................... 5,142 3,453 10,349 9,468 Interest expense ...................................... 5,365 6,226 20,420 16,058 ------------------------------------------------------- 31,306 39,068 105,497 107,689 ------------------------------------------------------- Income (loss) before income taxes and cumulative effect of a change in accounting method ............... (3,735) 1,429 27,360) 1,866 Provision (benefit) for income taxes ................... (1,307) 736 (9,576) 784 ------------------------------------------------------- Income (loss) before income taxes and cumulative effect of a change in accounting method ............... $ (2,428) $ 693 $ (17,784) $ 1,082 Cumulative effect of a change in accounting method, net of deferred tax of $1,633 ................. --- --- --- 2,767 ------------------------ ------------------------ Net income (loss) ...................................... $ (2,428) $ 693 $ (17,784) $ (1,685) ======================== ======================== Income (loss) before cumulative effect of a change in accounting method per share ................ $ (0.10) $ 0.03 $ (0.75) $ 0.06 ======================== ======================== Income (loss) before cumulative effect of a change in accounting method per share-diluted ......... $ (0.10) $ 0.03 $ (0.75) $ 0.06 ======================== ======================== Net income (loss) per share ............................ $ (0.10) $ 0.03 $ (0.75) $ (0.09) ======================== ======================== Net income (loss) per share-diluted .................... $ (0.10) $ 0.03 $ (0.75) $ (0.09) ======================== ======================== Weighted average common shares outstanding ............. 23,586 23,586 23,586 18,860 ======================== ======================== Weighted average common shares outstanding-diluted ..... 23,586 23,681 23,586 19,189 ======================== ========================
See accompanying notes to condensed consolidated financial statements -3- MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Nine Months Ended September 30, ------------------------- 2002 2001 ---------- --------- Cash flows from operating activities: Net loss .................................................................. $ (17,784) $ (1,685) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization .............................. 31,917 33,033 Gain on interest rate swap ............................................ (1,567) (699) (Gain) loss due to commodity hedge ineffectiveness .................... 9,308 (1,524) Mining venture ........................................................ --- 729 Cumulative effect of a change in accounting method, net of deferred tax ................................................. --- 2,767 Stock option expense .................................................. 102 799 Amortization of deferred financing costs and bond premium ............................................................. 1,949 1,206 Loss on sale of assets ................................................ --- 11,602 Bad debt expense ...................................................... 763 183 Deferred income taxes ................................................. (9,576) (550) Changes in assets and liabilities: Accounts receivable and accrued revenue ............................... 8,435 3,308 Accounts payable and other liabilities ................................ (10,186) (8,790) Abandonment costs ..................................................... (2,505) (874) Other ................................................................. 1,631 (2,284) ---------- --------- Net cash flows provided by operating activities ....................... 12,487 37,221 ---------- --------- Cash flows from investing activities: Acquisition of oil and gas properties ................................... (419) (23,566) Acquisition of Bargo oil and gas properties ............................. --- (143,886) Additions to properties and facilities .................................. (16,607) (29,597) Additions to leasehold, furniture and equipment ......................... (147) (529) Proceeds on sale of Ecuador interests, net of costs ..................... --- 4,760 Proceeds on sale of oil and gas properties, net of costs ................ 49,095 16,399 Additions to gas plant facilities ....................................... --- (1,081) ---------- --------- Net cash flows provided by (used in) investing activities ................. 31,922 (177,500) ---------- ---------
See accompanying notes to condensed consolidated financial statements -4- MISSION RESOURCES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (Amounts in thousands)
Nine Months Ended September 30, ------------------------- 2002 2001 ---------- --------- Cash flows from financing activities: Proceeds from borrowings ......................................... 21,000 208,754 Payments of long term debt ....................................... (49,000) (195,204) Net proceeds from issuance of common stock ....................... --- 899 Proceeds from issuance of senior subordinated notes due 2007, including premium ...................................... --- 126,875 Credit facility costs ............................................ (65) (7,055) ---------- ---------- Net cash flows (used in) provided by financing activities ........ (28,065) 134,269 ---------- ---------- Net increase (decrease) in cash and cash equivalents ............. 16,344 (6,010) Cash and cash equivalents at beginning of period ................. 603 14,464 ---------- ---------- Cash and cash equivalents at end of period ......................... $ 16,947 $ 8,454 ========== ========== Nine Months Ended September 30, -------------------------- 2002 2001 ---------- ---------- Supplemental disclosures of cash flow information: Cash paid (received) during the period: Interest ......................................................... $ 14,003 $ 8,140 Income taxes (refunds) ........................................... $ (4,972) $ 2,185 Supplemental schedule of non-cash investing and financing activities: Fair value of assets and liabilities acquired: Net current assets and other assets ............................ $ --- $ 2,453 Property, plant and equipment .................................. --- 260,893 Goodwill and intangibles ....................................... --- 20,849 Deferred tax liability ......................................... --- (59,000) ---------- ---------- Total allocated purchase price ............................ --- 225,195 Less non-cash consideration - issuance of stock .................... --- 80,000 Less cash acquired in transaction .................................. --- 1,309 ---------- ---------- Cash used for business acquisition, net of cash acquired ........... $ --- $ 143,886 ========== ==========
See accompanying notes to condensed consolidated financial statements -5- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America. However, in the opinion of management, these statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position at September 30, 2002, and the results of operations and changes in cash flows for the periods ended September 30, 2002 and 2001. Interim period results are not necessarily indicative of results of operations or cash flows for a full year. These financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements in the Mission Resources Corporation (the "Company" or "Mission") Annual Report. Merger On May 16, 2001, Bellwether Exploration Company ("Bellwether") merged with Bargo Energy Company ("Bargo") and changed its name to Mission Resources Corporation. At that time, the Company increased its authorized capital stock to 60 million shares of common stock and 5 million shares of preferred stock and amended its 1996 Stock Incentive Plan to increase the number of shares reserved for issuance under the plan by 2.0 million shares. Under the merger agreement, holders of Bargo stock and options received a combination of cash and Mission common stock. The merger was accounted for using the purchase method of accounting, which generally allows a one year window for adjustment to the purchase price allocation. Accordingly, adjustments were made to goodwill in the first and second quarters of 2002 relating to tax and accrual adjustments. No further adjustments have been required. The impact of such adjustments on the carrying value of goodwill is shown in the table in the Goodwill section of this Note. Oil and Gas Property Accounting The Company utilizes the full cost method of accounting for its investment in oil and gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs, and direct internal costs) are capitalized as the cost of oil and gas properties when incurred. To the extent that capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and amortization, exceed the discounted future net revenues of proved oil and gas reserves net of deferred taxes, such excess capitalized costs will be charged to operations. No such charges to operations were required during the three and nine month periods ending September 30, 2002 or 2001. -6- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Comprehensive Income Comprehensive income includes all changes in a company's equity except those resulting from investments by owners and distributions to owners. The Company's total comprehensive income for the three months and nine months ended September 30, 2002 and 2001 was as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ----------- --------- ------------ ---------- 2002 2001 2002 2001 ----------- --------- ------------ ---------- Net income (loss) ................................... $(2,428) $ 693 $(17,784) $ (1,685) Cumulative effect attributable to adoption of SFAS No. 133, net of tax .......................... --- --- --- (19,328) Accounting for commodity hedges ..................... (2,739) 3,032 (5,492) 26,380 ------------------------------------------------- Comprehensive income (loss) ......................... $(5,167) $ 3,725 $(23,276) $ 5,367 =================================================
The accumulated balance of other comprehensive income (loss) related to commodity hedges, net of taxes, is as follows (in thousands): Balance at December 31, 2001 ................................... $ 2,286 Net gains on hedges ............................................ 868 Reclassification adjustments ................................... (8,987) Effectiveness of cancelled hedges (See Footnote 4) ............. (331) Tax effect on hedging activity ................................. 2,957 -------- Balance at September 30, 2002 .................................. $ (3,207) ======== Goodwill The Financial Accounting Standards Board ("FASB") approved Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets in June 2001. This pronouncement requires that intangible assets with indefinite lives, including goodwill, cease being amortized and be evaluated on an annual basis for impairment. The Company adopted SFAS No. 142 on January 1, 2002 at which time the Company had unamortized goodwill in the amount of $15.1 million and unamortized identifiable intangible assets in the amount of $374,300, all subject to the transition provisions. Upon adoption of SFAS No. 142, $277,000 of workforce intangible assets recorded as unamortized identifiable assets was subsumed into goodwill and was not amortized as it no longer qualified as a recognizable intangible asset. SFAS No. 142 requires disclosure of what reported income before extraordinary items and net income would have been in all periods presented exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized, any deferred credit related to excess over cost equity method goodwill, and changes in amortization periods for intangible assets that will continue to be amortized (including related tax effects). Similarly adjusted per share amounts are also required to be disclosed for all periods presented. -7- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) The merger with Bargo, which resulted in all of the Company's goodwill, occurred in May 2001. The following table presents the required disclosures concerning adjusted income for the quarter and nine months ended September 30, 2001 (amounts in thousands):
Three Months Nine Months Ended Ended September 30, September 30, 2001 2001 ------------- ------------- Net income (loss) ........................................................................ $ 693 $ (1,685) Exclude goodwill amortization............................................................. 536 804 ------------- ------------- Net income (loss) exclusive of amortization .............................................. $ 1,229 $ (881) ============= ============= Net income (loss) exclusive of amortization per share .................................... $ 0.05 $ (0.05) Net income (loss) exclusive of amortization per share - diluted .......................... $ 0.05 $ (0.05)
The changes in the carrying amount of goodwill for the period ended September 30, 2002, are as follows (amounts in thousands):
Intangible Total Goodwill Goodwill Assets and Intangibles -------- ---------- --------------- Balance, December 31, 2001 ......................................... $ 15,061 $ 375 $ 15,436 Transferred to goodwill ............................................ 277 (277) --- Amortization of lease .............................................. --- (98) (98) Merger purchase price allocation adjustments ....................... (726) --- (726) -------- -------- -------- Balance, September 30, 2002 ........................................ $ 14,612 $ --- $ 14,612 ======== ======== ========
The transition and impairment test for goodwill, effective January 1, 2002, was performed in the second quarter of 2002. As of January 1, 2002, the Company's fair value exceeded the carrying amount; therefore, goodwill was not impaired. Goodwill will be evaluated for impairment annually at December 31st of each year. Ecuador Due to widening price differentials, higher operating costs and marginal drilling results, the Company decided in early 2001 to seek a buyer for its assets in Ecuador. In June 2001, with an effective date of May 31, 2001, the Company sold its wholly-owned subsidiaries that were party to the concessions of the Charapa and Tiguino fields. The Company retained two receivables: 1) a $1.0 million escrow receivable from the purchaser to be settled before year end upon resolution of negotiations with the Ecuadorian government concerning production levels, and 2) a receivable of approximately $900,000 to be collected out of oil sales from the partner in the Tiguino field. -8- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) In the fourth quarter of 2001, management deemed the $1.0 million receivable to be uncollectible due to a lack of success in negotiating with the Ecuador government, and recorded an increase to the loss on the sale. In the second quarter of 2002, the partner receivable was reduced to $559,000, with the $341,000 charged against income as bad debt expense. The collectible portion of the receivable was determined based upon actual and estimated future operations of the field. In June 2002, the Company was presented with post-closing adjustments to the final accounting for this sale. The post-closing adjustments included reimbursements for reduction of value added tax receivable, reimbursement of production royalties, pricing and volume adjustments negotiated with the purchaser through June 2002 and costs of completing the divestiture. The Company recognized the full amount of the proposed adjustments as a $2.7 million additional loss on the property sale in the second quarter of 2002. However, the Company continues to negotiate specific issues. Trade Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and typically do not bear interest. The Company reviews collectibility of trade accounts receivable monthly. Past due balances over ninety days and $50,000 are reviewed individually for collectibility. Account balances are charged off against earnings when the Company determines potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. Reclassifications Certain reclassifications of prior period statements have been made to conform with current reporting practices. Use of Estimates In order to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America, management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reserve information. Actual results could differ from those estimates. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, which provided accounting requirements for retirement obligations associated with tangible long-lived assets, including: . the timing of liability recognition; . initial measurement of liability; . allocation of asset retirement cost to expense; . subsequent measure of the liability; and . financial statement disclosures. Statement No. 143 requires that the Company record a liability for the fair value of its asset retirement obligation, primarily comprised of its plugging and abandonment liabilities, in the period in which it is incurred if a reasonable estimate of fair value can be made. The liability is accreted at the end of each period through charges to operating expense. The amount of the asset retirement obligation is added to the carrying amount of the oil and gas properties and this additional carrying amount is depreciated over the life of the properties. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. -9- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) The Company is required and plans to adopt the provisions of Statement No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report. SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statements No. 13 and Technical Corrections, was issued in April 2002. SFAS No. 145 provides guidance for income statement classification of gains and losses on extinguishments of debt and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is effective for the Company in January 2003. The Company will apply SFAS No. 145 as appropriate to future activities. SFAS No. 146, Accounting for Exit or Disposal Activities, was issued in June 2002. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF Issue No. 94-3, Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 is effective for the exit and disposal activities initiated after December 31, 2002. The Company will apply SFAS No. 146 as appropriate to future activities. 2. Stockholders' Equity On May 16, 2001, Bellwether merged with Bargo. The resulting company was renamed Mission Resources Corporation. As partial consideration in the merger, 9.5 million shares of Mission common stock were issued to the holders of Bargo common stock and options. The $80 million value of such shares was included in the purchase price. Concurrent with the merger, all Bellwether employees who held stock options were immediately vested in those options upon closing of the merger. Compensation expense of $620,000 was recognized on that date for an estimate of those employee options that would have expired unexercisable pursuant to original terms. The expense was calculated as the excess of the stock price on the merger date over the exercise price of the options. An additional $102,000 of compensation expense was recognized in the nine month period ending September 30, 2002 as a result of staff reductions. In September 1997, the Company adopted a shareholder rights plan to protect its shareholders from coercive or unfair takeover tactics. Under the plan, each outstanding share of the Company's common stock and each share of subsequently issued common stock has attached to it one right. The rights become exercisable if a person or group acquires or announces an intention to acquire beneficial ownership of 15% or more of the outstanding shares of common stock without the prior consent of the Company. When the rights become exercisable, each holder of a right will have the right to receive, upon exercise, a number of shares of the Company's common stock having a market price of two times the exercise price of the right. The Company may redeem the rights for $0.01 per right at any time before they become exercisable without shareholder approval. The rights will expire on September 26, 2007, subject to earlier redemption by the Board of Directors of the Company. -10- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) The following tables represent a reconciliation of the numerator and denominator of the basic Earnings per Share ("EPS") computation to the numerator and denominator of the diluted EPS computation. Potentially dilutive options totaling 2,910,168 in the three and nine month periods ended September 30, 2002, and 3,402,000 and 2,027,000 in the three and nine month periods ended September 30, 2001, respectively, were not included in the computation of diluted EPS because to do so would have been antidilutive. SFAS No.128 reconciliation (amounts in thousands except per share amounts):
Three Months Ended Three Months Ended September 30, 2002 September 30, 2001 -------------------------------------- ------------------------------------- Loss Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ---------- ----------- ------------- --------- Net income (loss) per common share: Net income (loss) available to common stockholders ......................... $ (2,428) 23,586 $ (0.10) $ 693 23,586 $ 0.03 ======== ======== Effect of dilutive securities: Options and warrants .......................... $ --- --- $ -- 95 -------- -------- -------- -------- Net income (loss) per common share-diluted: Net income (loss) available to common stockholders and assumed conversions ................................. $ (2,428) 23,586 $ (0.10) $ 693 23,681 $ 0.03 ======== ======== ======== ======== ======== ======== Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 -------------------------------------- ------------------------------------- Loss Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ---------- ----------- ------------- --------- Net income (loss) per common share: Net loss available to common stockholders ................................ $(17,784) 23,586 $ (0.75) $ (1,685) 18,860 $ (0.09) ======== ======== Effect of dilutive securities: Options and warrants .......................... $ --- --- $ --- --- -------- -------- -------- -------- Net loss per common share-diluted: Net loss available to common stockholders and assumed conversions ................................ $(17,784) 23,586 $ (0.75) $ (1,685) 18,860 $ (0.09) ======== ======== ======== ======== ======== ========
In periods of loss, the effect of potentially dilutive options and warrants is excluded from the calculation as antidilutive. For the three and nine months ended September 30, 2002, potential incremental shares of 275,197 and 479,052, respectively, were excluded. -11- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 3. Long Term Debt Credit Facility On May 16, 2001, concurrent with the previously discussed merger, the Company's existing credit facility was replaced by a $200.0 million credit facility ("Credit Facility") that terminates in May 2004. The borrowing base is determined from time to time by the lenders based on the Company's reserves and other factors deemed relevant by the lenders. The interest rate on borrowings is determined based upon the Company's credit rating and borrowing base utilization. Interest can be either Prime plus a margin of up to 1% or LIBOR plus a margin of 1.5% to 2.5%. The average interest rate paid by the Company in the three and nine month periods ended September 30, 2002 was 3.9%. The Credit Facility contains various covenants including certain required financial measurements for current ratio, ratio of total debt to earnings before interest, taxes, depreciation, depletion, amortization and extraordinary items ("EBITDAX") and interest coverage ratio. Restrictions are placed on debt, liens, dividends, leases and capital spending on foreign operations. On September 30, 2002, $7 million was outstanding under the Credit Facility and the Company was in compliance with its covenants under the Credit Facility. On October 7, 2002, the Company, entered into a third amendment (the "Amendment") to the Credit Facility. The Amendment reduces the maximum amount available under the Credit Facility from $200 million to $150 million, and sets the borrowing base at: (i) $50 million for the period from October 7, 2002 through March 30, 2003, and (ii) $40 million for the period from March 31, 2003 until the next redetermination after such date. This modification does not limit the rights of the parties to initiate interim borrowing base redeterminations in accordance with the Credit Facility. Approximately $400,000 of deferred financing costs related to the $200 million Credit Facility will be recorded as additional Interest Expense in the fourth quarter of 2002 as a result of this modification. The Amendment provides that the Company is obligated to grant liens on additional oil and gas properties such that the mortgaged oil and gas properties under the Credit Facility represent 90% of the value of the Company's oil and gas properties evaluated in the most recently completed reserve report. It prohibits the Company and its restricted subsidiaries from holding in excess of $12 million in cash and cash equivalents for any period in excess of three business days while borrowings are outstanding under the Credit Facility. The Amendment increases the required ratio of total debt to EBITDAX, and decreases the required interest coverage ratio through 2003. These ratios return to their original levels incrementally by 2004 (see table below). The definition of consolidated net income is amended to exclude therefrom any non-recurring items. The tables below detail the required ratios by fiscal quarter:
Fiscal Quarter Interest Coverage Ratio -------------- ----------------------- 09/30/02 through 03/31/03 1.75 to 1.00 04/01/03 through 06/30/03 1.90 to 1.00 07/01/03 through 09/30/03 2.10 to 1.00 10/01/03 through 12/31/03 2.30 to 1.00 01/01/04 and thereafter 2.50 to 1.00
-12- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited)
Fiscal Quarter Total Debt to EBITDAX -------------- --------------------- 09/30/02 through 12/31/02 5.50 to 1.00 01/01/03 through 03/31/03 5.00 to 1.00 04/01/03 through 06/30/03 4.75 to 1.00 07/01/03 through 09/30/03 4.50 to 1.00 10/01/03 through 12/31/03 4.00 to 1.00 01/01/04 and thereafter 3.50 to 1.00
Senior Subordinated Notes In April 1997, the Company issued $100.0 million of 10-7/8% senior subordinated notes due 2007. On May 29, 2001 the Company issued an additional $125.0 million of senior subordinated notes due 2007 with identical terms to the notes issued in April 1997 (collectively, the "Notes") at a premium of $1.9 million. The premium is amortized as a reduction of interest expense over the life of the notes so that the effective interest rate on these additional bonds is 10.5%. The premium is shown separately on the Balance Sheet. Through September 30, 2002, approximately $375,000 of the premium had been amortized. Interest on the Notes is payable semi-annually on April 1 and October 1. The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after April 1, 2002 at 105.44%, which decreases annually to 100.00% on April 1, 2005 and thereafter, plus accrued and unpaid interest. In the event of a change of control of the Company, as defined in the indenture, each holder of the Notes will have the right to require the Company to repurchase all or part of such holder's Notes at an offer price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes contain certain covenants, including limitations on indebtedness, liens, compliance with requirements of existing indebtedness, dividends, repurchases of capital stock and other payment restrictions affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales and restrictions on mergers and consolidations or sales of assets. As of September 30, 2002, the Company was in compliance with its covenants under the Notes. In the event the Company becomes out of compliance with its Credit Facility covenants, the Notes will not be impacted unless borrowings under the Credit Facility are in excess of $10.0 million. At September 30, 2002, Credit Facility borrowings had been reduced to $7 million with the funds from the sale of assets in 2002. -13- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 4. Derivative Instruments and Hedging Activities Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception of a derivative. Accounting for qualified hedges allows a derivative's gains and losses to offset related results on the hedged item in the Statement of Operations. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in Other Comprehensive Income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based upon the relative changes in fair value between the derivative contract and the hedged item over time. Any change in the fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized immediately in earnings. For the quarters ended September 30, 2002 and 2001, respectively, a $0.2 million loss and a $1.3 million gain were reported in the interest and other income line of the Statement of Operations due to commodity hedge ineffectiveness. The Company produces and sells crude oil, natural gas and natural gas liquids. As a result, its operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces. The Company periodically seeks to reduce its exposure to price volatility by hedging a portion of its production through swaps, options and other commodity derivative instruments. A combination of options, structured as a collar, is the Company's preferred hedge instrument because there are no up-front costs and protection is given against low prices. Such hedges assure that Mission receives NYMEX prices no lower than the price floor and no higher than the price ceiling. Recently, as shown on the following tables, the Company has entered into some commodity swaps that fix the price to be received. The Company's realized price for natural gas per Mcf is generally $0.08 less than the NYMEX MMBTU price. The company's realized price for oil is generally $1.08 per barrel less than NYMEX. Realized prices differ from NYMEX due to factors such as the location of the property, the heating content of natural gas and the quality of oil. The oil differential excludes the impact of Point Pedernales field production for which the Company's selling price is capped at $9.00 per barrel. In May 2002, the Company saw an opportunity to enter into hedging transactions at favorable prices. In order to maximize this opportunity, several existing oil collars were cancelled. New swaps and collars hedging forecast oil production were acquired. The Company paid approximately $3.3 million to counterparties, the fair value of the oil price collars at that time, in order to cancel the transactions. As required by SFAS No. 133, the effective portion of the hedges at termination was $418,000 that remained in other Comprehensive Income to be amortized as a hedge loss over the 19-month life of the cancelled hedges. As of September 30, 2002, the unamortized amount was $ 331,000. -14- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) The following tables detail all hedges of future production outstanding at September 30, 2002: Oil Hedges
- -------------------------------------------------------------------------------------------------------- NYMEX NYMEX BBLS Price Price Period Per Day Total BBLS Type Floor/Swap Avg. Ceiling Avg. - -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2002 5,000 460,000 Collar $25.00 $25.54 - -------------------------------------------------------------------------------------------------------- First Qtr. 2003 4,000 360,000 Swap $24.82 n/a - -------------------------------------------------------------------------------------------------------- Second Qtr. 2003 4,000 364,000 Swap $24.31 n/a - -------------------------------------------------------------------------------------------------------- Third Qtr. 2003 3,500 322,000 Swap $23.95 n/a - -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2003 3,500 322,000 Swap $23.59 n/a - --------------------------------------------------------------------------------------------------------
Gas Hedges
- -------------------------------------------------------------------------------------------------------- NYMEX NYMEX Price MMBTU Total Price Ceiling Period Per Day MMBTU Type Floor Avg. Avg. - -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2002 8,500 782,000 Collar $3.40 $7.00 - -------------------------------------------------------------------------------------------------------- First Qtr. 2003 10,000 920,000 Collar $3.00 $4.65 - -------------------------------------------------------------------------------------------------------- Second Qtr. 2003 10,000 910,000 Collar $3.00 $4.00 - -------------------------------------------------------------------------------------------------------- Third Qtr. 2003 10,000 920,000 Collar $3.00 $4.10 - -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2003 10,000 920,000 Collar $3.00 $4.65 - --------------------------------------------------------------------------------------------------------
By removing the price volatility from these volumes of oil and natural gas production, the Company has mitigated, but not eliminated, the potential negative effect of declining prices on its operating cash flow. The potential for increased operating cash flow from increasing prices has also been reduced. In October 2002, the Company entered into additional hedges of future production, taking advantage of higher natural gas future prices. The table below details the collars that were acquired:
- -------------------------------------------------------------------------------------------------------- NYMEX NYMEX Price MMBTU Total Price Ceiling Period Per Day MMBTU Type Floor Avg. Avg. - -------------------------------------------------------------------------------------------------------- Nov. 2002-Dec. 2002 5,000 305,000 Collar $3.83 $4.36 - -------------------------------------------------------------------------------------------------------- First Qtr. 2003 5,000 450,000 Collar $3.73 $4.61 - -------------------------------------------------------------------------------------------------------- Second Qtr. 2003 5,000 455,000 Collar $3.54 $4.08 - -------------------------------------------------------------------------------------------------------- Third Qtr. 2003 5,000 460,000 Collar $3.56 $4.11 - -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2003 5,000 460,000 Collar $3.73 $4.32 - --------------------------------------------------------------------------------------------------------
-15- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Effective September 22, 1998, the Company entered into an eight and one-half year interest rate swap agreement with a notional value of $80 million. Under the agreement, the Company receives a fixed interest rate and pays a floating interest rate based on the simple average of three foreign LIBOR rates. Floating rates are redetermined for six-month periods each April 1 and October 1. The interest rate swap does not qualify for hedge accounting under SFAS No. 133 and is marked to market quarterly. The Company recognized $2.8 million, net of tax, loss as the cumulative effect of a change in accounting method related to this interest rate swap upon implementation of SFAS No. 133 in January 2001. Currently, the swap's fair value of $2.5 million is shown on the Balance Sheet as a $594,000 current liability and a $1.9 million long-term liability. The increase in the swap's fair value of $1.8 million and $996,000 during the three months ended September 30, 2002 and 2001, respectively, have been reported as reductions in Interest Expense. 5. Income Taxes The benefit for federal and state income taxes for the three and nine months ended September 30, 2002 was based upon a 35% effective tax rate. The $4.3 million valuation allowance on deferred taxes applicable at December 31, 2001 has been increased to $5.1 million at September 30, 2002, because the Company determined that the portion of deferred tax asset relating to state tax losses generated during the period would not be realized. In assessing the realizability of the 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 ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projection for future state taxable income, management believes it is more likely than not that the Company will not realize its deferred tax asset related to state income taxes. Management believes that merger with Bargo was not an ownership change as defined in section 382 of the Internal Revenue Code since 1994. A change of stock ownership in the future by a shareholder of the Company may cause an ownership change, which would affect the Company's ability to utilize its net operating loss carryforwards in the future. 6. Pro Forma The merger with Bargo, completed on May 16, 2001, significantly impacted the future operating results of the Company. The merger was accounted for as a purchase, and the results of operations are included in the Company's results of operations from May 16, 2001. The pro forma results are based on assumptions and estimates and are not necessarily indicative of the Company's results of operations had the transaction occurred as of January 1, 2001, or of those in the future. -16- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) The following table presents the unaudited pro forma results of operations as if the merger had occurred on January 1, 2001 (amounts in thousands, except earnings per share). Nine Months Ended September 30, 2001 -------------------- Revenues ................................... $ 149,730 Income before cumulative effective of change in accounting method ............. $ 3,206 Net income ................................. $ 436 Net income per share ....................... $ 0.14 Net income per share-diluted ............... $ 0.13 7. Restructuring During 2001 the Company took several steps planned to enhance its asset base, improve its cost structure and boost its competitive position in the business environment presented by low oil and gas prices. Among those steps were the reduction of staff by almost 50% and the termination of the Company's administrative, accounting and information technology services outsourcing contracts. In the fourth quarter of 2001, the Company recorded a $2.1 million charge associated with these plans. The charge was included in general and administrative expenses. During 2002, the Company paid these restructuring costs. In the third quarter of 2002, Mission's Chief Executive Officer and Chief Financial Officer left the Company to pursue other activities. This resulted in a $2.6 million charge, which is reflected in general and administrative expenses. As a condition of the separation agreement, the Company has signed an agreement with the former Chief Financial Officer to provide consulting services as needed over a 12 month period. 8. Related Party Transactions In 2002, as part of an effort to improve liquidity, the Company sold interests in various oil and gas fields through a series of competitive bids. In July 2002, in one of those transactions, the Company sold interests in several properties located in New Mexico to Chisos, LTD ("Chisos"). J.P. Bryan, a member of Mission's Board of Directors until October 2002, is the President and sole owner of Chisos. Over 25 companies requested information packages and four submitted bids on these properties. The bid from Chisos was approximately $4.0 million, which exceeded all others by $250,000 and additionally provided Mission a non-competition agreement in New Mexico, a one-year right to participate in developmental drilling and a one-year right to participate in any preferential rights events. These considerations were not offered to Mission by any other bidder. Milam Energy, LP ("Milam") is a 51% working interest owner with the Company in several south Louisiana properties. Torch Energy Advisors Incorporated ("Torch") is a majority owner of Milam, and J.P. Bryan, a member of Mission's Board of Directors until October 2002 is also a managing director and stockholder of Torch. As of September 30, 2002, Milam owed the Company approximately $1.0 million in joint interest billings and cash calls related to these properties. The receivable is reflected on the accounts receivable and accrued revenues line of the consolidated Balance Sheet. A portion of the outstanding receivable is past due. The Company is exercising its rights under the operating agreement to net all further revenue against all outstanding receivables until paid. As of October 31, 2002, the receivable balance has been reduced to approximately $570,000. -17- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) A $250,000 payment under a non-compete agreement was paid in the second quarter of 2002 to Tim J. Goff, Bargo's former Chief Executive Officer and former member of Mission's Board of Directors. During the fiscal year 1992, the Company acquired an average 24.4% interest in three mining ventures (the "Mining Venture") from an unaffiliated individual for $128,500. At the time of such acquisition, J. P. Bryan, a member of Mission's Board of Directors until October 2002, his brother, Shelby Bryan and Robert L. Gerry III (the "Affiliated Group"), owned an average 21.5% interest in the Mining Venture. The Company's interest in the Mining Venture increased as it paid costs of the venture while the interest of the Affiliated Group decreased. Throughout the first half of 2001, the Company spent $137,000 on costs of the Mining Venture, primarily for soil core evaluations. These costs, plus the $729,000 accumulated on the Balance Sheet in Other Assets as of December 31, 2000, were charged to earnings in 2001. No such costs were incurred in 2002. Pursuant to contracts in place, the Company is not obligated to make any future payments. 9. Subsequent Events The following changes to the Company's management and Board of Directors occurred after September 30, 2002: . Jonathon M. Clarkson, resigned his positions as President, Chief Financial Officer and Director effective September 30, 2002. . Richard W. Piacenti became the company's Senior Vice President and Chief Financial Officer on October 7, 2002. . David A. Brown was elected to the Company's Board of Directors in October 2002. He will also serve as Chairman of the Audit Committee. . J.P. Bryan retired as Director of the Company in October 2002. . John (Jack) L. Eells became Senior Vice President - Exploration and Geoscience on November 7, 2002. . Martin Phillips resigned as Director of the Company in November 2002. . Herbert C. Williamson was appointed to the Company's Board of Directors on November 12, 2002. Hurricane Lili passed through the Gulf of Mexico and South Louisiana during the first week of October. Four fields in which the Company holds interests sustained damage in the storm. Two operated platforms at Eugene Island 307 are currently being repaired and will be producing at full rates by the end of November. A non-operated platform in the area was heavily damaged, and the field is expected to remain off production until mid-November. Mission's net production at that field is 660 BOE per day. The Lac Blanc field in inland waters of Louisiana sustained nominal damage, and is producing. Mission has filed claims with its insurance carriers on these properties, and we expect our financial exposure from property damage to be only the applicable deductible. Fourth quarter production will be affected by about 600 BOE per day as a result of Hurricane Lili, but the impact is not expected to extend to the first quarter of 2003. 10. Contingencies A dispute between the Minerals Management Service ("MMS") and the Company concerning the appropriate expenses to be used in calculating royalties has been resolved. The Company has agreed to pay the MMS approximately $170,000, which is less than the $1.9 million reserve previously classified as Other Liabilities on the Balance Sheet. The Company had reserved an expense tariff each month -18- MISSION RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) assuming that the entire expense tariff being deducted could be disallowed by the MMS. The Company was able to resolve the dispute on more favorable terms, resulting in a $1.7 million gain that is included in Interest and Other Income on the Statement of Operations. 11. Segment Reporting The Company's operations were concentrated primarily in three segments: exploration and production of oil and natural gas in the United States, in Ecuador and gas plants. The Ecuadorian assets were sold in June 2001 and the gas plants were sold in October and November 2001.
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------- 2002 2001 2002 2001 ---------------------------------------------- Sales to unaffiliated customers: -------------------------------- Oil and gas - US ..................................................... $ 25,848 $ 38,034 $ 86,096 $ 101,875 Oil and gas - Ecuador ................................................ --- --- --- 1,877 Gas plants ........................................................... --- 1,152 --- 4,275 --------------------------------------------- Total sales ......................................................... $ 25,848 $ 39,186 $ 86,096 108,027 Interest and other income (expense) ................................. 1,723 1,311 (7,959) 1,528 --------------------------------------------- Total revenues ..................................................... $ 27,571 $ 40,497 $ 78,137 $ 109,555 ============================================= Operating profit (loss) before income taxes and ----------------------------------------------- cumulative effect of change in accounting method: ------------------------------------------------- Oil and gas - US .................................................... $ 5,049 $ 9,585 $ 14,087 $ 36,860 Oil and gas - Ecuador ............................................... --- --- --- (1,698) Gas plants .......................................................... --- 593 --- 2,304 --------------------------------------------- 5,049 10,178 14,087 37,466 Loss on sale of assets .............................................. --- 381 2,719 11,602 Unallocated corporate expenses ...................................... 3,419 2,142 18,308 7,940 Interest expense .................................................... 5,365 6,226 20,420 16,058 --------------------------------------------- Operating profit (loss) before income taxes ......................... $ (3,735) $ 1,429 $(27,360) $ 1,866 ============================================= Identifiable assets: -------------------- Oil and gas - US .................................................... $ 318,764 $389,661 $318,764 $ 389,661 Oil and gas - Ecuador ............................................... --- --- --- --- Gas plants .......................................................... --- 11,235 --- 11,235 --------------------------------------------- 318,764 400,896 318,764 400,896 Corporate assets and investments .................................... 58,065 84,547 58,065 84,547 --------------------------------------------- Total ............................................................ $ 376,829 $485,443 $376,829 $ 485,443 ============================================= Capital expenditures: --------------------- Oil and gas - US .................................................... $ 5,072 $ 10,840 $ 16,607 $ 49,012 Oil and gas - Ecuador ............................................... --- --- 4,151 Gas plants .......................................................... --- 464 --- 1,081 --------------------------------------------- $ 5,072 $ 11,304 $ 16,607 $ 54,244 ============================================= Depreciation, depletion, amortization and impairments: ------------------------------------------------------ Oil and gas - US .................................................... $ 9,599 $ 12,410 $ 31,411 $ 30,345 Oil and gas - Ecuador ............................................... --- --- 504 Gas plants .......................................................... --- 328 --- 953 --------------------------------------------- $ 9,599 $ 12,738 $ 31,411 $ 31,802 =============================================
-19- MISSION RESOURCES CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS General 2001 Merger On May 16, 2001, Bellwether Exploration Company ("Bellwether") merged with Bargo Energy Company ("Bargo") and changed its name to Mission Resources Corporation ("Mission" or the "Company"). Simultaneously with the merger, Bellwether increased its authorized capital stock to 60 million shares of common stock and 5 million shares of preferred stock and amended its 1996 Stock Incentive Plan to increase the number of shares reserved for issuance under the plan by 2.0 million shares. Under the merger agreement, holders of Bargo stock and options received a combination of cash and Mission common stock. The merger was accounted for using the purchase method of accounting. The merger was financed through the issuance of $80.0 million in Mission common stock to Bargo option holders and shareholders, and an initial draw down under a new credit facility ("Credit Facility") of $166.0 million used to refinance Bargo's and Bellwether's then existing credit facilities and to pay the cash portion of the purchase price of the Bargo common stock and options, and the amount incurred by Bargo to redeem its preferred stock immediately prior to the merger. The Company issued $125.0 million of additional senior subordinated notes on May 29, 2001 and used most of the net proceeds to reduce borrowings under the Credit Facility. Critical Accounting Policies Mission's discussion and analysis of its financial condition and results of operation are based upon condensed consolidated financial statements, which have been prepared in accordance with instructions to Form 10-Q. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In response to SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company has identified certain of these policies as being of particular importance to the portrayal of its financial position and results of operations and which require the application of significant judgment by its management. The Company believes these critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Full Cost Method The Company uses the full cost method of accounting for its investment in oil and gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized in a "full cost pool" as incurred. In accordance with the full cost method, included in the capitalized full costs pool are a portion of certain employee-related costs incurred for the purpose of finding and developing oil and gas reserves. Oil and gas properties in the full cost pool, plus estimated future expenditures to develop reserves and abandon sites, are depleted using the unit of production method based on the ratio of current production to total proved recoverable oil and gas reserves. The full cost method subjects companies to a quarterly calculation of a "ceiling" or limitation on the amount that may be capitalized on the balance sheet related to oil and gas properties. To the extent that capitalized costs (net of depreciation, depletion and amortization) exceed the calculated ceiling, the excess must be written off to expense. Once incurred, the writedown of oil and gas properties is not reversible at a later date even if oil and gas prices increase. -20- MISSION RESOURCES CORPORATION Both the depletion calculation and the "ceiling" calculation are dependent upon the estimation of the Company's oil and natural gas reserves. Estimates of reserves are forecasts based on engineering data, projected future rates of production, and the timing of future expenditures. The process of estimating reserves requires substantial judgment: different reserve engineers may make different estimates of reserve quantities based on the same data. The Company relies on reserve engineers from outside consultants to prepare its reserve estimates. While quantities of reserves require substantial judgment, the associated prices oil and natural gas used in valuing reserves are required to be those prices in effect as of the last day of the period, held constant indefinitely. These prices are obtained from market postings, adjusted to the field level for factors such as quality and location. In calculating the ceiling, the Company adjusts the end-of-period price by the effect of cash flow hedges in place. This requirement for constant pricing in the ceiling test, differs from typical price trends. Oil and natural gas prices have historically been variable and, on any particular day at the end of a quarter, can be either substantially higher or lower than Mission's long-term price forecast more indicative of true fair value. Oil and gas property writedowns resulting from the application of the full cost ceiling limitation, and that are caused by fluctuation in price as opposed to reductions in the underlying quantities of reserves, should not be viewed as absolute indicators of a reduction in the ultimate value of the related reserves. Derivative Instruments The estimated fair values of the Company's commodity derivative instruments are recorded in the consolidated balance sheet. All of the Company's commodity derivative instruments represent hedges of the price of future oil and natural gas production. The changes in fair value of those derivative instruments that qualify for treatment due to being highly effective are recorded to Other Comprehensive Income until the hedged oil or natural gas quantities are produced. Estimating the fair values of hedging derivatives requires complex calculations incorporating estimates of future prices, discount rates and price movements. Instead, Mission chooses to obtain the fair value of its commodity derivatives from the counterparties to those contracts. Since the counterparties are market makers, they are able to provide Mission with a literal market value, or what they would be willing to settle such contracts for as of the given date. Business Combinations and Goodwill Under the purchase method, the acquiring company adds to its balance sheet the estimated fair values of the acquired company's assets and liabilities. Any excess of the purchase price over the fair values of the tangible and intangible net assets acquired is recorded as goodwill. In prior years, goodwill was amortized over its estimated useful life. As of 2002, goodwill with an indefinite useful life is no longer amortized, but instead is assessed for impairment at least annually. Various assumptions are made by the Company in determining the fair values of an acquired company's assets and liabilities. The most significant, requiring the most judgment, involve the estimated fair values of the oil and gas properties acquired. First estimates of oil and gas reserves are obtained from outside consultants. These estimates are subject to all the uncertainties previously discussed regarding the reserve estimates used for depletion and ceiling test calculations. Additionally, the fair value of reserves acquired in a business combination must be based on Mission's estimates of future oil and natural gas prices. In order to reduce the impact of management judgment and the possibly resulting inaccuracies, the Company typically uses future price forecasts from independent third parties, adjusted to the wellhead for its historically realized price differentials, in estimating the fair values of acquisitions. These estimated future prices are applied to the estimated reserve -21- MISSION RESOURCES CORPORATION quantities acquired to arrive at projections of future net revenues. The future net revenues are then discounted at a rate deemed appropriate given current market conditions. The Company uses these same general principles in arriving at the fair value of unproved reserves acquired in a business combination. These unproved reserves are generally classified as either probable or possible reserves. Because of their very nature, probable and possible reserve estimates are more imprecise than those of proved reserves. To compensate for the inherent risk of estimating and valuing unproved properties, the discounted future net revenues of probable and possible reserves are reduced by a risk-weighting factor. The probable or possible reserves are reviewed on an individual field basis to determine the appropriate risk-weighting factor for each field. In aggregate, the discounted future net revenues of probable and possible reserves are reduced by factors ranging from 30% to 90% to arrive at what Mission considers to be the appropriate fair values. The annual test of goodwill for impairment requires some of the same valuation steps, and therefore the same types of estimates and management judgment, as valuation of an acquired company. Revenue Recognition The Company records revenues from sales of crude oil and natural gas when delivery to the customer has occurred and title has transferred. This occurs when production has been delivered to a pipeline or a tanker lifting has occurred. The Company may have an interest with other producers in certain properties. In this case, the Company uses the sales method to account for sales of production. It is customary in the industry for various working interest partners to sell more or less than their entitled share of natural gas production, creating gas imbalances. Under the sales method, gas sales are recorded when revenue checks are received or are receivable on the accrual basis. Typically no provision is made on the balance sheet to account for potential amounts due to or from Mission related to gas imbalances. If the gas reserves attributable to a property have depleted to the point that there are insufficient reserves to satisfy existing imbalance positions, a liability or receivable, as appropriate, should be recorded equal to the current value of the imbalance. The Company does not currently have a significant net obligation as a result of such situation. The settlement or disposition of existing gas balancing positions is not anticipated to adversely impact financial condition of the Company. Liquidity and Capital Resources The Company has experienced and expects to continue to experience substantial capital requirements, primarily due to its active exploration and development programs. The Company's current primary sources of liquidity are internally generated cash flow, borrowings under its senior revolving credit facility and the sale of non-core oil and gas properties. The Company has also in the past utilized public debt and equity offerings to fund its capital requirements. Cash Flows Cash flow from operations was $12.5 million and $37.2 million for the nine month periods ending September 30, 2002 and 2001, respectively. The period to period decrease in cash flow is primarily caused by increased interest expense related to the $125.0 million of senior subordinated notes issued May 29, 2001, sale of properties since June 30, 2001, High Island 302 abandonment costs, and increased production expenses related to the properties acquired in 2001. -22- MISSION RESOURCES CORPORATION Cash provided by investing activities for the nine month period ending September 30, 2002 was $31.9 million while $177.5 million was used by investing activities in the nine month period ending September 30, 2001. The Company invested $16.6 million in exploration and development of oil and gas properties for the nine month period ended September 30, 2002 compared to $29.6 million for the same period of 2001. Spending on property acquisitions, however, was $167.4 million in 2001 and included the cost of the merger with Bargo. In 2002, the Company has focused on evaluating existing properties and divesting those determined to be non-core properties. In 2002, through September 30, 2002, $49 million in net proceeds were received from the sale of oil and gas properties. Net cash outflows related to financing activities of $28.1 million in 2002 represent principal payments net of borrowings under the Credit Facility. Financing activities provided $134.3 million for the nine month period ending September 30, 2001. Activity in 2001 related to the Bargo merger with initial borrowings under the Credit Facility, which borrowings were substantially repaid with the proceeds of the $125.0 million issuance of subordinated notes. A capital budget of $26.6 million was adopted for the year 2002, with $21.3 million for development, $0.63 million for exploration and $4.7 million for seismic data, land and other related items. As properties were divested, capital spending for development has been reduced and the Company currently anticipates its capital expenditures for 2002 to be less than $25.0 million. The Company designed and continually adjusts its capital spending plan to make optimal use of, but not to exceed, operating cash flow after debt service and administrative expenses. Natural gas and oil prices and drilling results have a significant impact on the Company's cash flows available for capital expenditures and its ability to borrow and raise additional capital. The amount the Company can borrow under its Credit Facility is subject to periodic re-determination based in part on changing expectations of future prices. Lower prices may also reduce the amount of natural gas and oil that the Company can economically produce. Additionally, the production declines of certain producing wells and the sale of producing prospects have reduced cash flows in 2002. Lower prices and/or lower production may decrease revenues, cash flows and the borrowing base under the Credit Facility, thus reducing the amount of financial resources available to meet the Company's capital requirements. Credit Facility On May 16, 2001, concurrent with the previously discussed merger, the Company's existing credit facility was replaced by a $200.0 million credit facility ("Credit Facility"). The borrowing base is determined from time to time by the lenders based on the Company's reserves and other factors deemed relevant by the lenders. The interest rate on borrowings is determined based upon the Company's credit rating and borrowing base utilization. Interest can be either Prime plus a margin of up to 1% or LIBOR plus a margin of 1.5% to 2.5%. The average interest rate paid by the Company in the three and nine months ended September 30, 2002 was 3.9%. The Credit Facility contains various covenants including certain required financial measurements for current ratio, ratio of total debt to earnings before interest, taxes, depreciation, depletion, amortization and extraordinary items ("EBITDAX") and interest coverage ratio. Restrictions are placed on debt, liens, dividends, leases and capital spending on foreign operations. On September 30, 2002, $7 million was outstanding under the Credit Facility. As of September 30, 2002, the Company was in compliance with its covenants under the Credit Facility. -23- MISSION RESOURCES CORPORATION On October 7, 2002, the Company, entered into a third amendment (the "Amendment") to the Credit Facility. The Amendment reduces the maximum amount available under the Credit Facility from $200 million to $150 million, and sets the borrowing base at: (i) $50 million for the period from October 7, 2002 through March 30, 2003, and (ii) $40 million for the period from March 31, 2003 until the next redetermination after such date. This modification does not limit the rights of the parties to initiate interim borrowing base redeterminations in accordance with the Credit Facility. Approximately $400,000 of deferred financing costs related to the $200 million Credit Facility will be recorded as additional Interest Expense in the fourth quarter of 2002 as a result of this modification. The Amendment provides that the Company is obligated to grant liens on additional oil and gas properties such that the mortgaged oil and gas properties under the Credit Facility represent 90% of the value of the Company's oil and gas properties evaluated in the most recently completed reserve report. It prohibits the Company and its restricted subsidiaries from holding in excess of $12 million in cash and cash equivalents for any period in excess of three business days while borrowings are outstanding under the Credit Facility. The Amendment increases the required ratio of total debt to EBITDAX, and decreases the required interest coverage ratio through 2003. These ratios return to their original levels incrementally by 2004 (see table below). The definition of consolidated net income is amended to exclude there from any non-recurring items. The tables below detail the required ratios by fiscal quarter: Fiscal Quarter Interest Coverage Ratio -------------- ----------------------- 09/30/02 through 03/31/03 1.75 to 1.00 04/01/03 through 06/30/03 1.90 to 1.00 07/01/03 through 09/30/03 2.10 to 1.00 10/01/03 through 12/31/03 2.30 to 1.00 01/01/04 and thereafter 2.50 to 1.00 Fiscal Quarter Total Debt to EBITDAX -------------- --------------------- 09/30/02 through 12/31/02 5.50 to 1.00 01/01/03 through 03/31/03 5.00 to 1.00 04/01/03 through 06/30/03 4.75 to 1.00 07/01/03 through 09/30/03 4.50 to 1.00 10/01/03 through 12/31/03 4.00 to 1.00 01/01/04 and thereafter 3.50 to 1.00 Senior Subordinated Notes In April 1997, the Company issued $100.0 million of 10-7/8% senior subordinated notes due 2007. On May 29, 2001, the Company issued an additional $125.0 million of senior subordinated notes due 2007 with identical terms to the notes issued in April 1997 (collectively "Notes") at a premium of $1.9 million. The premium is amortized as a reduction of interest expense over the life of the Notes so that the effective interest rate on these additional bonds is 10.5%. Through September 30, 2002, approximately $375,000 of the premium had been amortized. The premium is shown separately on the Balance Sheet. Interest on the Notes is payable -24- MISSION RESOURCES CORPORATION semi-annually on April 1 and October 1. At September 30, 2002, the Company's available cash was used to pay the approximately $12.0 million interest accrued on the bonds. The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after April 1, 2002 at 105.44% which decreases annually to 100.00% on April 1, 2005 and thereafter, plus accrued and unpaid interest. In the event of a change of control of the Company, as defined in the indenture, each holder of the Notes will have the right to require the Company to repurchase all or part of such holder's Notes at an offer price in cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. The Notes contain certain covenants, including limitations on indebtedness, liens, compliance with requirements of existing indebtedness, dividends, repurchases of capital stock and other payment restrictions affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales and restrictions on mergers and consolidations or sales of assets. As of September 30, 2002, the Company was in compliance with its covenants under the Notes. In the event the Company becomes out of compliance with its Credit Facility covenants, the Notes will not be impacted unless borrowings under the Credit Facility are in excess of $10.0 million. At September 30, 2002, Credit Facility borrowings had been reduced to $7 million with the funds from the sale of assets in 2002. The Company receives debt ratings from two major rating agencies in the United States. In determining the Company's debt rating, the agencies consider a number of items including, but not limited to, debt levels, planned asset sales, near-term and long-term production growth opportunities, capital allocation challenges and commodity price levels. At September 30, 2002 the Company's corporate bonds were rated "B+, Negative Watch" by Standard & Poor's and "Caa1, Negative Outlook" by Moody's. On November 13, 2002, Standard & Poor's lowered the Company's corporate credit rating to "B" from "B+", lowered its subordinated debt rating to "CCC+" from "B-", lowered its senior secured debt rating to "BB-" from "BB" and removed the ratings from CreditWatch with a negative outlook. A change in the Company's credit rating does not constitute a default or acceleration under the Credit Facility or the Notes. The Company has a highly leveraged capital structure due to the Notes, which limits its financial flexibility. In particular, the Company must pay approximately $24.0 million in annual interest on the Notes, which limits the amount of cash provided by operations that is available for its exploration and development program. The Notes also contain various covenants that limit the ability of the Company to, among other things, incur additional indebtedness, pay dividends, purchase capital stock and sell assets. In addition, the Company's common stock is trading at historically low levels, which limits the ability of the Company to complete offerings of its equity securities. Because of these issues, the Company's new management team has undertaken a review of the various alternatives to restructure the Company and has retained the investment banking firm of Petrie Parkman & Co. to assist in this evaluation. Among the alternatives being considered are a refinancing of the Notes, a new credit facility, a merger with or an acquisition by another company, the sale of certain producing properties, the acquisition by the Company of another company or assets, additional secured and unsecured debt financings, and the issuance of equity securities or other debt securities for cash or properties or in exchange for the Notes. Some of these alternatives would require approval of the Company's shareholders, and all of them will require the approval of other parties to the transaction. There can be no assurances that the Company will be successful in completing any of these possible transactions. Related Parties Milam Energy, LP ("Milam") is a 51% working interest owner with the Company in several south Louisiana properties. Torch Energy Advisors Incorporated ("Torch") is a majority owner of Milam, and J.P. Bryan, a member of Mission's Board of Directors until October 2002, is also a managing director and stockholder of Torch. As of September 30, 2002, Milam owed the Company approximately $1.0 million in joint interest billings and cash calls related to these properties. The receivable is reflected on the accounts receivable and accrued revenues line of the consolidated Balance Sheet. A portion of the outstanding receivable is past due. -25- MISSION RESOURCES CORPORATION The Company is exercising its rights under the joint operating agreement to net all further revenue against all outstanding receivables until paid. Full payout is expected in 4 to 6 months if production levels maintain. As of October 31, 2002, the receivable balance has been reduced to approximately $570,000. In 2002, as part of an effort to improve liquidity, the Company sold interests in various oil and gas fields through a series of competitive bids. In July 2002, the Company sold interests in several properties located in New Mexico to Chisos, LTD ("Chisos"). J.P. Bryan, a member of Mission's Board of Directors until October 2002, is the President and sole owner of Chisos. Over 25 companies requested information packages and four submitted bids on the properties. The bid from Chisos was approximately $4.0 million, which exceeded all others by $250,000 and additionally provided Mission a non-competition agreement in New Mexico, a one-year right to participate in developmental drilling and a one-year right to participate in any preferential rights events. These considerations were not offered to Mission by any other bidder. Results of Operations The following table sets forth certain operating information for the Company for the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------------------- 2002 2001/(2)/ 2002 2001/(2)/ --------------------------------------------- Production: Oil and condensate (MBbls)--US ........................................... 729 1,073 2,623 2,366 Oil and condensate (MBbls)--Ecuador ...................................... --- --- --- 95 Natural gas (MMcf) ....................................................... 3,061 4,863 10,225 13,542 Equivalent barrels (MBOE) ................................................ 1,239 1,884 4,327 4,718 Average sales price including the effect of hedges: Oil and condensate ($ per Bbl)--US ....................................... 22.78 23.42 21.20 23.21 Oil and condensate ($ per Bbl)--Ecuador .................................. --- --- --- 19.76 Natural gas ($ per Mcf) .................................................. 3.02 2.65 2.98 3.47 Average sales price excluding the effect of hedges: Oil and condensate ($ per Bbl)--US ....................................... 23.86 23.42 21.35 23.21 Oil and condensate per ($ per Bbl)-Ecuador ............................... --- --- --- 19.76 Natural gas ($ per Mcf) .................................................. 3.01 2.79 2.86 4.62 Average costs: Lease operating expenses (per Boe) ....................................... $ 7.92 $ 7.19 $ 8.30 $ 6.65 Production taxes (per Boe) ............................................... $ 0.97 $ 0.74 $ 0.92 $ 0.68 General and administrative expense ....................................... $ 4.15 $ 1.83 $ 2.39 $ 1.89 (per Boe)--US ...................................................... General and administrative expense (per Boe)--Ecuador ............................................... $ --- $ --- $ --- $ 7.60 Depreciation, depletion and amortization (per Boe)/(1)/--US .................................................. $ 7.75 $ 6.59 $ 7.26 $ 6.56 Depreciation, depletion and amortization (per Boe)/(1)/--Ecuador ............................................. $ --- $ --- $ --- $ 5.31
(1) Excludes depreciation, depletion and amortization on gas plants, furniture and fixtures and other assets. (2) Beginning with May 16, 2001, the operations of the former Bargo properties are included. -26- MISSION RESOURCES CORPORATION Three Months Ended September 30, 2002 and 2001 Net Loss For the three months ended September 30, 2002, the Company reported a loss of $2.4 million or $0.10 per share, and for the same period in 2001 reported income of $0.7 million, or $0.03 per share. The loss can be attributed to declining production combined with increased administrative costs related to the recent management changes. Oil and Gas Revenues Oil revenues decreased 34% to $16.6 million for the quarter ended September 30, 2002 from $25.1 million for the same quarter of the previous year. Average realized oil prices for the quarter ended September 30, 2002 were $22.78 per Bbl as compared to $23.42 per Bbl for 2001. Oil production decreased to 729 MBbls for the quarter ended September 30, 2002 from 1,073 MBbls for the same quarter of the previous year. Production decreased as a result of the sale of certain oil properties in July 2002 coupled with approximately one week of downtime at coastal and offshore properties due to Hurricane Isidore. Gas revenues decreased 29% from $12.9 million reported for the quarter ended September 30, 2001 to $9.2 million for the quarter ended September 30, 2002. Gas prices averaged $3.02 per Mcf, or 14% higher, in the three month period ended September 30, 2002 as compared to $2.65 per Mcf in the comparable period of 2001. Gas production was down 37% compared to the same quarter of 2001 with 3,061 MMcf and 4,863 MMcf for the three month periods ending September 30, 2002 and 2001, respectively. This decrease is due to the steep production declines of the Gulf of Mexico properties, a one-week shut in of coastal and offshore properties for Hurricane Isidore, and the impact of property sales. The realized prices discussed above include the impact of oil and gas hedges. A decrease of $767,000 related to hedging activity was reflected in oil and gas revenues for the three months ended September 30, 2002, while a decrease in oil and gas revenues of $642,000 was reflected for the same period of 2001. Gas Plant Revenues Gas plant revenues were $1.1 million in the quarter ended September 30, 2001. There were no gas plant revenues in the three months ended September 30, 2002 because these gas plants were sold in 2001. Interest and Other Income Interest and other income increased to $1.7 million in the three months ended September 30, 2002 from $1.3 million income for the three months ended September 30, 2001. The $1.7 million gain resulting from the settlement of the royalty calculation dispute with the MMS was the primary reason for the increase. The loss on ineffectiveness of commodity hedges in 2002 was $0.2 million compared to a net gain of $1.3 million for the same period of 2001. Production Expenses Lease operating expenses decreased 27% to $9.8 million in the three months ended September 30, 2002, from $13.5 million in the three months ended September 30, 2001. Production taxes decreased 14% to $1.2 million in the quarter ended September 30, 2002 from $1.4 million for the same period of the previous year. On a barrel equivalent basis (BOE), lease operating expenses, excluding production taxes, increased 10% per BOE for -27- MISSION RESOURCES CORPORATION the quarter ended September 30, 2002, from $7.19 per BOE for the three months ended September 30, 2001 because production declined as discussed above. On an aggregate basis lease operating expenses have decreased as a result of property sales. Transportation Costs Transportation costs were not significant in either period presented. Gas Plant Expenses Gas plant expenses were $559,000 in the quarter ended September 30, 2001. There were no gas plant expenses in the three months ended September 30, 2002 because these gas plants were sold in 2001. Depreciation, Depletion and Amortization Depreciation, depletion and amortization decreased 28% to $9.7 million for the three months ended September 30, 2002 from $13.5 million for the same period of 2001. The total amount for the quarter ended September 30, 2001 included approximately $328,000 of depreciation on the gas plants that were sold in late 2001 and $493,000 of goodwill amortization. Neither of these items continued into 2002. Depreciation, depletion and amortization per BOE has increased 18% to $7.75 per BOE in the quarter ended September 30, 2002, from $6.59 per BOE in the same period of 2001. The rate increased as a result of property sales in the past year. None of the sales in the third quarter of 2002 significantly altered the full cost pool and as such no gain or loss was recorded. General and Administrative Expenses General and administrative expenses increased 46% to $5.1 million for the three months ended September 30, 2002 as compared to $3.5 million for the same period of fiscal 2001. The general and administrative expense included $2.8 million for non-recurring transition costs, comprised primarily of payments to the former Chief Executive Officer and the former Chief Financial Officer upon their resignations. This is partially offset by salary savings attributable to the February 2002 staff reduction. Interest Expense Interest expense decreased 13% to $5.4 million for the three months ended September 30, 2002 from $6.2 million in the same period of 2001. A $1.8 million gain on the interest rate swap was recorded for the three months ended September 30, 2002 while a $1.0 million gain was recorded for the same period of 2001. In addition, borrowings outstanding in the Credit Facility have decreased significantly. Income Taxes The benefit for federal and state income taxes for the three months ended September 30, 2002 was based upon a 35% effective tax rate. The $4.3 million valuation allowance on deferred taxes applicable at December 31, 2001 has been increased to $5.1 million at September 30, 2002, because the Company determined that the portion of deferred tax asset relating to state tax losses generated during the period would not be realized. In assessing the realizability of the 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 ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projection for future state taxable income, management believes it is more likely than not that the Company will not realize its deferred tax asset related to state income taxes. -28- MISSION RESOURCES CORPORATION Management believes that the merger with Bargo was not an ownership change as defined in section 382 of the Internal Revenue Code since 1994. A change of stock ownership in the future by a shareholder of the Company may cause an ownership change, which would affect the Company's ability to utilize its net operating loss carryforwards in the future. Nine Months Ended September 30, 2002 and 2001 Net Loss For the nine months ended September 30, 2002, the Company reported a loss of $17.8 million or $0.75 per share, while the same period in 2001 had a loss of $1.7 million, or $0.06 per share. A $9.3 million loss on hedge ineffectiveness, lower revenues from reduced production and lower commodity prices, were the primary reasons for the variance. Oil and Gas Revenues Oil revenues decreased 2% to $55.6 million for the nine months ended September 30, 2002 from $56.8 million for the same period of the previous year. Lower oil prices partially offset by increased production in 2002 produced this change. Average realized oil prices for the nine month period ended September 30, 2002 were $21.20 per Bbl as compared to $23.08 per Bbl, including Ecuadorian oil, for the same period in 2001. Oil production increased to 2,623 MBbls for the nine month period ended September 30, 2002 from 2,461 MBbls for the same period of the previous year. Increased production in the nine months ended September 30, 2002 resulted from the properties acquired in the Bargo merger and the acquisition of properties in south Louisiana, more than offsetting production lost as a result of the Ecuador divestiture, property sales in July 2002, and downtime along the coast due to hurricanes. Gas revenues decreased 35% to $30.5 million reported for the nine month period ended September 30, 2002, from $47.0 million for the same period of 2001. Gas prices averaged $2.98 per Mcf, or 14% lower, in the nine month period ended September 30, 2002 as compared to $3.47 per Mcf in the comparable period of 2001. Gas production decreased 24% to 10,225 Mmcf in the nine month ended September 30, 2002, from 13,542 Mmcf in the same period of 2001. The annual production decline on the offshore properties and downtime in coastal areas caused by the hurricane, combined with the impact of late 2001 and 2002 property sales, are evident in this decline. These production declines were partially offset by inclusion of the Bargo properties' gas production after May 16, 2001. The realized prices discussed above include the impact of oil and gas hedges. An increase of $0.9 million related to hedging activity was reflected in oil and gas revenues for the nine months ended September 30, 2002, while a decrease in oil and gas revenues of $15.6 million was reflected for the same period of 2001. Ecuadorian oil production was not hedged. Gas Plant Revenues Gas plant revenues were $4.3 million in the nine months ended September 30, 2001. There were no gas plant revenues in the nine months ended September 30, 2002 because these gas plants were sold in 2001. -29- MISSION RESOURCES CORPORATION Interest and Other Income Interest and other income decreased significantly to a net expense of $7.9 million in the nine months ended September 30, 2002 from income of $1.5 million for the nine months ended September 30, 2001. A net loss on ineffectiveness of commodity hedges of $9.3 million in 2002 versus a net gain of $1.5 million reflected in the same period of 2001 accounts for $10.8 million of the decrease. This was partially offset by the resolution of the MMS dispute that resulted in a $1.7 million gain. Production Expenses Lease operating expenses increased 14% to $35.9 million in the nine months ended September 30, 2002, from $31.4 million in the nine months ended September 30, 2001. Production taxes increased 24% to $4.0 million in the nine months ended September 30, 2002 from $3.2 million for the same period of the previous year. Production tax increases reflect the inclusion of the Bargo properties for the entire period of 2002 versus only four and one-half months included in 2001. Because most of the Bargo properties are onshore, a larger proportion of the Bargo production is burdened by production taxes. On a barrel equivalent basis (BOE), lease operating expenses, excluding production taxes, increased 25% per BOE for the nine months ended September 30, 2002, from $6.65 per BOE for the nine months ended September 30, 2001. Transportation Costs Transportation costs were not significant in either period presented. Gas Plant Expenses Gas plant expenses were $2.0 million in the nine months ended September 30, 2001. There were no gas plant expenses in the nine months ended September 30, 2002 because these gas plants were sold in 2001. Depreciation, Depletion and Amortization Depreciation, depletion and amortization decreased 3% to $31.9 million for the nine months ended September 30, 2002 from $33.0 million for the same period of 2001. While the totals for the nine months ended September 30, 2001 included approximately $953,000 of depreciation on the gas plants and $761,000 of goodwill amortization, an increase in the per BOE rate reduced the benefit. Depreciation, depletion and amortization per BOE has increased 11% to $7.26 per BOE in the period ended September 30, 2002, from property sales in the past year. Production volumes decreased on a per BOE basis by 8%. General and Administrative Expenses General and administrative expenses totaled $10.3 million in the nine months ended September 30, 2002 as compared to $9.5 million for the same period of fiscal 2001, an increase of 8%. Savings attributable to reductions in staff and executive pay in 2002 were offset by approximately $3.4 million in nonrecurring costs, primarily severance payments made during the period. Interest Expense Interest expense increased 27% to $20.4 million for the nine months ended September 30, 2002 from $16.1 million in the same period of 2001. The additional $125.0 million of 10-7/8% subordinated debt issued on May 29, 2001 accounts for the increased interest expense, but the impact has been reduced by significant declines in the interest rates paid on bank debt and a $1.6 million gain on the interest rate swap in 2002. -30- MISSION RESOURCES CORPORATION Income Taxes The benefit for federal and state income taxes for the nine months ended September 30, 2002 was based upon a 35% effective tax rate. The $4.3 million valuation allowance on deferred taxes applicable at December 31, 2001 has been increased to $5.1 million at September 30, 2002, because the Company determined that the portion of deferred tax asset relating to state tax losses generated during the period would not be realized. In assessing the realizability of the 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 ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the projection for future state taxable income, management believes it is more likely than not that the Company will not realize its deferred tax asset related to state income taxes. Management believes that the merger with Bargo was not an ownership change as defined in section 382 of the Internal Revenue Code since 1994. A change of stock ownership in the future by a shareholder of the Company may cause an ownership change, which would affect the Company's ability to utilize its net operating loss carryforward in the future. Subsequent Events Hurricane Lili passed through the Gulf of Mexico and South Louisiana during the first week of October. Four fields in which the Company holds interests sustained damage in the storm. Two operated platforms at Eugene Island 307 are currently being repaired and will be producing at full rates by the end of November. A non-operated platform in the area was heavily damaged, and the field is expected to remain off production until mid-November. Mission's net production at that field is 660 BOE per day. The Lac Blanc field in inland waters of Louisiana sustained nominal damage, and is producing. Mission has filed claims with its insurance carriers on these properties, and we expect our financial exposure from property damage to be only the applicable deductible. Fourth quarter production will be affected by about 600 BOE per day as a result of Hurricane Lili, but the impact is not expected to extend to the first quarter of 2003. On November 13, 2002, Standard & Poor's lowered the Company's corporate credit rating to "B" from "B+", lowered its subordinated debt rating to "CCC+" from "B-", lowered its senior secured debt rating to "BB-" from "BB" and removed the ratings from CreditWatch with a negative outlook. Ecuador Due to widening price differentials, higher operating costs and marginal drilling results, the Company decided in early 2001 to seek a buyer for its assets in Ecuador. In June 2001, with an effective date of May 31, 2001, the Company sold its wholly-owned subsidiaries that were party to the concessions of the Charapa and Tiguino fields. The Company retained two receivables: 1) a $1.0 million escrow receivable from the purchaser to be settled before year end upon resolution of negotiations with the Ecuadorian government concerning production levels, and 2) a receivable of approximately $900,000 to be collected out of oil sales from the partner in the Tiguino field. In the fourth quarter of 2001, management deemed the $1.0 million receivable to be uncollectible due to a lack of success in negotiating with the Ecuador government, and recorded an increase to the loss on the sale. In the second quarter of 2002, the partner receivable was reduced to $559,000, with the $341,000 charged to income as bad debt expense. The collectible portion of the receivable was determined based upon actual and estimated future operations of the field. -31- MISSION RESOURCES CORPORATION In June 2002, the Company was presented with post-closing adjustments in the final accounting for this sale. The post-closing adjustments included reimbursements for reduction of value added tax receivable, reimbursement of production royalties, pricing and volume adjustments negotiated with the purchaser through June 2002 and costs of completing the divestiture. The Company recognized the full amount of the proposed adjustments as a $2.7 million additional loss on the property sale in the second quarter of 2002. However, the Company continues to negotiate specific issues. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations, which provided accounting requirements for retirement obligations associated with tangible long-lived assets, including: . the timing of liability recognition; . initial measurement of liability; . allocation of asset retirement cost to expense; . subsequent measure of the liability; and . financial statement disclosures. Statement No. 143 requires that the Company record a liability for the fair value of its asset retirement obligation, primarily comprised of its plugging and abandonment liabilities, in the period in which it is incurred if a reasonable estimate of fair value can be made. The liability is accreted at the end of each period through charges to operating expense. The amount of the asset retirement obligation is added to the carrying amount of the oil and gas properties and this additional carrying amount is depreciated over the life of the properties. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required and plans to adopt the provisions of Statement No. 143 for the quarter ending March 31, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report. SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statements No. 13 and Technical Corrections, was issued in April 2002. SFAS No. 145 provides guidance for income statement classification of gains and losses on extinguishments of debt and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is effective for the Company in January 2003. The Company will apply SFAS No. 145 as appropriate to future activities. SFAS No. 146, Accounting for Exit or Disposal Activities, was issued in June 2002. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in EITF Issue No. 94-3, Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 is effective for the exit and disposal activities initiated after December 31, 2002. The Company will apply SFAS No. 146 as appropriate to future activities. -32- MISSION RESOURCES CORPORATION Forward Looking Statements This Form 10-Q contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included herein, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the financial statements regarding the Company's financial position, capital budget, intent to acquire oil and gas properties, estimated quantities and net present values of reserves, business strategy, plans and objectives of management of the Company for future operations, and the effect of gas balancing, are forward-looking statements. There can be no assurances that such forward-looking statements will be correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include the volatility of oil and gas prices, operating hazards, government regulations, exploration risks and other factors described in the Company's Form 10-K filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf are expressly qualified by the Cautionary Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including adverse changes in commodity prices and interest rates. Commodity Price Risk The Company produces and sells crude oil, natural gas and natural gas liquids. As a result, its operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces. The Company periodically seeks to reduce its exposure to price volatility by hedging a portion of its production through swaps, options and other commodity derivative instruments. The Company frequently utilizes a combination of options, structured as a collar because there are no up-front costs and protection is given against low prices. These collars assure that the NYMEX prices the Company receives on the hedged production will be at NYMEX prices no lower than the price floor and no higher than the price ceiling. Recently, as shown on the tables below, the Company has entered into some commodity swaps that fix the price to be received. The Company's realized price for natural gas per Mcf is generally $0.08 less than the NYMEX MMBTU price. The company's realized price for oil is generally $1.08 per barrel less than NYMEX. Realized prices differ from NYMEX due to factors such as location of the property heating content of gas and quality of oil. The oil differential excludes the impact of Point Pedernales field production that is capped at $ 9.00 per barrel. Currently Outstanding Oil Hedges
-------------------------------------------------------------------------------------------------------- NYMEX NYMEX Price Price BBLS Floor/Swap Ceiling Period Per Day Total BBLS Type Avg. Avg. -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2002 5,000 460,000 Collar $25.00 $25.54 -------------------------------------------------------------------------------------------------------- First Qtr. 2003 4,000 360,000 Swap $24.82 n/a -------------------------------------------------------------------------------------------------------- Second Qtr. 2003 4,000 364,000 Swap $24.31 n/a -------------------------------------------------------------------------------------------------------- Third Qtr. 2003 3,500 322,000 Swap $23.95 n/a -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2003 3,500 322,000 Swap $23.59 n/a --------------------------------------------------------------------------------------------------------
-33- MISSION RESOURCES CORPORATION Currently Outstanding Gas Hedges
-------------------------------------------------------------------------------------------------------- NYMEX NYMEX MMBTU Total Price Price Period Per Day MMBTU Type Avg. Avg. -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2002 13,500 1,087,000 Collar $3.56 $6.02 -------------------------------------------------------------------------------------------------------- First Qtr. 2003 15,000 1,370,000 Collar $3.24 $4.64 -------------------------------------------------------------------------------------------------------- Second Qtr. 2003 15,000 1,365,000 Collar $3.18 $4.02 -------------------------------------------------------------------------------------------------------- Third Qtr. 2003 15,000 1,380,000 Collar $3.19 $4.10 -------------------------------------------------------------------------------------------------------- Fourth Qtr. 2003 15,000 1,380,000 Collar $3.24 $4.54 --------------------------------------------------------------------------------------------------------
These commodity derivative instruments expose the Company to counterparty credit risk to the extent the counterparty is unable to meet its monthly settlement commitment to the Company. The Company believes it selects creditworthy counterparties to its hedge transactions. Each of the Company's counterparties have long term senior unsecured debt ratings of at least A/A2 by Standard & Poor or Moody's. Interest Rate Risk The Company may enter into financial instruments such as interest rate swaps to manage the impact of interest rates. Effective September 22, 1998, the Company entered into an eight and one-half year interest rate swap agreement with a notional value of $80.0 million. Under the agreement, the Company receives a fixed interest rate and pays a floating interest rate, subject to a cap, based on the simple average of three foreign LIBOR rates. Floating rates are re-determined for a six-month period each April 1 and October 1. After April 1, 2002, the floating rate is capped at 12.375%. The floating rate for the period from October 1, 2002 to April 1, 2002 is 10.88%. The Company's exposure to changes in interest rates primarily results from short-term changes in the LIBOR rates. A 10% change in the floating LIBOR rates would change interest costs to the Company by $870,400 per year. The maximum annual change in interest charges is $1.2 million. This agreement is not held for trading purposes. The swap provider is a major financial institution, and the Company does not anticipate non-performance by the provider. The Company marks the swap value to market quarterly, recording changes in value as reductions to interest expense of $1.8 million and $996,000 for the three months ended September 30, 2002 and 2001, respectively. ITEM 4. Controls and procedures Evaluation of Disclosure Controls and Procedures Within 90 days prior to the filing date of this Report, the Company's principal executive officer ("CEO") and principal financial officer ("CFO") carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures. Based on those evaluations, the Company's CEO and CFO believe i. that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure; and ii. that the Company's disclosure controls and procedures are effective. -34- MISSION RESOURCES CORPORATION Changes in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the evaluation referred to above, nor have there been any corrective actions with regard to significant deficiencies or material weaknesses. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The Company is involved in litigation relating to claims arising out of its operations in the normal course of business, including workmen's compensation claims, tort claims and contractual disputes. Some of the existing known claims against the Company are covered by insurance subject to the limits of such policies and the payment of deductible amounts by the Company. Management believes that the ultimate disposition of all uninsured or unindemnified matters resulting from existing litigation will not have a material adverse effect on the Company's business or financial position. ITEM 2. Changes in Securities and Use of Proceeds None. ITEM 3. Defaults Upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information By letter dated October 29, 2002, the Company received notification from the Listing Qualifications Department of The Nasdaq Stock Market, Inc., indicating that its common stock has not maintained the required minimum bid price for continued quotation on the Nasdaq National Market. NASD Rule 4450(a)(5) requires that, for continued quotation on the Nasdaq National Market, the Company must maintain a minimum bid price of $1.00 for at least one day during any period of 30 consecutive business days. Nasdaq has given the Company a period of 90 calendar days, or until January 27, 2002, to achieve compliance with the minimum bid requirement in order to maintain its listing on the Nasdaq National Market. During the 90-day period, the Company will be considered to be in compliance with Nasdaq's minimum bid price requirements if the bid price of the Company's common stock closes at $1.00 per share or greater for a minimum of ten consecutive business days. There can be no assurance that the Company will be able to take actions sufficient to bring it back into compliance with the Nasdaq National Market continued listing criteria within the allotted period of time. If the Company's listing is transitioned to the Nasdaq Small Cap Market, it would have until April 28, 2003 to trade above $1.00 per share for a minimum of ten consecutive trading days to remain on the Small Cap Market. The Company may also be eligible for an additional 180-day calendar grace period beyond April 28, 2003 provided it meets the initial listing criteria for the Small Cap Market. If the Company fails to do that, it would be delisted from Nasdaq and would most likely be quoted on the OTC Bulletin Board. Furthermore, the Company may be eligible to transfer back to the Nasdaq National Market, without paying the listing fees, if, by October 24, 2003, its bid price per share maintains the $1.00 per share requirement for 30 consecutive trading days and it has maintained compliance with all other continued listing requirements on the market. The Company is -35- MISSION RESOURCES CORPORATION reviewing all options available to it to return to compliance with Nasdaq's continued listing requirements. The delisting of the Company's common stock from Nasdaq may result in a reduction in some or all of the following, each of which may have a material adverse effect on its investors: . the market price of the Company's common stock; . the liquidity of the Company's common stock; . the number of institutional investors that will be allowed by their charter to invest or consider investing in the Company's common stock; . the number of investors in general that will consider investing in the Company's common stock; . the number of market makers in the Company's common stock; . the availability of information concerning the trading prices and volume of the Company's common stock; . the number of broker-dealers willing to execute trades in shares of the Company's common stock; and . The Company's ability to obtain financing for the continuation of its operations. ITEM 6. Exhibits and Reports on Form 8-K - ------ -------------------------------- a. Exhibits. The following exhibits are filed with this Form 10-Q and are identified by the number indicated. 10.1 Third Amendment to the Credit Agreement by and among the Company and JPMorganChase Bank, as Administrative Agent, BNP Paribas, as Syndication Agent, Wachovia Bank National Association and Fleet National Bank, as Co-Documentation Agent, and the Lenders Signatory Hereto, dated October 7, 2002 (incorporated by reference to Current Report on Form 8-K filed on October 10, 2002). 10.2 Separation Agreement between Jonathon M. Clarkson and Mission Resources Corporation effective September 30, 2002 (filed herewith). 10.3 Employment Agreement between Robert L. Cavnar and Mission Resources Corporation dated August 8, 2002 (filed herewith). 10.4 Employment Agreement between Richard W. Piacenti and Mission Resources Corporation dated October 8, 2002 (filed herewith). 10.5 Form of Indemnification Agreement between Mission Resources Corporation and each of its directors and executive officers (filed herewith). 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer of the Company (filed herewith). 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer of the Company (filed herewith). b. Reports on Form 8-K None. -36- MISSION RESOURCES CORPORATION 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. MISSION RESOURCES CORPORATION (Registrant) Date: November 13, 2002 By: /s/ Robert L. Cavnar ----------------- --------------------- Robert L. Cavnar Chief Executive Officer Date: November 13, 2002 By: /s/ Richard W. Piacenti ----------------- -------------------------- Richard W. Piacenti Chief Financial Officer -37- MISSION RESOURCES CORPORATION I, Robert L. Cavnar certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mission Resources Corporation. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 Signature: /s/ Robert L. Cavnar ----------------- -------------------- Chief Executive Officer -38- I, Richard W. Piacenti certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mission Resources Corporation. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 Signature: /s/ Richard W. Piacenti ----------------- -------------------------- Chief Financial Officer -39- EX-10.2 3 dex102.txt SEPARATION AGREEMENT Exhibit 10.2 SEPARATION AGREEMENT It is hereby agreed by and between Jonathan M. Clarkson ("Employee") and Mission Resources Corporation ("Company"), that Employee will separate from employment with Company effective September 30, 2002, (hereinafter "Separation Date"), and that in order to resolve amicably all matters concerning Company employment and release, Employee and Company, in consideration of their mutual promises and other consideration itemized below, hereafter enter into the following agreement: 1. When used in this Agreement, "Company and/or its Affiliates" shall mean and include Mission Resources, Inc., a Delaware corporation, and all of its predecessors, successors, parents, subsidiaries, divisions or other affiliated companies, partners, partnerships, assigns, present and former officers, directors, employees, shareholders, agents, employee benefit plans and plan fiduciaries, whether in their individual or official capacities. 2. Nothing stated in this Agreement, or stated or done in connection herewith, shall constitute or indicate in any way any admission of wrongdoing of any kind either by Employee or Company and/or its Affiliates. (a) Company agrees that upon execution by Employee and receipt by its representative of this Agreement and the Release appended as Exhibit B, Company will pay Employee, a total of $1,250,000.00 (the "Severance Payment"), less payroll deductions for Federal Income Tax (at the supplemental withholding rate of 26%) and FICA (Medicare portion only). The above sum will be paid in a lump sum on the Effective Date (defined in Section 8 below). The Severance Payment is made pursuant to and in full settlement of all cash payments due to Employee under the terms of the Employment Agreement between Employee and Company dated May 2, 2001 ("Employment Agreement"). The Severance Payment will not be eligible for 401(k)-plan participation. (b) In addition, the Employee shall be entitled to the following: (i) For the twenty-four (24) month period after the Separation Date, Company, at its sole expense, shall continue to provide or arrange to provide Employee (and Employee's dependents) with health insurance benefits no less favorable than the health plan benefits provided by Company (or any successor) during such twenty-four (24) month period to any senior executive officer of Company, and shall continue to provide the additional dental benefits described in a memorandum dated April 29, 2002 (a copy of which has been provided to the Executive) in accordance with the terms set forth therein; provided, further, to the extent the coverage or benefits received are taxable to Executive, the Company shall make Executive "whole" on a net after tax basis, and Employee's rights under any other welfare or benefit plans maintained by the Company and/or its Affiliates will be governed by the terms of such plans; and (ii) An amount, in cash, equal to the sum of (a), any unreimbursed expenses incurred by Employee in the performance of his duties hereunder through the Separation Date upon submission of appropriate documentation in accordance with Company policy, plus (b), any accrued and unused vacation time as of the Separation Date. (c) Set forth on Exhibit A attached hereto is a list of all options or rights to acquire the Company's and/or its Affiliates' capital stock held by the Employee that were issued to the Employee on or before the Separation Date (the "Options"). The Employee will surrender to the Options to the Company on the Separation Date, and hereby relinquishes any and all claims of any type to the Options. (d) The Employee agrees to provide consulting services to the Company and/or its Affiliates on the terms and conditions set forth below during the one year period subsequent to the Separation Date (the "Consulting Period"). In consideration for such consulting services, and Employee's execution of the Release, including any claims under the Age Discrimination in Employment Act, the Company will pay to the Employee $125,000 on each of the Effective Date and March 31, 2003 ($250,000 total), and will reimburse the Employee for all out of pocket expenses incurred in providing consulting services during the Consulting Period upon submission of appropriate documentation in accordance with Company policy. During the Consulting Period, the Employee will be available to consult with the Company on an as needed basis with regard to such matters as may be reasonably related to Employee's previous experience and responsibilities with the Company prior to the date of this Agreement as the CEO and Board of Directors shall reasonably request and specify, including, without limitation, consultation regarding the Company's capital and operating budgets, financings, commercial banking and investment banking relationships, financial reporting and accounting, and exploration and development projects. To the extent necessary, such services shall be provided in the Company's Houston, Texas offices, unless otherwise agreed by the Company and Employee. The CEO or the Board of Directors shall give Employee reasonable prior notice of the nature and scope of the services needed. The Employee agrees to be available during normal business hours for a minimum of 20 hours of consulting services per week until March 31, 2003, and thereafter, on an as needed but reduced basis during the remainder of the Consulting Period. Such services shall be performed at times selected by mutual agreement of the Company and the Employee and such services shall be requested only as reasonably needed by the Company. Employee shall not be limited in any manner in accepting other employment and/or performing services for others on account of his obligation hereunder to perform consulting services. Employee shall not be expected to be available to perform such services on a regular daily basis, it being acknowledged that Employee shall have substantial duties and responsibilities with respect to other business endeavors and scheduling of any services to be provided by Employee hereunder shall be subject to such other duties and responsibilities. The Employee will be considered as an independent contractor during the Consulting Period and will not be entitled to any other benefits or compensation of any type during the Consulting Period, except as set forth herein. -2- (e) Employee hereby resigns as of the Separation Date as an officer and director of the Company and its Affiliates. (f) Except as otherwise specifically noted, any payments set forth above shall be subject to Company's required tax withholding obligations, if any. Notwithstanding the foregoing, if any excise tax relating to "parachute payments" under Section 280G of the Code applies to any payment made to Employee pursuant to the terms of this Agreement, then Company shall pay Employee an additional payment in an amount such that, after payment of federal income taxes (but not the excise tax) on such additional payment, Employee retains an amount equal to the excise tax originally imposed on the payment 4. Employee agrees that the provisions of Sections 7 and 8 of the Employment Agreement will expressly survive the termination of the Employment Agreement and will remain in full force and effect in accordance with their terms after the Separation Date, it being agreed that the covenants of Employee not to hire, employ, solicit or engage any employee of the Company or its affiliates under Section 8 of the Employment Agreement shall not apply to any employee who at such time is no longer an employee of the Company or its affiliates. Employee also acknowledges that during the course of Employee's employment Employee has had access to certain trade secrets of Company and that such trade secrets constitute valuable, highly confidential, special and unique property of Company, which Employee agrees not to disclose. These "trade secrets" include but are not limited to maps, computer programs, engineering studies, geological studies, proposed transactions, and files, records and documents relating thereto. Also, the "trade secrets" include lists of customers who utilize Company's services, and related customer information. However, such trade secrets do not include customers with whom Employee had a business relationship before being employed by Company. These "trade secrets" shall not include any information readily discernable from trade or general circulation publications or otherwise existing or available in the public domain. 5. Company and Employee acknowledge that during the term of the Employment Agreement and for a period of six years thereafter, Company shall cause Employee to be covered by any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of Company or service in other capacities at the request of Company. The coverage provided to Employee pursuant to this paragraph shall be of a scope and on terms and conditions at least as favorable as the most favorable coverage provided to any other officer or director of Company (or any successor). In addition, the Company agrees that the Indemnification Agreement dated September 30, 2002, entered into by and between the Company and the Employee, as well as all other rights to which Employee is entitled with regard to indemnification and advancement of expenses, whether by virtue of the Company's certificate of incorporation, bylaws or otherwise, will remain in full force and effect, in accordance with its terms, after the Separation Date. -3- 6. Employees, officers and directors of Company shall refrain from making any derogatory or disparaging remarks to any third party against Employee with respect to Employee's employment by Company, Employee's performance, Employee's character, or any such matters. Further, employees, officers and directors of Company shall refrain from discussions among themselves using any such derogatory or disparaging remarks. 7. Employee shall refrain from making any derogatory or disparaging remarks regarding Employee's employment by Company, or Company's services, management, or operations to any third party other than members of Employee's immediate family. 8. Employee acknowledges that he or she has been given a period of at least 21 days within which to consider this Agreement as required by the Age Discrimination in Employment Act, and the Release attached hereto as Exhibit B and to be executed hereunder, and that these documents have been executed by Employee voluntarily, with full knowledge of all relevant information and after ample opportunity to consult with legal counsel. Employee is hereby advised to consult with an attorney prior to entering into this Agreement and the Release to be executed hereunder. Employee and Company further agree that Employee has a period of seven (7) days following Employee's execution of this Agreement and the Release to be executed hereunder in which to revoke these documents by delivering to Company's undersigned representative written notice of Company revocation (such notice to be effective on dispatch), and that this Agreement and the Release executed hereunder shall not become effective or enforceable until such revocation period has expired. If Employee timely elects to revoke the Agreement, all of the provisions of this Agreement shall be void and unenforceable. This Agreement shall become effective and enforceable immediately upon the date of the expiration of the revocation period (the "Effective Date"). At Employee's option and sole discretion, Employee may waive the twenty-one (21) day review period and execute this Agreement before the expiration of twenty-one (21) days in which case the seven-day revocation period shall commence upon Employee's execution of this Agreement. If Employee elects to waive the twenty-one (21) day review period, Employee acknowledges and admits that he was given a reasonable period of time within which to consider this Agreement and his waiver is made freely and voluntarily, without duress or any coercion by any other person. 9. Except as required by applicable law, including, without limitation, the Securities Exchange Act of 1934, as amended, Company and Employee agree that they will not disclose to any other person or entity and will keep confidential the fact of the existence of this Agreement, and all other facts or information of every kind concerning this Agreement. Notwithstanding the foregoing, Employee may disclose the existence of this Agreement or information therein to Employee's family, Employee's attorney(s) or to Employee's financial advisors or tax preparer or to the government for tax purposes (each of whom will be advised that this Agreement is to remain confidential), or as otherwise required by law. -4- 10. In the event and for so long as the Company is actively contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand brought against (a) the Company or (b) the Employee in his capacity of employee, director or officer of the Company in connection with any fact, situation, circumstance, status, condition, activity practice, plan, occurrence, event, incident, action, failure to act, or transaction involving the Company, then Employee will reasonably cooperate with the Company or its counsel in the contest or defense, and provide such testimony and access to his books and records as shall be reasonably necessary in connection with the contest or defense, all at the sole cost and expense of the Company. The Employee further agrees to not provide assistance of any kind, other than as required by law, to any party to assist in pursuing any currently pending or threatened claim, litigation, arbitration, mediation, administrative hearing or other legal proceedings against the Company. 11. Any dispute arising out of or relating to this Agreement, or any breach thereof, shall be resolved by binding arbitration in Houston, Texas, in accordance with the Employment Arbitration Rules of the American Arbitration Association then in effect, as amended by this Agreement, and judgment on the award rendered by the arbitrator may be entered in any court of competent jurisdiction. The parties agree that the arbitrator shall have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Agreement. The arbitrator's decision shall follow the plain meaning of the relevant documents, apply Texas law, and shall be final and binding. The location of such arbitration in Houston, Texas, shall be selected by the Company in its sole and absolute discretion. All costs and expenses, including attorneys' fees, relating to the resolution of any such dispute shall be borne by the party incurring such costs and expenses. Notwithstanding the preceding paragraph, the parties acknowledge that either of them may seek emergency or temporary injunctive relief, but absolutely no other relief, in any court of competent jurisdiction. All other disputes, claims and remedies shall be settled by arbitration in accordance with this Section 11. 12. (a) This Agreement, the surviving paragraphs of the Employment Agreement and the Indemnification Agreement constitute the entire agreement between the parties. (b) The parties warrant that no representations have been made other than those contained in the written provisions of this Agreement, and that they do not rely on any representations not stated in this Agreement. (c) The parties further warrant that they or their undersigned representatives are legally competent and fully authorized to execute and deliver this Agreement. (d) The parties confirm they have had the opportunity to have this Agreement explained to them by attorneys of their choice, and that they executed this Agreement freely, knowingly and voluntarily. The Company is relying on its own judgment and on the advice of its attorneys and not upon any recommendation of Employee or his agents, attorneys or other representatives. Likewise, Employee is relying on his own judgment and on the advice of his -5- attorneys, and not upon any recommendation of the Company or its directors, officers, employees, agents, attorneys or other representatives. By voluntarily executing this Agreement, both parties confirm their competence to understand and do hereby accept the terms of this Agreement as resolving fully all differences, disputes and claims that may exist within the scope of this Agreement. (e) Employee represents that he has not filed or authorized the filing of any complaints, charges or lawsuits against the Company with any federal, state or local court, governmental agency, or administrative agency, and that if, unbeknownst to Employee, any such complaint has been filed on his behalf, he will use his best efforts to cause it to immediately be withdrawn and dismissed with prejudice. (f) The Company represents that it has not filed or authorized the filing of any complaints, charges or lawsuits against Employee with any federal, state or local court, governmental agency, or administrative agency, and that if, unbeknownst to the Company, any such complaint has been filed on its behalf, it will use his best efforts to cause it to immediately be withdrawn and dismissed with prejudice. (g) This Agreement may not be modified or amended except by a writing signed by all parties. No waiver of this Agreement or of any of the promises, obligations, terms, or conditions contained in it shall be valid unless it is in writing signed by the party against whom the waiver is to be enforced. (h) If any part or any provision of this Agreement shall be finally determined to be invalid or unenforceable under applicable law by a court of competent jurisdiction, that part shall be ineffective to the extent of such invalidity or unenforceability only, without in any way affecting the remaining parts of said provision or the remaining provisions of the Agreement. (i) The parties have cooperated in the preparation of this Agreement. Hence, the Agreement shall not be interpreted or construed against or in favor of any party by virtue of the identity, interest, or affiliation of its preparer. (j) This Agreement is made and shall be enforced pursuant to the laws of the State of Texas, without regard to its law governing conflicts of law. All performance required by the terms of this Agreement shall take place in Harris County, Texas. (k) Agreement shall be binding on and inure to the benefit of Employee and Company as well as all of their heirs, executors, administrators, officers, directors, employees, stockholders, successors and assigns, and all subsidiaries, affiliates and representatives of any of the foregoing entities. (l) This Agreement and the Release contain the entire agreement of the parties in complete satisfaction of any and all claims Employee or Company may have against each other as of the date of execution of this Agreement, whether or not arising from that certain Employment Agreement between Employee and Company dated May 2, 2001, which agreement -6- is terminated except as expressly set forth herein. This Agreement may be executed in one or more counterparts, all of which together shall constitute a single instrument. The parties to this Agreement have executed this instrument on the dates set forth below. Date: September 30, 2002 /s/ Jonathan M. Clarkson ----------------------------------------- Jonathan M. Clarkson Date: September 30, 2002 Mission Resources Corporation By: /s/ Robert J. Cavnar ------------------------------------- Robert J. Cavnar, Chairman and Chief Executive Officer -7- EXHIBIT A OPTION SCHEDULE Grant Date Amount ---------- ------ 05/16/01 100,000 05/16/01 100,000 05/16/01 100,000 -8- EXHIBIT B RELEASE FOR VALUE RECEIVED, the receipt of which is hereby acknowledged, Jonathan M. Clarkson ("Employee"), for himself and his heirs, executors, administrators, and assigns, agrees to hereby release, acquit and forever discharge Mission Resources Corporation as well as each of its assigns, divisions, subsidiaries, predecessors, successors, parents, divisions or affiliated companies or entities, partners, partnership, present or former officers, directors, employees, shareholders, agents, employee benefit plans and plan fiduciaries, whether in their individual or official capacities (hereinafter collectively "Company"), of and from any and all obligations, claims, counterclaims, third-party claims, debts, demands, covenants, contracts, security agreements, promises, agreements, liabilities, controversies, costs, expenses, attorneys' fees, actions, amended causes of action, or causes of action whatsoever, whether known or unknown, suspected or unsuspected, he ever had or now has or claims to have against Company from the beginning of the world to the day and date hereof, including specifically but not exclusively, and without limiting the generality of the foregoing, any and all claims, demands and causes of action, known or unknown, suspected or unsuspected, arising out of any transaction, act or omission concerning the Employment Agreement and Employee's former employment by Company, and all claims of every kind for any wages, salary, compensation, sick time, vacation time, paid leave or other remuneration of any kind; any claim of discrimination and/or retaliation on the basis of race, sex, religion, marital status, sexual preference, national origin, handicap or disability, veteran status, or special disabled veteran status; for any claim arising under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act of 1938, the Texas Commission on Human Rights Act, Chapter 451 of the Texas Labor Code, or the Texas Payday Law, as such statutes may be amended from time to time; any claim arising out of or related to an express or implied employment contract; any other contract affecting terms and conditions of employment, or a covenant of good faith and fair dealing; and any personal gain with respect to any claim arising under the qui tam provisions of any state or federal law; provided, however, that nothing contained herein shall release Company from the obligations spelled out in a Separation Agreement between Employee and Company of even date. Employee hereby acknowledges that he is executing this Release pursuant to the terms of the Separation Agreement identified above, the terms of which, are fully incorporated into this Release, that he has been advised to consult with an attorney in connection with both the Separation Agreement and this Release, that he has had sufficient time (as required under the Age Discrimination in Employment Act and set forth in the Separation Agreement) in which to consider entering into the Separation Agreement and providing this Release, that the Separation Agreement includes consideration in addition to anything of value to which Employee is entitled, that the Separation Agreement and Release are not effective until seven days after Employee has -9- executed the Release during which period Employee may revoke the Separation Agreement and Release. Employee and Company further hereby covenant and agree that this Release shall be binding in all respects upon themselves, their heirs, executors, administrators, assigns and transferees and all persons claiming under them, and shall inure to the benefit of the officers, directors, stockholders, assigns, divisions, subsidiaries, agents, employees, and successors in interest of Employee and Company. IN WITNESS WHEREOF, I have signed this Release this the 30/th/ day of September 2002. /s/ Jon Clarkson --------------------------------------- Jonathan M. Clarkson I have signed this Release on behalf of Mission Resources on this 30/th/ day of September 2002. Mission Resources Corporation By: /s/ Robert Cavnar ------------------------------------- Robert J. Cavnar, Chairman and Chief Executive Officer -10- EX-10.3 4 dex103.txt EMPLOYMENT AGREEMENT - ROBERT CAVNAR Exhibit 10.3 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") entered into effective as of August 8, 2002, by and between Robert L. Cavnar (the "Executive"), and Mission Resources Corporation, a Delaware corporation having its principal place of business at 1331 Lamar, Suite 1455, Houston, Texas 77010-3039 (the "Company"); W I T N E S S E T H: WHEREAS, The Company wishes to employ the Executive as Chairman and the Chief Executive Officer and to perform services incident to such position for the Company, and the Executive wishes to be so employed by the Company, all upon the terms and conditions hereinafter set forth: NOW THEREFORE, in consideration of the premises and mutual covenants and obligations herein set forth and for other good and valuable consideration, the receipt, sufficiency and adequacy of which is hereby acknowledged, accepted and agreed to, the parties hereto, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT AND TERM. The Company hereby employs the Executive to serve as Chairman and the Chief Executive Officer of the Company. The term of this Agreement (the "Term of this Agreement") shall be effective as of the date first above written and shall terminate thirty-six (36) months from the date hereof (the "Termination Date"), unless earlier terminated by either party hereto in accordance with the provisions of Section 5 hereof; provided, however, that beginning on the first anniversary date of the date hereof and on each anniversary date of the date hereof thereafter, the Term of this Agreement shall be automatically extended one additional year unless either party give written notice to the other at least six months prior to such anniversary of the date hereof that the Term of this Agreement shall cease to be so extended. During the Term of this Agreement, the terms of employment shall be as set forth herein unless modified by the Executive and the Company in accordance with the provisions of Section 12 hereof. The Executive hereby agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter set forth. 2. POSITION AND RESPONSIBILITIES. The Executive shall serve as Chairman and Chief Executive Officer of the Company and shall report to, and be subject to the general direction of the Board of Directors of the Company. During the Term of this Agreement, the Executive will also be nominated to be a member of the Board of Directors of the Company with respect to each meeting, or consent in lieu of meeting, of stockholders of the Company at which directors are to be elected. The Executive shall have other obligations, duties, authority and power to do all acts and things as are customarily done by a person holding the same or equivalent position or performing duties similar to those to be performed by executives in corporations of similar size to the Company and shall perform such managerial duties and responsibilities for the Company which are not inconsistent with his position as may reasonably be assigned to him by the Board of Directors of the Company (or a committee thereof). Unless otherwise agreed to by the Executive, the Executive shall be based at the Company's principal executive offices located in the greater Houston, Texas metropolitan area. 1 3. EXTENT OF SERVICE. The Executive shall devote his full business time and attention to the business of the Company. During the Term of this Agreement, Executive shall devote his best efforts and skills to the business and interests of Company, do his utmost to further enhance and develop Company's best interests and welfare, and endeavor to improve his ability and knowledge of Company's business, in an effort to increase the value of his services for the mutual benefit of the parties hereto. During the Term of this Agreement, it shall not be a violation of this Agreement for Executive to (i) serve on any corporate board or committee thereof with the approval of the Board, (ii) serve on any civic or charitable boards or committees (except for boards or committees of a competing business unless approved by the Board), (iii) deliver lectures, fulfill teaching or speaking engagements, (iv) testify as a witness in litigation involving a former employer or (v) manage personal investments; provided, however, any such activities must not materially interfere with performance of Executive's responsibilities under this Agreement. 4. COMPENSATION. (a) In consideration of the services to be rendered by the Executive to the Company, the Company will pay the Executive a salary ("Salary") of $330,000 per year during the Term of this Agreement. Such Salary will be payable in conformity with the Company's prevailing practice for executives' compensation as such practice shall be established or modified from time to time. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. From time to time during the Term of this Agreement, the amount of the Executive's Salary may be increased by, and at the sole discretion of, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"), which shall review the Executive's Salary no less regularly than annually. (b) The Company has granted the Executive on August 8, 2002 an option to purchase 1,000,000 shares of common stock of the Company at an exercise price per share of $.55 ("Option"). Such Option shall vest 33.4% on the date of grant and 33.3% on each of the first and second anniversary date of grant. The term of the Option shall be ten years from the date of grant subject to the provisions of paragraphs 5(f)(i) and 5(g) hereof. Additional grants of options will be considered by the Compensation Committee on an annual basis based on a review of the Executive's performance. (c) The Executive will be considered for an annual cash and/or stock bonus based on an evaluation of his performance by the Compensation Committee. Any such bonus will be at the sole discretion of the Compensation Committee. (d) During the term of this Agreement, the Company shall pay or reimburse the Executive for all reasonable out-of-pocket expenses for travel, meals, hotel accommodations, entertainment and the like incurred by him in connection with the business of the Company upon submission by him and approval of an appropriate statement documenting such expenses as required by the Company's policy and the Internal Revenue Code of 1986, as amended (the "Code"). In addition, the Audit Committee of the Board of Directors shall review all such expense reports on a quarterly basis. 2 (e) The Executive shall be entitled to four (4) weeks of paid vacation during each calendar year during the term of this Agreement. Vacation shall accrue on the first day of each calendar year. The Company shall not pay the Executive for any accrued but unused portion of vacation and any such unused portion of vacation shall not be carried forward to the next year. (f) During the term of this Agreement, the Executive shall be entitled to participate in and to receive all rights and benefits under any life, disability, medical and dental, health and accident and profit sharing or deferred compensation plans and such other plan or plans as may be implemented by the Company during the term of this Agreement. The Executive shall also be entitled to participate in and to receive all rights and benefits under any plan or program adopted by the Company for any other or group of other executive employees of the Company, including without limitation, the rights and benefits under the directors' and officers' liability insurance in place from time to time under the Company's insurance program for the directors and officers of the Company. (g) During the term of this agreement, the Executive shall be entitled to receive a car allowance of $500.00 per month, and one parking space shall be provided to the Executive by the Company. (h) The Company shall pay one club initiation fee of up to $25,000.00 and the base monthly dues applicable thereto, not to exceed $400.00 per month. 5. TERMINATION. (a) Termination by Company; Discharge for Cause. The Company shall be entitled to terminate this Agreement and the Executive's employment with the Company at any time and for whatever reason; or at any time for "Cause" (as defined below) by written notice to the Executive. Termination of the Executive's employment by the Company shall constitute a termination for "Cause" if such termination is for one or more of the following reasons: (i) the willful failure or refusal of the Executive to render services to the Company in accordance with his obligations under this Agreement, including, without limitation, the willful failure or refusal of the Executive to comply with the work rules, policies, procedures, and directives as established by the Board of Directors and consistent with this Agreement; such failure or refusal to be uncured and continuing for a period of not less than fifteen (15) days after notice outlining the situation is given by the Company to the Executive; (ii) the commission by the Executive of an act of fraud or embezzlement; (iii) the commission by the Executive of any other action with the intent to injure the Company; (iv) the Executive having been convicted of a felony or a crime involving moral turpitude; (v) the Executive having misappropriated the property of the Company; (vi) the Executive having engaged in personal misconduct which materially injures the Company; or (vii) the Executive having willfully violated any law or regulation relating to the business of the Company which results in material injury to the Company. In the event of the Executive's termination by the Company for Cause hereunder, the Executive shall be entitled to no severance or other termination benefits except for any unpaid Salary accrued through the date of termination. A termination of this Agreement by the Company without Cause pursuant to this Section 5(a) (which shall include the decision by the Company to not renew the Term of this Agreement for any additional one year periods as provided in Section 1 above) shall entitle the 3 Executive to the Severance Payment and other benefits specified in Section 5(f) or (g), hereof, as the case may be. (b) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Executive or his estate except that the Company shall pay to the Executive's estate that portion of his Salary and benefits accrued through the date of death. All such payments to the Executive's estate shall be made in the same manner and at the same time as the Executive's Salary. (c) Disability. If during the term of this Agreement, the Executive shall be prevented from performing his duties hereunder for a period of 90 days by reason of disability, then the Company, on 30 days' prior notice to the Executive, may terminate this Agreement. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon verification by a physician designated by the Company, shall have determined that the Executive has become physically or mentally unable (excluding infrequent and temporary absences due to ordinary illness) to perform the essential functions of his duties under this Agreement with reasonable accommodation. In the event of a termination pursuant to this paragraph (c), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Executive or his estate in the event of his subsequent death, that portion of the Executive's Salary and benefits accrued through the date of such termination. All such payments to the Executive or his estate shall be made in the same manner and at the same time as his Salary would have been paid to him had he not become disabled. (d) Termination for Good Reason. The Executive shall be entitled to terminate this Agreement and his employment with the Company at any time upon thirty (30) days written notice to the Company for "Good Reason" (as defined below). The Executive's termination of employment shall be for "Good Reason" if such termination is a result of any of the following events: (i) The Executive is assigned any responsibilities or duties materially inconsistent with his position, duties, responsibilities and status with the Company as in effect at the date of this Agreement or as may be assigned to the Executive pursuant to Section 2 hereof; or his title or offices as in effect at the date of this Agreement or as the Executive may be appointed or elected to in accordance with Section 2 are changed; or the Executive is required to report to or be directed by any person other than the Board of Directors of the Company; provided, that, the election by the Board of Directors of the Company of a Chairman of the Board who is not an officer of the Company, and the removal of that title from the Executive, shall not be an event constituting "Good Reason". (ii) there is a reduction in the Salary (as such Salary shall have been increased from time to time) payable to the Executive pursuant to Section 4(a) hereof unless such reduction is applicable to all senior executives of the Company; 4 (iii) failure by the Company or any successor to the Company or its assets to continue to provide to the Executive any material benefit, bonus, profit sharing, incentive, remuneration or compensation plan, stock ownership or purchase plan, stock option plan, life insurance, disability plan, pension plan or retirement plan in which the Executive was entitled to participate in as at the date of this Agreement or subsequent thereto, or the taking by the Company of any action that materially and adversely affects the Executive's participation in or materially reduces his rights or benefits under or pursuant to any such plan or the failure by the Company to increase or improve such rights or benefits on a basis consistent with practices in effect prior to the date of this Agreement or with practices implemented and subsequent to the date of this Agreement with respect to the executive employees of the Company generally, which ever is more favorable to the Executive, but excluding such action that is required by law; (iv) without Executive's consent, the Company requires the executive to relocate to any city or community other than one within a fifty (50) mile radius of the greater Houston, Texas metropolitan area, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations under this Agreement; or (v) there is any material breach by the Company of any provision of this Agreement. (vi) Upon the Executive's termination of this Agreement for Good Reason, the Executive shall be entitled to the Severance Payment and other benefits specified in Section 5(f) hereof. (e) Voluntary Termination. Notwithstanding anything to the contrary herein, the Executive shall be entitled to voluntarily terminate this Agreement and his employment with the Company at his pleasure upon sixty (60) days written notice to such effect. In such event, the Executive shall not be entitled to any further compensation other than any unpaid Salary and benefits accrued through the date of termination. At the Company's option, the Company may pay to the Executive the salary and benefits that the Executive would have received during such sixty (60) day period in lieu of requiring the Executive to remain in the employment of the Company for such sixty (60) day period. (f) Termination Benefits Upon Involuntary Termination or Termination for Good Reason. In the event that (i) the Company terminates this Agreement and the Executive's employment with the Company for any reason other than for Cause (as defined in Section 5(a) hereof) or the death or disability (as defined in Section 5(c) hereof) of the Executive, or (ii) the Executive terminates this Agreement and his employment with the Company for Good Reason (as set forth in Section 5(d) hereof), then the Company shall pay the Executive, within thirty (30) days after the date of termination, an amount (the "Severance Payment") equal to (x) two (2) times the Executive's highest annual Salary in existence at any time during the last two (2) years of employment immediately preceding the date of termination, and (y) a prorata portion (based on the portion of the calendar year that the Executive served hereunder prior to such termination) of the annual bonus which would have been paid to the Executive for the full year during which such termination occurred, minus applicable withholding and authorized salary reductions (the 5 "Severance Payment"). In addition, following other such termination, the Executive shall be entitled to the following benefits (collectively, the "Additional Benefits"); (i) immediate vesting of any of the Executive's outstanding options to purchase securities of the Company which were not vested by their own terms on the date of termination and the extension of the Executive's right to exercise all the Executive's options to purchase securities of the Company for a period equal to the lesser of (A) one (1) year following the date of termination or (B) the remaining term of the applicable option; (ii) continued coverage, at the Company's cost, under the Company's group health plan for the applicable coverage period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") but only if Executive elects such COBRA continuation in accordance with the time limits and in the applicable COBRA regulations; and (iii) an amount, in cash, equal to the sum of (A) any unreimbursed expenses incurred by the Executive in the performance of his duties hereunder and in compliance with Company policy through the date of termination, plus (B) any accrued and unused vacation time or other unpaid benefits as of the date of termination; and (iv) Company shall cause Executive to be covered by any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of Company or service in other capacities at the request of the company. The coverage provided to Executive pursuant to this paragraph shall be of a scope and on terms and conditions at least as favorable as the most favorable coverage provided to any other officer or director of Company (or any successor). In addition, the Company agrees that the Indemnification Agreement dated October 17, 2002, entered into by and between the Company and the Executive, as well as all other rights to which Executive is entitled with regard to indemnification and advancement of expenses, whether by virtue of the Company's certificate of incorporation, bylaws or otherwise, will remain in full force and effect, in accordance with its terms. The parties agree that, because there can be no exact measure of the damages which would occur to the Executive as a result of termination of employment, such payments contemplated in this Section 5(f) shall be deemed to constitute liquidated damages and not a penalty and the Company agrees that the Executive shall not be required to mitigate his damages. The termination compensation in this Section 5(f) shall be paid only if the Executive executes a termination agreement releasing all legally waivable claims arising from the Executive's employment. (g) Termination and Benefits upon a Change in Control. In the event of a Change in Control, as defined in this Section 5(g), then in lieu of the Severance Payment contained in Section 5(f) hereof, if the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within the twelve (12) month period immediately following a 6 Change in Control the Company shall pay to the Executive a lump sum amount equal to: (x) two (2) times the Executive's highest annual salary paid during the last two (2) years immediately preceding the date of termination, and (y) a prorata portion (based on the portion of the calendar year that the Executive served hereunder prior to such termination) of the annual bonus which would have been paid to the Executive for the full year during which such termination occurred, which in no event will be less than one-half of the Executive's then current Salary, minus applicable withholding and authorized salary reductions (the "Payment"). In the event that the excise tax relating to "parachute payments" under Section 280G of the Code applies to the Payment, then the Company shall pay the Executive an additional payment in an amount such that, after payment of federal income taxes (but not the excise tax) on such additional payment, the Executive receives an additional amount equal to the excise tax originally imposed on the Payment. The Executive shall also be entitled to receive the Additional Benefits. "Change of Control" means or shall be deemed to have occurred if and when: (i) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the outstanding voting stock of the Company; (ii) the Company is merged with or into or consolidated with another Person and, immediately after giving effect to the merger or consolidation, (a) less than 50% of the total voting power of the outstanding voting stock of the surviving or resulting Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the stockholders of the Company immediately prior to such merger or consolidation, and (b) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the voting stock of the surviving or resulting Person; (iii) the Company sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of the Company assets (either in one transaction or a series of related transactions); (iv) the liquidation or dissolution of the Company; or (v) during any consecutive two-year period individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination by the Board of Directors for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. (h) Survival. Notwithstanding the termination of this Agreement under this Section 5, the provisions of Sections 7 and 8 of this Agreement, and all other provisions hereof which by their terms are to be performed following the termination hereof shall survive such termination and be continuing obligations. 6. CONSENT AND WAIVER BY THIRD PARTIES. The Executive hereby represents and warrants that he has obtained all necessary waivers and/or consents from third parties as to enable him to accept employment with the Company on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligations or understanding with any such third party. 7 7. CONFIDENTIAL INFORMATION. The Executive acknowledges that in the course of his employment with the Company, he has received and will receive access to confidential information of a special and unique value concerning the Company and its business, including, without limitation, trade secrets, know-how, lists of customers, employee records, books and records relating to operations, costs or providing service and equipment, operating and maintenance costs, pricing criteria and other confidential information and knowledge concerning the business of the Company and its affiliates (hereinafter collectively referred to as "information") which the Company desires to protect. The Executive acknowledges that such information is confidential and the protection of such confidential information against unauthorized use or disclosure is of critical importance to the Company. The Executive agrees that he will not reveal such information to any one outside the Company. The Executive further agrees that during the term of this Agreement and thereafter he will not use or disclose such information. Upon termination of his employment hereunder, the Executive shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment hereunder and relating to the information referred to in this Section 7, and the Executive agrees that all such materials will at all times remain the property of the Company. The obligation of confidentiality, non-use and non- disclosure of know-how set forth in this Section 7 shall not extend to know-how (i) which was in the public domain prior to disclosure by the disclosing party, (ii) which comes into the public domain other than through a breach of this Agreement, (iii) which is disclosed to the Executive after the termination of this Agreement by a third party having legitimate possession thereof and the unrestricted right to make such disclosure, or (iv) which is necessarily disclosed in the course of the Executive's performance of his duties to the Company as contemplated in this Agreement. The agreements in this Section 7 shall survive the termination of this Agreement. 8. NO SOLICITATION. To support the agreements contained in Section 7 hereof, from the date hereof and for a period twelve (12) months after the Executive's employment with the Company is terminated for any reason, the Executive shall not, either directly or indirectly, through any person, firm, association or corporation with which the Executive is now or may hereafter become associated, (i) solicit any then current employee of the Company or its affiliates (except through ads or notices offering employment that are published or otherwise made publicly available), or (ii) use in any competition, solicitation or marketing effort any information as to which the Executive has a duty of confidential treatment under paragraph 7 above. 9. NOTICES. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Executive: Robert L. Cavnar c/o Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 8 If to the Company: Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 Attn: Chairman, Compensation Committee Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 10. SPECIFIC PERFORMANCE. The Executive acknowledges that a remedy at law for any breach or attempted breach of Section 7 or 8 of this Agreement will be inadequate, agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such a breach or attempted breach, and further agrees to waive any requirement of the securing or posting of any bond in connection with the obtaining of any such injunctive or any other equitable relief. 11. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 11. No modifications or waiver by the Company shall be effective without the consent of at least a majority of the Compensation Committee of the Board of Directors then in office at the time of such modification or waiver. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 12. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Texas. 13. SEVERABILITY. In case of one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never contained herein. 14. ARBITRATION. In the event that a dispute or controversy should arise between the Executive and the Company as to the meaning or application of any provision, term or condition of this Agreement, such dispute or controversy shall be settled by binding arbitration in Houston, Texas and for said purpose each of the parties hereto hereby expressly consents to such arbitration in such place. Such arbitration shall be conducted in accordance with the existing rules and regulations of the American Arbitration Association governing commercial transactions. The expense of the arbitrator shall be borne by the Company. 9 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date and year first above written. COMPANY: MISSION RESOURCES CORPORATION By: /s/ Joseph G. Nicknish ----------------------------------- Name: Joseph Nicknish Title: Senior Vice President EXECUTIVE: /s/ Robert Cavnar -------------------------- Robert L. Cavnar 10 EX-10.4 5 dex104.txt EMPLOYMENT AGREEMENT - RICHARD PIACENTI Exhibit 10.4 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") entered into effective as of October 8, 2002, by and between Richard W. Piacenti (the "Executive"), and Mission Resources Corporation, a Delaware corporation having its principal place of business at 1331 Lamar, Suite 1455, Houston, Texas 77010-3039 (the "Company"); W I T N E S S E T H: WHEREAS, The Company wishes to employ the Executive as Senior Vice President and the Chief Financial Officer and to perform services incident to such position for the Company, and the Executive wishes to be so employed by the Company, all upon the terms and conditions hereinafter set forth: NOW THEREFORE, in consideration of the premises and mutual covenants and obligations herein set forth and for other good and valuable consideration, the receipt, sufficiency and adequacy of which is hereby acknowledged, accepted and agreed to, the parties hereto, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT AND TERM. The Company hereby employs the Executive to serve as Senior Vice President and the Chief Financial Officer of the Company. The term of this Agreement (the "Term of this Agreement") shall be effective as of the date first above written and shall terminate thirty-six (36) months from the date hereof (the "Termination Date"), unless earlier terminated by either party hereto in accordance with the provisions of Section 5 hereof; provided, however, that beginning on the first anniversary date of the date hereof and on each anniversary date of the date hereof thereafter, the Term of this Agreement shall be automatically extended one additional year unless either party give written notice to the other at least six months prior to such anniversary of the date hereof that the Term of this Agreement shall cease to be so extended. During the Term of this Agreement, the terms of employment shall be as set forth herein unless modified by the Executive and the Company in accordance with the provisions of Section 12 hereof. The Executive hereby agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter set forth. 2. POSITION AND RESPONSIBILITIES. The Executive shall serve as Senior Vice President and Chief Financial Officer of the Company and shall report to, and be subject to the general direction of the Chairman and Chief Executive Officer of the Company. The Executive shall have other obligations, duties, authority and power to do all acts and things as are customarily done by a person holding the same or equivalent position or performing duties similar to those to be performed by executives in corporations of similar size to the Company and shall perform such managerial duties and responsibilities for the Company which are not inconsistent with his position as may reasonably be assigned to him by the Chairman and Chief Executive Officer and/or the Board of Directors of the Company (or a committee thereof). Unless otherwise agreed to by the Executive, the Executive shall be based at the Company's principal executive offices located in the greater Houston, Texas metropolitan area. 1 3. EXTENT OF SERVICE. The Executive shall devote his full business time and attention to the business of the Company. During the Term of this Agreement, Executive shall devote his best efforts and skills to the business and interests of Company, do his utmost to further enhance and develop Company's best interests and welfare, and endeavor to improve his ability and knowledge of Company's business, in an effort to increase the value of his services for the mutual benefit of the parties hereto. During the Term of this Agreement, it shall not be a violation of this Agreement for Executive to (i) serve on any corporate board or committee thereof with the approval of the Board, (ii) serve on any civic or charitable boards or committees (except for boards or committees of a competing business unless approved by the Board), (iii) deliver lectures, fulfill teaching or speaking engagements, (iv) testify as a witness in litigation involving a former employer or (v) manage personal investments; provided, however, any such activities must not materially interfere with performance of Executive's responsibilities under this Agreement. 4. COMPENSATION. (a) In consideration of the services to be rendered by the Executive to the Company, the Company will pay the Executive a salary ("Salary") of $250,000 per year during the Term of this Agreement. Such Salary will be payable in conformity with the Company's prevailing practice for executives' compensation as such practice shall be established or modified from time to time. Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes. From time to time during the Term of this Agreement, the amount of the Executive's Salary may be increased by, and at the sole discretion of, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"), which shall review the Executive's Salary no less regularly than annually. (b) The Company has granted the Executive on October 8, 2002 an option to purchase 250,000 shares of common stock of the Company at an exercise price per share of $.65 ("Option"). Such Option shall vest 33.4% on the date of grant and 33.3% on each of the first and second anniversary date of grant. The term of the Option shall be ten years from the date of grant subject to the provisions of paragraphs 5(f)(i) and 5(g) hereof. Additional grants of options will be considered by the Compensation Committee on an annual basis based on a review of the Executive's performance. (c) The Executive will be considered for an annual cash and/or stock bonus based on an evaluation of his performance by the Compensation Committee. Any such bonus will be at the sole discretion of the Compensation Committee. The Executive will also receive a sign-on bonus of $25,000 payable on the date hereof. (d) During the term of this Agreement, the Company shall pay or reimburse the Executive for all reasonable out-of-pocket expenses for travel, meals, hotel accommodations, entertainment and the like incurred by him in connection with the business of the Company upon submission by him and approval of an appropriate statement documenting such expenses as required by the Company's policy and the Internal Revenue Code of 1986, as amended (the "Code"). In addition, the Audit Committee of the Board of Directors shall review all such expense reports on a quarterly basis. 2 (e) The Executive shall be entitled to four (4) weeks of paid vacation during each calendar year during the term of this Agreement. Vacation shall accrue on the first day of each calendar year. The Company shall not pay the Executive for any accrued but unused portion of vacation and any such unused portion of vacation shall not be carried forward to the next year. (f) During the term of this Agreement, the Executive shall be entitled to participate in and to receive all rights and benefits under any life, disability, medical and dental, health and accident and profit sharing or deferred compensation plans and such other plan or plans as may be implemented by the Company during the term of this Agreement. The Executive shall also be entitled to participate in and to receive all rights and benefits under any plan or program adopted by the Company for any other or group of other executive employees of the Company, including without limitation, the rights and benefits under the directors' and officers' liability insurance in place from time to time under the Company's insurance program for the directors and officers of the Company. (g) During the term of this agreement, the Executive shall be entitled to receive a car allowance of $500.00 per month, and one parking space shall be provided to the Executive by the Company. (h) The Company shall pay one club initiation fee of up to $25,000.00 and the base monthly dues applicable thereto, not to exceed $400.00 per month. 5. TERMINATION. (a) Termination by Company; Discharge for Cause. The Company shall be entitled to terminate this Agreement and the Executive's employment with the Company at any time and for whatever reason; or at any time for "Cause" (as defined below) by written notice to the Executive. Termination of the Executive's employment by the Company shall constitute a termination for "Cause" if such termination is for one or more of the following reasons: (i) the willful failure or refusal of the Executive to render services to the Company in accordance with his obligations under this Agreement, including, without limitation, the willful failure or refusal of the Executive to comply with the work rules, policies, procedures, and directives as established by the Chairman and Chief Executive Officer and the Board of Directors and consistent with this Agreement; such failure or refusal to be uncured and continuing for a period of not less than fifteen (15) days after notice outlining the situation is given by the Company to the Executive; (ii) the commission by the Executive of an act of fraud or embezzlement; (iii) the commission by the Executive of any other action with the intent to injure the Company; (iv) the Executive having been convicted of a felony or a crime involving moral turpitude; (v) the Executive having misappropriated the property of the Company; (vi) the Executive having engaged in personal misconduct which materially injures the Company; or (vii) the Executive having willfully violated any law or regulation relating to the business of the Company which results in material injury to the Company. In the event of the Executive's termination by the Company for Cause hereunder, the Executive shall be entitled to no severance or other termination benefits except for any unpaid Salary accrued through the date of termination. A termination of this Agreement by the Company without Cause pursuant to this Section 5(a) (which shall include the decision by the Company to not renew the Term of this Agreement for 3 any additional one year periods as provided in Section 1 above) shall entitle the Executive to the Severance Payment and other benefits specified in Section 5(f) or (g), hereof, as the case may be. (b) Death. If the Executive dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Executive or his estate except that the Company shall pay to the Executive's estate that portion of his Salary and benefits accrued through the date of death. All such payments to the Executive's estate shall be made in the same manner and at the same time as the Executive's Salary. (c) Disability. If during the term of this Agreement, the Executive shall be prevented from performing his duties hereunder for a period of 90 days by reason of disability, then the Company, on 30 days' prior notice to the Executive, may terminate this Agreement. For purposes of this Agreement, the Executive shall be deemed to have become disabled when the Board of Directors of the Company, upon verification by a physician designated by the Company, shall have determined that the Executive has become physically or mentally unable (excluding infrequent and temporary absences due to ordinary illness) to perform the essential functions of his duties under this Agreement with reasonable accommodation. In the event of a termination pursuant to this paragraph (c), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Executive or his estate in the event of his subsequent death, that portion of the Executive's Salary and benefits accrued through the date of such termination. All such payments to the Executive or his estate shall be made in the same manner and at the same time as his Salary would have been paid to him had he not become disabled. (d) Termination for Good Reason. The Executive shall be entitled to terminate this Agreement and his employment with the Company at any time upon thirty (30) days written notice to the Company for "Good Reason" (as defined below). The Executive's termination of employment shall be for "Good Reason" if such termination is a result of any of the following events: (i) The Executive is assigned any responsibilities or duties materially inconsistent with his position, duties, responsibilities and status with the Company as in effect at the date of this Agreement or as may be assigned to the Executive pursuant to Section 2 hereof; or his title or offices as in effect at the date of this Agreement or as the Executive may be appointed or elected to in accordance with Section 2 are changed; or the Executive is required to report to or be directed by any person other than the Chairman and Chief Executive Officer and the Board of Directors of the Company; (ii) there is a reduction in the Salary (as such Salary shall have been increased from time to time) payable to the Executive pursuant to Section 4(a) hereof unless such reduction is applicable to all senior executives of the Company; (iii) failure by the Company or any successor to the Company or its assets to continue to provide to the Executive any material benefit, bonus, profit sharing, incentive, remuneration or compensation plan, stock ownership or purchase plan, stock option plan, life insurance, disability plan, pension plan or retirement plan in which the Executive was 4 entitled to participate in as at the date of this Agreement or subsequent thereto, or the taking by the Company of any action that materially and adversely affects the Executive's participation in or materially reduces his rights or benefits under or pursuant to any such plan or the failure by the Company to increase or improve such rights or benefits on a basis consistent with practices in effect prior to the date of this Agreement or with practices implemented and subsequent to the date of this Agreement with respect to the executive employees of the Company generally, which ever is more favorable to the Executive, but excluding such action that is required by law; (iv) without Executive's consent, the Company requires the executive to relocate to any city or community other than one within a fifty (50) mile radius of the greater Houston, Texas metropolitan area, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations under this Agreement; or (v) there is any material breach by the Company of any provision of this Agreement. (vi) Upon the Executive's termination of this Agreement for Good Reason, the Executive shall be entitled to the Severance Payment and other benefits specified in Section 5(f) hereof. (e) Voluntary Termination. Notwithstanding anything to the contrary herein, the Executive shall be entitled to voluntarily terminate this Agreement and his employment with the Company at his pleasure upon sixty (60) days written notice to such effect. In such event, the Executive shall not be entitled to any further compensation other than any unpaid Salary and benefits accrued through the date of termination. At the Company's option, the Company may pay to the Executive the salary and benefits that the Executive would have received during such sixty (60) day period in lieu of requiring the Executive to remain in the employment of the Company for such sixty (60) day period. (f) Termination Benefits Upon Involuntary Termination or Termination for Good Reason. In the event that (i) the Company terminates this Agreement and the Executive's employment with the Company for any reason other than for Cause (as defined in Section 5(a) hereof) or the death or disability (as defined in Section 5(c) hereof) of the Executive, or (ii) the Executive terminates this Agreement and his employment with the Company for Good Reason (as set forth in Section 5(d) hereof), then the Company shall pay the Executive, within thirty (30) days after the date of termination, an amount (the "Severance Payment") equal to (x) two (2) times the Executive's highest annual Salary in existence at any time during the last two (2) years of employment immediately preceding the date of termination, and (y) a prorata portion (based on the portion of the calendar year that the Executive served hereunder prior to such termination) of the annual bonus which would have been paid to the Executive for the full year during which such termination occurred, minus applicable withholding and authorized salary reductions (the "Severance Payment"). In addition, following other such termination, the Executive shall be entitled to the following benefits (collectively, the "Additional Benefits"); 5 (i) immediate vesting of any of the Executive's outstanding options to purchase securities of the Company which were not vested by their own terms on the date of termination and the extension of the Executive's right to exercise all the Executive's options to purchase securities of the Company for a period equal to the lesser of (A) one (1) year following the date of termination or (B) the remaining term of the applicable option; (ii) continued coverage, at the Company's cost, under the Company's group health plan for the applicable coverage period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") but only if Executive elects such COBRA continuation in accordance with the time limits and in the applicable COBRA regulations; and (iii) an amount, in cash, equal to the sum of (A) any unreimbursed expenses incurred by the Executive in the performance of his duties hereunder and in compliance with Company policy through the date of termination, plus (B) any accrued and unused vacation time or other unpaid benefits as of the date of termination; and (iv) Company shall cause Executive to be covered by any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of Company or service in other capacities at the request of the company. The coverage provided to Executive pursuant to this paragraph shall be of a scope and on terms and conditions at least as favorable as the most favorable coverage provided to any other officer or director of Company (or any successor). In addition, the Company agrees that the Indemnification Agreement dated October 17, 2002, entered into by and between the Company and the Executive, as well as all other rights to which Executive is entitled with regard to indemnification and advancement of expenses, whether by virtue of the Company's certificate of incorporation, bylaws or otherwise, will remain in full force and effect, in accordance with its terms. The parties agree that, because there can be no exact measure of the damages which would occur to the Executive as a result of termination of employment, such payments contemplated in this Section 5(f) shall be deemed to constitute liquidated damages and not a penalty and the Company agrees that the Executive shall not be required to mitigate his damages. The termination compensation in this Section 5(f) shall be paid only if the Executive executes a termination agreement releasing all legally waivable claims arising from the Executive's employment. (g) Termination and Benefits upon a Change in Control. In the event of a Change in Control, as defined in this Section 5(g), then in lieu of the Severance Payment contained in Section 5(f) hereof, if the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within the twelve (12) month period immediately following a Change in Control the Company shall pay to the Executive a lump sum amount equal to: (x) two (2) times the Executive's highest annual salary paid during the last two (2) years immediately preceding the date of termination, and (y) a prorata portion (based on the portion of the calendar year that the Executive served hereunder prior to such termination) of the annual bonus which 6 would have been paid to the Executive for the full year during which such termination occurred, which in no event will be less than one-half of the Executive's then current Salary, minus applicable withholding and authorized salary reductions (the "Payment"). In the event that the excise tax relating to "parachute payments" under Section 280G of the Code applies to the Payment, then the Company shall pay the Executive an additional payment in an amount such that, after payment of federal income taxes (but not the excise tax) on such additional payment, the Executive receives an additional amount equal to the excise tax originally imposed on the Payment. The Executive shall also be entitled to receive the Additional Benefits. "Change of Control" means or shall be deemed to have occurred if and when: (i) any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the outstanding voting stock of the Company; (ii) the Company is merged with or into or consolidated with another Person and, immediately after giving effect to the merger or consolidation, (a) less than 50% of the total voting power of the outstanding voting stock of the surviving or resulting Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the stockholders of the Company immediately prior to such merger or consolidation, and (b) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the voting stock of the surviving or resulting Person; (iii) the Company sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of the Company assets (either in one transaction or a series of related transactions); (iv) the liquidation or dissolution of the Company; or (v) during any consecutive two-year period individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination by the Board of Directors for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. (h) Survival. Notwithstanding the termination of this Agreement under this Section 5, the provisions of Sections 7 and 8 of this Agreement, and all other provisions hereof which by their terms are to be performed following the termination hereof shall survive such termination and be continuing obligations. 6. CONSENT AND WAIVER BY THIRD PARTIES. The Executive hereby represents and warrants that he has obtained all necessary waivers and/or consents from third parties as to enable him to accept employment with the Company on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligations or understanding with any such third party. 7. CONFIDENTIAL INFORMATION. The Executive acknowledges that in the course of his employment with the Company, he has received and will receive access to confidential information of a special and unique value concerning the Company and its business, including, without limitation, trade secrets, know-how, lists of customers, employee records, books and records relating to operations, costs or providing service and equipment, operating and 7 maintenance costs, pricing criteria and other confidential information and knowledge concerning the business of the Company and its affiliates (hereinafter collectively referred to as "information") which the Company desires to protect. The Executive acknowledges that such information is confidential and the protection of such confidential information against unauthorized use or disclosure is of critical importance to the Company. The Executive agrees that he will not reveal such information to any one outside the Company. The Executive further agrees that during the term of this Agreement and thereafter he will not use or disclose such information. Upon termination of his employment hereunder, the Executive shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment hereunder and relating to the information referred to in this Section 7, and the Executive agrees that all such materials will at all times remain the property of the Company. The obligation of confidentiality, non-use and non- disclosure of know-how set forth in this Section 7 shall not extend to know-how (i) which was in the public domain prior to disclosure by the disclosing party, (ii) which comes into the public domain other than through a breach of this Agreement, (iii) which is disclosed to the Executive after the termination of this Agreement by a third party having legitimate possession thereof and the unrestricted right to make such disclosure, or (iv) which is necessarily disclosed in the course of the Executive's performance of his duties to the Company as contemplated in this Agreement. The agreements in this Section 7 shall survive the termination of this Agreement. 8. NO SOLICITATION. To support the agreements contained in Section 7 hereof, from the date hereof and for a period twelve (12) months after the Executive's employment with the Company is terminated for any reason, the Executive shall not, either directly or indirectly, through any person, firm, association or corporation with which the Executive is now or may hereafter become associated, (i) solicit any then current employee of the Company or its affiliates (except through ads or notices offering employment that are published or otherwise made publicly available), or (ii) use in any competition, solicitation or marketing effort any information as to which the Executive has a duty of confidential treatment under paragraph 7 above. 9. NOTICES. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Executive: Richard W. Piacenti c/o Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 If to the Company: Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 Attn: Chairman, Compensation Committee Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 8 10. SPECIFIC PERFORMANCE. The Executive acknowledges that a remedy at law for any breach or attempted breach of Section 7 or 8 of this Agreement will be inadequate, agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such a breach or attempted breach, and further agrees to waive any requirement of the securing or posting of any bond in connection with the obtaining of any such injunctive or any other equitable relief. 11. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 11. No modifications or waiver by the Company shall be effective without the consent of at least a majority of the Compensation Committee of the Board of Directors then in office at the time of such modification or waiver. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement sets forth all the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. 12. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Texas. 13. SEVERABILITY. In case of one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never contained herein. 14. ARBITRATION. In the event that a dispute or controversy should arise between the Executive and the Company as to the meaning or application of any provision, term or condition of this Agreement, such dispute or controversy shall be settled by binding arbitration in Houston, Texas and for said purpose each of the parties hereto hereby expressly consents to such arbitration in such place. Such arbitration shall be conducted in accordance with the existing rules and regulations of the American Arbitration Association governing commercial transactions. The expense of the arbitrator shall be borne by the Company. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date and year first above written. COMPANY: MISSION RESOURCES CORPORATION By: /s/ Joseph G. Nicknish ----------------------------------------- Name: Joseph Nicknish Title: Senior Vice President 9 EXECUTIVE: /s/ Richard W. Piacenti ------------------------------------------ Richard W. Piacenti 10 EX-10.5 6 dex105.txt INDEMNIFICATION AGREEMENT EXHIBIT 10.5 INDEMNIFICATION AGREEMENT This Indemnification Agreement is entered into and effective as of the ______ day of ____________________, 2002 (this "Agreement"), by and between Mission Resources Corporation, a Delaware corporation (the "Company"), and _____________ ("Indemnitee"): WHEREAS, highly competent persons have become more reluctant to serve corporations as directors, executive officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to, and activities on behalf of, the corporation; WHEREAS, the Board of Directors of the Company (the "Board") has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the corporation or business enterprise itself; WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified. NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: Section 1. Services by Indemnitee. Indemnitee agrees to serve as a director/executive officer of the Company and, as mutually agreed by Indemnitee and the Company, as a director, officer, employee, agent or fiduciary of other corporations, partnerships, joint ventures, trusts or other enterprises (including, without limitation, employee benefit plans). Indemnitee may at any time and for any reason resign from any such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in that position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries) and Indemnitee. Indemnitee specifically acknowledges that Indemnitee's employment with the Company (or any of its subsidiaries), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Company (or any of its subsidiaries), other applicable formal severance policies duly adopted by the Board or, with respect to service as a director of the Company, by the Company's Certificate of Incorporation, Bylaws and the General Corporation Law of the State of Delaware. Notwithstanding, the foregoing, this Agreement shall continue in force after Indemnitee has ceased to serve as an officer or director of the Company and no longer serves at the request of the Company as a director, officer, employee or agent of the Company or any subsidiary of the Company. Section 2. Indemnification--General. The Company shall indemnify, and advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this Agreement and (b) to the fullest extent permitted by applicable law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement. Section 3. Proceedings Other than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in Section 2 and this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or a participant in any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, the Company shall indemnify Indemnitee against, and shall hold Indemnitee harmless from and in respect of, all Expenses, judgments, penalties, fines (including excise taxes) and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, penalties, fines or amounts paid in settlement) actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. Section 4. Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in Section 2 and this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or a participant in any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, the Company shall indemnify Indemnitee against, and shall hold Indemnitee harmless from and in respect of, all Expenses actually and reasonably incurred by him or on his behalf in connection with, and any amounts paid in settlement of, such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company if applicable law prohibits such indemnification; provided, however, if applicable law so permits, indemnification against such Expenses shall nevertheless be made by the Company in 2 such event if and only to the extent that the Court of Chancery (as hereinafter defined), or the court in which such Proceeding shall have been brought or is pending, shall determine. Section 5. Indemnification for Expenses of a Party Who Is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to (or a participant in) and is successful, on the merits or otherwise, in defense of any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in defense of such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. Section 6. Indemnification for Expenses as a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 7. Advancement of Expenses. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten (10) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it ultimately shall be determined, in accordance with this Agreement, that Indemnitee is not entitled to be indemnified against such Expenses. Section 8. Procedure for Determination of Entitlement to Indemnification. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. (b) On written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a), a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change of Control (as hereinafter defined) shall have occurred within two (2) years prior to the date of such written request, by Independent Counsel (as hereinafter defined) in a written opinion to the Board, a copy of which shall be 3 delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred within two (2) years prior to the date of such written request, (A) by a majority vote of the Disinterested Directors (as hereinafter defined), even though less than a quorum of the Board, or (B) if there are no such Disinterested Directors, or if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity on reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b), the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred within two (2) years prior to the date of Indemnitee's written request for indemnification pursuant to Section 8(a), the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred within two (2) years prior to the date of Indemnitee's written request for indemnification pursuant to Section 8(a), the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 17, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty (20) days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a), no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery or other court of competent jurisdiction for resolution of any objection which shall have been made 4 by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the petitioned court or by such other person as the petitioned court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 8(b). The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b), and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected and appointed. If (i) Independent Counsel does not make any determination respecting Indemnitee's entitlement to indemnification hereunder within ninety (90) days after receipt by the Company of a written request therefor and (ii) any judicial proceeding or arbitration pursuant to Section 10(a)(iii) hereof is then commenced, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 9. Presumptions and Effect of Certain Proceedings. (a) In making a determination with respect to entitlement to indemnification hereunder, the Person, Persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a), and the Company shall have the burden of proof to overcome that presumption in connection with the making by any Person, Persons or entity of any determination contrary to that presumption. (b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or on a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. (c) Any action taken by Indemnitee in connection with any employee benefit plan shall, if taken in good faith by Indemnitee and in a manner Indemnitee reasonably believed to be in the interest of the participants in or beneficiaries of that plan, be deemed to have been taken in a manner "not opposed to the best interests of the Company" for all purposes of this Agreement. Section 10. Remedies of Indemnitee. (a) In the event that (i) a determination is made pursuant to Section 8 that Indemnitee is not entitled to indemnification hereunder, (ii) advancement of Expenses is not timely made pursuant to Section 7, (iii) Independent Counsel is to 5 determine Indemnitee's entitlement to indemnification hereunder, but does not make that determination within ninety (90) days after receipt by the Company of the request for that indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 within ten (10) days after receipt by the Company of a written request therefor or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication from the Court of Chancery of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such Proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5. (b) In the event that a determination shall have been made pursuant to Section 8(b) that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 10, the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 8(b) that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission by Indemnitee of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 17) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. 6 Section 11. Non-Exclusivity; Survival of Rights; Insurance; Subrogation. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Delaware law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. (e) The Company's obligation to indemnify or advance Expenses hereunder to Indemnitee with respect to Indemnitee's service at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. Section 12. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or of any other corporation, partnership, joint 7 venture, trust, employee benefit plan or other enterprise which Indemnitee served on behalf of the Company; or (b) the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any Proceeding commenced by Indemnitee pursuant to Section 10 relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his spouse (if Indemnitee resides in Texas or another community property state), heirs, executors and administrators, and this Agreement does not, and shall not be construed to confer any rights on any person that is not a party to this Agreement, other than Indemnitee's spouse, and his heirs, executors and assigns. Section 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable which is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable which is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. Section 14. Exception to Right of Indemnification or Advancement of Expenses. Notwithstanding any other provision hereof, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee or any claim therein prior to a Change of Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board. Section 15. Identical Counterparts. This Agreement may be executed in one or more counterparts by means of original or facsimile signatures, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. Section 16. Headings. The headings of the Sections hereof are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 17. Definitions. For purposes of this Agreement: (a) "Acquiring Person" means any Person who or which, together with all Affiliates and Associates of such Person, is or are the Beneficial Owner of twenty-five percent (25%) or more of the shares of Common Stock then outstanding, but does not include any Exempt Person; provided, however, that a Person shall not be or become an Acquiring Person if such Person, together with its Affiliates and Associates, shall become the Beneficial Owner of twenty-five percent (25%) or more of the shares of Common Stock then outstanding solely as 8 a result of a reduction in the number of shares of Common Stock outstanding due to the repurchase of Common Stock by the Company, unless and until such time as such Person or any Affiliate or Associate of such Person shall purchase or otherwise become the Beneficial Owner of additional shares of Common Stock constituting one percent (1%) or more of the then outstanding shares of Common Stock or any other Person (or Persons) who is (or collectively are) the Beneficial Owner of shares of Common Stock constituting one percent (1%) or more of the then outstanding shares of Common Stock shall become an Affiliate or Associate of such Person, unless, in either such case, such Person, together with all Affiliates and Associates of such Person, is not then the Beneficial Owner of twenty-five percent (25%) or more of the shares of Common Stock then outstanding. (b) "Affiliate" has the meaning ascribed to that term in Exchange Act Rule 12b-2. (c) "Associate" means, with reference to any Person, (i) any corporation, firm, partnership, association, unincorporated organization or other entity (other than the Company or a subsidiary of the Company) of which that Person is an officer or general partner (or officer or general partner of a general partner) or is, directly or indirectly, the Beneficial Owner of 10% or more of any class of its equity securities, (ii) any trust or other estate in which that Person has a substantial beneficial interest or for or of which that Person serves as trustee or in a similar fiduciary capacity and (iii) any relative or spouse of that Person, or any relative of that spouse, who has the same home as that Person. (d) A specified Person is deemed the "Beneficial Owner" of, and is deemed to "beneficially own," any securities: (i) of which that Person or any of that Person's Affiliates or Associates, directly or indirectly, is the "beneficial owner" (as determined pursuant to Exchange Act Rule 13d-3) or otherwise has the right to vote or dispose of, including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this subparagraph as a result of an agreement, arrangement or understanding to vote that security if that agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given in response to a public (that is, not including a solicitation exempted by Exchange Act Rule 14a-2(b)(2)) proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act; and (B) is not then reportable by such Person on Exchange Act Schedule 13D (or any comparable or successor report); (ii) which that Person or any of that Person's Affiliates or Associates, directly or indirectly, has the right or obligation to acquire 9 (whether that right or obligation is exercisable or effective immediately or only after the passage of time or the occurrence of an event) pursuant to any agreement, arrangement or understanding (whether or not in writing) or on the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," securities tendered pursuant to a tender or exchange offer made by that Person or any of that Person's Affiliates or Associates until those tendered securities are accepted for purchase or exchange; or (iii) which are beneficially owned, directly or indirectly, by (A) any other Person (or any Affiliate or Associate thereof) with which the specified Person or any of the specified Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy or consent as described in the proviso to subparagraph (i) of this definition) or disposing of any voting securities of the Company or (B) any group (as that term is used in Exchange Act Rule 13d-5(b)) of which that specified Person is a member; PROVIDED, HOWEVER, that nothing in this definition shall cause a Person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of that acquisition. For purposes of this Agreement, "voting" a security shall include voting, granting a proxy, acting by consent, making a request or demand relating to corporate action (including, without limitation, calling a stockholder meeting) or otherwise giving an authorization (within the meaning of Section 14(a) of the Exchange Act) in respect of such security. (e) "Change of Control" means the occurrence of any of the following events that occurs after the effective date of this Agreement: (i) any Person becomes an Acquiring Person; (ii) at any time the then Continuing Directors cease to constitute a majority of the members of the Board; (iii) a merger of the Company with or into, or a sale by the Company of its properties and assets substantially as an entirety to, another Person occurs and, immediately after that occurrence, any Person, other than an Exempt Person, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of twenty-five percent (25%) or more of the total voting power of the then outstanding Voting Shares of the Person surviving that transaction (in the case or a merger or consolidation) or the Person acquiring those properties and assets substantially as an entirety. (f) "Common Stock" means the common stock, par value $.01 per share, of the Company. (g) "Continuing Director" means at any time any individual who then (i) is a member of the Board and was a member of the Board as of the effective 10 date of this Agreement or whose nomination for his first election, or that first election, to the Board following that date was recommended or approved by a majority of the then Continuing Directors (acting separately or as a part of any action taken by the Board or any committee thereof) and (ii) is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a nominee or representative of an Acquiring Person or of any such Affiliate or Associate. (h) "Corporate Status" describes the status of a Person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. For purposes of this Agreement, "serving at the request of the Company" includes any service by Indemnitee which imposes duties on, or involves services by, Indemnitee with respect to any employee benefit plan or its participants or beneficiaries. (i) "Court of Chancery" means the Court of Chancery of the State of Delaware. (j) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee hereunder. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Exempt Person" means (i), (A) the Company, any subsidiary of the Company, any employee benefit plan of the Company or of any subsidiary of the Company and (B) any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan or for the purpose of funding any such plan or funding other employee benefits for employees of the Company or any subsidiary of the Company and (ii) Indemnitee, any Affiliate or Associate of Indemnitee or any group (as that term is used in Exchange Act Rule 13d-5(b)) of which Indemnitee or any Affiliate or Associate of Indemnitee is a member. (m) "Expenses" include all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding and all interest or finance charges attributable to any thereof. Should any payments by the Company under this Agreement be determined to be subject to any federal, state or local income or excise tax, "Expenses" also shall include such amounts as are necessary to place Indemnitee in the same after-tax position (after giving effect to all applicable taxes) he would have been in had no such tax been determined to apply to such payments. 11 (n) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five (5) years has been, retained to represent: (i) the Company, its Affiliates or Indemnitee in any matter material to either such party; or (ii) any other Party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing. the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (o) "Person" means any natural person, sole proprietorship, corporation, partnership of any kind having a separate legal status, limited liability company, business trust, unincorporated organization or association, mutual company, joint stock company, joint venture, estate, trust, union or employee organization or governmental authority. (p) "Proceeding" includes any action, suit, alternate dispute resolution mechanism, hearing or any other proceeding, whether civil, criminal, administrative, arbitrative, investigative or meditative, any appeal in any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding and any inquiry or investigation that could lead to any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding, except one (i) initiated by an Indemnitee pursuant to Section 10 to enforce his rights hereunder or (ii) pending on or before the date of this Agreement. (q) "Voting Shares" means: (i) in the case of any corporation, stock of that corporation of the class or classes having general voting power under ordinary circumstances to elect a majority of that corporation's board of directors; and (ii) in the case of any other entity, equity interests of the class or classes having general voting power under ordinary circumstances equivalent to the Voting Shares of a corporation. Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder; provided, however, failure to give such notice shall not deprive Indemnitee of his rights to indemnification and advancement of Expenses under this Agreement unless the Company is actually and materially prejudiced thereby. 12 Section 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (b) mailed by certified or registered mail with postage prepaid, on the third (3rd) business day after the date on which it is so mailed: (a) If to Indemnitee, to: _____________________ _____________________ _____________________ (b) If to the Company, to: Mission Resources Corporation 1331 Lamar, Suite 1455 Houston, Texas 77010 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case way be. Section 21. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all the circumstances of such Proceeding in order to reflect: (a) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (b) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s). Section 22. Governing Law; Submission to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 10(a), the Company and Indemnitee hereby irrevocably and unconditionally (a) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Court of Chancery and not in any other state or federal court in the United States of America or any court in any other country, (b) consent to submit to the exclusive jurisdiction of the Court of Chancery for purposes of any action or proceeding arising out of or in connection with this Agreement, (c) waive any objection to the laying of venue of any such action or proceeding in the Court of Chancery, and (d) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Court of Chancery has been brought in an improper or otherwise inconvenient forum. Section 23. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. When used in this Agreement, the words "herein," "hereof" and words of similar import shall refer to this Agreement as a whole and not to any provision of this Agreement, and the word "Section" refers to a Section of this Agreement, unless otherwise specified. 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. MISSION RESOURCES CORPORATION By: ________________________________ Name: ______________________________ Title: _____________________________ INDEMNITEE ____________________________________ [Name] 14 EX-99.1 7 dex991.txt CERTIFICATION OF CEO Exhibit 99.1 Certification of Chief Executive Officer of Mission Resources Corporation This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. ss. 1350, and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended September 30, 2002 of Mission Resources Corporation (the "Issuer"). I, Robert L. Cavnar, the Chief Executive Officer of the Issuer, certify that: (i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 13, 2002 /s/ Robert L. Cavnar Subscribed and sworn to before me this 13th day of November, 2002 /s/ Carmen M. Garcia Notary Public in and for the State of Texas My commission expires: EX-99.2 8 dex992.txt CERTIFICATION OF CFO Exhibit 99.2 Certification of Chief Financial Officer of Mission Resources Corporation This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. (S) 1350, and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended September 30, 2002 of Mission Resources Corporation (the "Issuer"). I, Richard W. Piacenti, the Chief Financial Officer of the Issuer, certify that: (i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 13, 2002 /s/ Richard W. Piacenti Subscribed and sworn to before me this 13th day of November, 2002 /s/ Carmen M. Garcia Notary Public in and for the State of Texas My commission expires: -----END PRIVACY-ENHANCED MESSAGE-----