-----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, E+JSWdQyxhyLiNoyBnac+iqPXL2Smv2HhIDhQGnv3n3yS43twkzX/qt9mFgAH9yw S9dkIzhJ14w+JSWXoAo+vg== 0000899243-99-001732.txt : 19990816 0000899243-99-001732.hdr.sgml : 19990816 ACCESSION NUMBER: 0000899243-99-001732 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLWETHER EXPLORATION CO 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: SEC FILE NUMBER: 000-09498 FILM NUMBER: 99687278 BUSINESS ADDRESS: STREET 1: 1331 LAMAR STREET 2: SUITE 1455 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136501025 MAIL ADDRESS: STREET 1: 1221 LAMAR STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010-3039 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 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 QUARTER ENDED JUNE 30, 1999 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 BELLWETHER EXPLORATION COMPANY (Exact name of registrant as specified in its charter) Delaware 74-0437769 (State of incorporation) (IRS Employer Identification Number) 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code: (713) 650-1025 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 August 2, 1999, 13,853,791 shares of common stock of Bellwether Exploration Company were outstanding. 1 BELLWETHER EXPLORATION COMPANY INDEX PART I. FINANCIAL INFORMATION Page # ITEM 1. Financial Statements Condensed Consolidated Balance Sheets: June 30, 1999 (Unaudited) and December 31, 1998.................... 3 Condensed Consolidated Statements of Operations (Unaudited): Three months and six months ended June 30, 1999 and June 30, 1998.. 5 Condensed Consolidated Statements of Cash Flows (Unaudited): Six months ended June 30, 1999 and June 30, 1998................... 6 Notes to Condensed Consolidated Financial Statements (Unaudited)..... 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................13 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...........24 PART II. OTHER INFORMATION....................................................25 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS June 30, December 31, 1999 1998 --------- --------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents.............................. $ 1,262 $ 10 Accounts receivable and accrued revenues............... 12,837 16,455 Prepaid expenses and other............................. 1,476 1,719 --------- --------- Total current assets.................................. 15,575 18,184 --------- --------- PROPERTY AND EQUIPMENT, AT COST: Oil and gas properties (full cost method).............. 313,917 289,231 Gas plant facilities................................... 17,529 17,406 --------- --------- 331,446 306,637 Accumulated depreciation, depletion and amortization... (208,985) (198,421) --------- --------- 122,461 108,216 --------- --------- OTHER ASSETS........................................... 4,411 4,796 --------- --------- $ 142,447 $ 131,196 ========= ========= See accompanying notes to condensed consolidated financial statements 3 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share information) LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31, 1999 1998 --------- --------- (Unaudited) CURRENT LIABILITIES: Accounts payable and accrued liabilities.............. $ 12,361 $ 11,982 Due to related parties................................ 159 125 --------- --------- Total current liabilities............................ 12,520 12,107 --------- --------- LONG-TERM DEBT........................................ 116,400 104,400 OTHER LIABILITIES..................................... 200 200 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued or outstanding at June 30, 1999 and December 31, 1998.................. --- --- Common stock, $0.01 par value, 30,000,000 shares authorized, 13,853,791 and 13,853,991 shares issued at June 30, 1999 and December 31, 1998, respectively. 142 142 Additional paid-in capital............................ 80,442 80,442 Retained earnings..................................... (65,352) (64,191) Treasury stock, at cost, 311,000 shares............... (1,905) (1,904) --------- --------- Total stockholders' equity.......................... 13,327 14,489 --------- --------- $ 142,447 $ 131,196 ========= ========= See accompanying notes to condensed consolidated financial statements 4 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except per share information)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ------------------------------ 1999 1998 1999 1998 -------- -------- ------- -------- REVENUES: Oil and gas revenues.......................... $ 14,024 $ 20,306 $ 26,751 $ 39,730 Gas plant operations, net..................... 254 321 475 547 Interest and other income..................... 986 326 1,269 513 -------- -------- -------- -------- 15,264 20,953 28,495 40,790 -------- -------- -------- -------- COST AND EXPENSES: Production expenses........................... 5,013 6,760 10,625 12,893 Depreciation, depletion and amortization...... 5,764 8,821 10,444 17,559 General and administrative expenses........... 1,474 1,997 2,868 4,608 Interest expense.............................. 2,890 2,976 5,719 5,955 -------- -------- -------- -------- 15,141 20,554 29,656 41,015 -------- -------- -------- -------- Income (loss) before income taxes.............. 123 399 (1,161) (225) Provision (benefit) for income taxes........... --- 152 --- (80) -------- -------- -------- -------- NET INCOME (LOSS).............................. $ 123 $ 247 $ (1,161) $ (145) ======== ======== ======== ======== Net income (loss) per share.................... $ 0.01 $ 0.02 $ (0.08) $ (0.01) ======== ======== ======== ======== Net income (loss) per share-diluted............ $ 0.01 $ 0.02 $ (0.08) $ (0.01) ======== ======== ======== ======== Weighted average common shares outstanding................................... 13,854 14,138 13,854 14,094 ======== ======== ======== ======== Weighted average common shares outstanding -diluted...................................... 13,894 14,416 13,854 14,094 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements 5 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands) Six Months Ended June 30, -------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS................................................ $ (1,161) $ (145) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization........... 10,854 17,990 Deferred income taxes.............................. --- (775) -------- -------- 9,693 17,070 Change in assets and liabilities: Accounts receivable and accrued revenue................ 3,618 4,414 Accounts payable and other liabilities................. 379 2,092 Due from (to) related parties.......................... 34 7,056 Other.................................................. 115 (839) -------- -------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES........ 13,839 29,793 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of oil and gas properties.................. (14,269) (531) Additions to properties and facilities................. (10,573) (23,208) Proceeds from sales of properties...................... 256 663 -------- -------- NET CASH FLOWS USED IN INVESTING ACTIVITIES............ (24,586) (23,076) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings............................... 12,000 --- Exercise of stock options.............................. --- 1,502 Purchase of treasury shares............................ (1) --- -------- -------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES........ 11,999 1,502 -------- -------- Net increase in cash and cash equivalents.............. 1,252 8,219 Cash and cash equivalents at beginning of period....... 10 2,699 CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 1,262 $ 10,918 ======== ======== See accompanying notes to condensed consolidated financial statements 6 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (Amounts in thousands) Six Months Ended June 30, --------------------- 1999 1998 ------ ------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest......................................... $5,313 $5,592 Income taxes..................................... $ 28 $1,204 See accompanying notes to condensed consolidated financial statements 7 BELLWETHER EXPLORATION COMPANY NOTES TO CONDENSED CONSOLIDATED 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 generally accepted accounting principles. However, in the opinion of management, these statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position at June 30, 1999 and December 31, 1998, and the results of operations and changes in cash flows for the periods ended June 30, 1999 and 1998. These financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements in the December 31, 1998 Form 10-K of Bellwether Exploration Company (the "Company") that was filed with the Securities and Exchange Commission on March 22, 1999. Certain reclassifications of prior period statements have been made to conform with current reporting practices. In order to prepare these financial statements in conformity with generally accepted accounting principles, management of the Company has made a number of 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. 8 BELLWETHER EXPLORATION COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. STOCKHOLDERS' EQUITY SFAS No. 128 requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. For the six months ended June 30, 1999 and 1998, diluted earnings per common share are not calculated since the issuance or conversion of additional securities would have an antidilutive effect. SFAS NO. 128 RECONCILIATION (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS):
For the Six Months Ended For the Six Months Ended June 30, 1999 June 30, 1998 ----------------------------------------- ----------------------------------------- Loss Shares Per Share Loss Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------- ------------- --------- ----------- ------------- --------- LOSS PER COMMON SHARE: Loss available to common stockholders.................. $ 1,161 13,854 $.08 $ 145 14,094 $ .01 ==== ====== EFFECT OF DILUTIVE SECURITIES: Options and Warrants........... $ --- --- $ --- --- ------- ------- ------ ------- LOSS PER COMMON SHARE-DILUTED: Loss available to common stockholders and assumed conversions................... $ 1,161 13,854 $.08 $ 145 14,094 $ .01 ======= ======= ==== ====== ======= ======
Securities that could potentially dilute basic earnings per share in the future, that were not included in the computation of diluted earnings per share because to do so would have been antidiluted are as follows: For the Periods Ended June 30, ------------------------------------ 1999 (shares) 1998 (shares) ----------------- ----------------- Options and Warrants 16,000 312,000 ====== ======= 9 BELLWETHER EXPLORATION COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In September 1998, the Company's Board of Directors authorized the repurchase of up to $5 million of the Company's common stock. As of June 30, 1999, 311,000 shares had been acquired at an aggregate price of $1,905,000. These treasury shares are reported at cost as a reduction to Stockholders' Equity. 3. LONG TERM DEBT In April 1997, the Company entered into a senior unsecured revolving credit facility ("Senior Credit Facility") which currently has a borrowing base of $55.0 million and a maturity date of November 5, 2003. The Company may elect an interest rate based either on a margin plus LIBOR or the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate. For LIBOR borrowings, the interest rate will vary from LIBOR plus 1.0% to LIBOR plus 1.75% based upon the borrowing base usage. As of June 30, 1999 there were $16.4 million borrowings outstanding under the Senior Credit Facility. The Senior Credit Facility contains various covenants including certain required financial measurements for current ratio, consolidated tangible net worth and interest coverage ratio. In addition, the Senior Credit Facility includes certain limitations on restricted payments, dividends, incurrence of additional funded indebtedness and asset sales. In April 1997, the Company issued $100.0 million of 10-7/8% senior subordinated notes ("Notes") that mature April 1, 2007. Interest on the Notes is payable semi-annually on April 1 and October 1. The Notes contain certain covenants, including limitations on indebtedness, liens, dividends 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. Effective September 22, 1998, the Company entered into an eight and a 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 a six month period each April 1 and October 1. The floating rate for the period from April 1, 1999 to October 1, 1999 is 9.39%. Through April 1, 2002 the floating rate is capped at 10.875% and capped at 12.875% thereafter. 10 BELLWETHER EXPLORATION COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement is effective for fiscal years beginning after June 15, 2000. The Company has not yet determined the impact of this statement on the Company's financial condition or results of operations. 5. NATURAL GAS AND CRUDE OIL HEDGING Oil and gas revenues decreased $1,631,000 and $1,643,000 in the three and six months ended June 30, 1999, and increased $438,000 and $962,000 in the three and six month period ended June 30, 1998, as a result of hedging activity. Since year end 1998, the Company has entered into two contracts which establish a maximum and minimum sales price ("collar"). The first establishes a collar for 30,000 MMBTU per day for July 1, 1999 through October 31, 1999 with a floor NYMEX quoted price of $2.20 per MMBTU and a ceiling NYMEX quoted price of $2.61 per MMBTU, and the second establishes a collar for 15,000 MMBTU per day for November 1, 1999 through March 31, 2000 with a floor NYMEX quoted price of $2.40 per MMBTU and a ceiling NYMEX quoted price of $3.10 per MMBTU. In addition, the Company has current contracts to hedge a total of 368 MBBLS of oil during the months of July through September 1999 at a weighted average NYMEX quoted price of $15.58 per barrel. The fair value at June 30, 1999 of these swap agreements was a loss of $1,171,000. 6. LEGAL PROCEEDING The Company is a defendant in Cause No. C-4417-96-G, A.R. Guerra, et al. v. Eastern Exploration, Inc., et al., in the 370th Judicial District Court of Hidalgo County, Texas. On May 11, 1999, the trial court granted plaintiffs' Motion for Summary Judgment and denied defendants' Motions for Summary Judgment. The Company was not notified of the trial court's judgment until May 18, 1999. The trial court awarded plaintiffs in excess of $5.8 million in damages plus interest. The Company has a 75% interest in the leases made the subject of the lawsuit, but the judgment is joint and several against all defendants. The majority of the damages awarded to plaintiffs consist of compensatory royalties assessed under a compensatory royalty clause in plaintiffs' 648- acre oil and gas lease. Defendants contend that the unambiguous meaning of the compensatory royalty clause is that, if a well is drilled within 1,200 feet of the 648-acre lease, lessee must either commence an offset well within 120 days of the offending well, or commence payment of compensatory royalties within 120 days of the offending well calculated on production from the well or wells drilled within 1,200 feet. 11 BELLWETHER EXPLORATION COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Plaintiffs contend that the unambiguous meaning of the compensatory royalty clause is that (1) lessees duties under the clause were expanded to the entirety of the gas unit within which plaintiffs' 648-acre lease is located; (2) if a well is drilled within 1,200 feet of the gas unit in which plaintiffs' 648-acre lease is located, the compensatory royalty provisions are merely "triggered"; (3) once the compensatory royalty provisions are triggered, lessee has a retroactive duty to commence an offset well or commence payment of compensatory royalties within 120 days of the first well drilled in the common field or reservoir underlying plaintiffs' 648-acre lease, regardless of when that first well was drilled and regardless of whether that first well is more than 1,200 feet away from either the gas unit or the 648-acre lease. Plaintiffs claim that the compensatory royalty provisions were triggered when a well was allegedly drilled within 1,200 feet of the gas unit within which plaintiffs' 648-acre lease is located. Because defendants could not go back in time and commence an offset well within 120 days of the first well that was allegedly drilled in the common field or reservoir underlying plaintiffs' 648-acre lease, defendants had to go back in time and commence payment of compensatory royalties calculated on all wells allegedly drilled in the common field or reservoir. In granting plaintiffs' Motion for Summary Judgement, the trial court adopted this interpretation of the clause. The Company believes that the trial court's judgment is in error for the following reasons, among others: (1) plaintiffs interpretation is unreasonable as a matter of law; (2) the duties under the compensatory royalty clause did not expand to the entirety of the unit, and because it is undisputed that no well was ever drilled within 1,200 feet of plaintiffs' 648-acre lease, lessees' duties under the compensatory royalty clause never came into effect as a matter of law; and (3) even if the duties under the compensatory royalty clause did expand to the entirety of the unit, defendants timely drilled an offset well within 120 days of the well that was allegedly drilled within 1,200 feet of the gas unit in which plaintiffs' 648-acre lease is located, and therefore no compensatory royalties are due as a matter of law. Because the Company believes that the trial court's judgment is in error, the Company perfected an appeal of the judgment on August 9, 1999. The Company intends to vigorously prosecute the appeal, and believes, with its legal counsel, that a reversal of the judgment is more likely than not to occur. Such an appeal could, however, require Bellwether to secure a bond in the amount of up to the full amount of the judgment, although it is more likely Bellwether's bonding obligation will be in the $3.5 million range. 12 BELLWETHER EXPLORATION COMPANY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES The Company strives to maximize long-term shareholder value through aggressive growth in reserves and cash flow using advanced technologies, implementation of a low cost structure and maintenance of a capital structure supportive of growth. The Company employs an integrated interdisciplinary team approach to a balanced program of strategic acquisitions of producing oil and gas properties and technology driven development and exploration activities. The funding of these activities has historically been provided by operating cash flows, bank financing, equity placements and sale of non-core assets. The Company invested $24.8 million in oil and gas properties for the six months ended June 30, 1999 versus $23.7 million for the same period in 1998. The 1999 period included a net expenditure of $13.2 million on June 30, 1999 to acquire producing oil and gas properties in the Gulf of Mexico. The results for the three and six month periods do not include any revenue, production costs or expenses relative to these properties. Cash flows from operations before changes in assets and liabilities were $9.7 million for the six months ended June 30, 1999 compared to $17.1 million provided by operating activities in the same period of 1998. At June 30, 1999, the Company had $38.6 million of available debt capacity under the Senior Credit Facility. 1999 CAPITAL EXPENDITURES During 1999, the Company anticipates investing approximately $45.0 million, primarily for development and exploratory drilling activities, leasehold and seismic acquisitions and the producing property acquisition discussed above. The Company believes its cash flow provided by operating activities and borrowings under its credit facilities will be sufficient to meet these projected capital investments (See Note 3 of the Notes to Condensed Consolidated Financial Statements). The Company continues to review acquisition opportunities and the consummation of such a transaction will directly impact anticipated capital expenditures. GAS BALANCING It is customary in the industry for working interest partners to sell more or less than their entitled share of natural gas. The settlement or disposition of existing gas balancing positions is not anticipated to materially impact the financial condition of the Company. 13 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 are capitalized as 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 would be charged to operations. Due to declines in oil and gas prices at year end, and to a lesser extent, downward revisions in estimated proved reserves, the Company recorded a $73.9 million pretax impairment charge in the fiscal year ended December 31, 1998. No such charges to operations were required during the six month periods ending June 30, 1999 or 1998. RESULTS OF OPERATIONS The following table sets forth certain operating information for the Company for the periods presented:
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------------------- 1999 1998 1999 1998 ---------------------------------------------------- Production: Oil and condensate (MBBLs)...................... 501 605 1,021 1,177 Natural gas (MMCF).............................. 4,196 6,025 8,981 11,756 Average sales price: (1) Oil and condensate (per BBL).................... $13.56 $11.29 $11.42 $ 11.93 Natural gas (per MCF).......................... $ 2.11 $ 2.17 $ 1.86 $ 2.10 Average costs: Production expenses (per MCFE).................. $ .70 $ .70 $ .70 $ .69 General and administrative expense (per MCFE)................................... $ .20 $ .21 $ .19 $ .25 Depreciation, depletion and amortization (per MCFE)(2)................................ $ .76 $ .90 $ .65 $ .90
(1) Average sales prices exclude the effect of hedges, which decreased revenues by $1,631,000 and $1,643,000 in the three and six month periods in 1999, and increased revenues by $438,000 and $962,000 in the three and six month periods in 1998. (2) Excludes depreciation, depletion and amortization on gas plants and other assets of $310,000 and $616,000 in the three and six month periods in 1999, and of $102,000 and $561,000 in the three and six month periods ended in 1998. 14 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED JUNE 30, 1999 AND 1998 Net income for the quarters ended June 30, 1999 and 1998 was $123,000 or $.01 per share, and $247,000 or $.02 per share, respectively. While oil and gas revenues were approximately 31% lower in the quarter ended June 30, 1999, expenses were, likewise, lower by 26% as compared to the quarter ended June 30, 1998. Oil and gas revenues for the three months ended June 30, 1999 were $14.0 million, as compared to $20.3 million for the respective period in 1998. The 31% decrease in oil and gas revenues is primarily due to the decline in oil and gas production. Production volumes reflect normal declines from primarily the offshore Gulf of Mexico properties. Oil production was down 17% compared to the same quarter of 1998 with 501,000 and 605,000 barrels for the three month periods ended June 30, 1999 and 1998, respectively. Gas production was down 30% compared to the same quarter of 1998 with 4,196 and 6,025 million cubic feet (MMcf) for the three month periods ended June 30, 1999 and 1998, respectively. Oil prices averaged $13.56 per barrel in the three month period ended June 30, 1999 as compared to $11.29 per barrel in the comparable period of 1998. Gas prices averaged $2.11 per mcf in the three month period ended June 30, 1999 as compared to $2.17 per mcf in the comparable period of 1998. This represents a 3% decline in gas prices. Oil and gas hedges in place in 1998 resulted in $438,000 of additional oil and gas revenues in the period ended June 30, 1998 while a decrease in oil and gas revenues of $1,631,000 was reflected in the same period of 1999. Net gas plant operating profit was $254,000 in the three months ended June 30, 1999 and $321,000 in the same period of 1998. While throughput volumes were slightly down in 1999 as compared to 1998, liquid prices were slightly higher in 1999 resulting in gas plant revenues in 1999 comparable to gas plant revenues in 1998. Gas plant expenses were approximately 22% higher in the three month period ended June 30, 1999 versus the three month period ended June 30, 1998. The increase was due to increased chemical and labor costs attributable to the amine unit. The amine unit problems have been successfully resolved and expenses should be lower in the next quarter. Interest and other income increased from $326,000 for the three months ended June 30, 1998 to $986,000 for the three months ended June 30, 1999 primarily as a result of the receipt of take or pay revenue contract settlements. Production expenses for the three months ended June 30, 1999 totaled $5.0 million, or 26% below the $6.8 million for the three months June 30, 1998. The decrease results from certain uneconomical properties being abandoned and the declining production in the Gulf of Mexico properties mentioned above. On an Mcf equivalency basis (Mcfe), production expenses of $.70 per Mcfe for the quarter ended June 30, 1999 were flat as compared to quarter ended June 30, 1998. 15 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Depreciation, depletion and amortization was $5.8 million for the three months ended June 30, 1999 and $8.8 million for the three month period ended June 30, 1998. The decline resulted from the $73.9 million impairment charge made at December 31, 1998 as well as decreased production volumes. Depreciation, depletion and amortization per Mcfe has declined from $.90 per Mcfe in 1998 to $.76 per Mcfe in 1999. General and administrative expenses totaled $1.5 million in the three months ended June 30, 1999 as compared to $2.0 million for the comparable period of fiscal 1998. A decrease in outsourcing costs from $1.0 million to $.5 million was the major contribution to the decline. The Company is charged a management fee under its current outsourcing contract which is based upon a specified percentage of the average book value of the Company's total assets, excluding cash, plus a percentage of operating cash flows. Due to the $73.9 million impairment charge described above, the Company's total assets and resulting percentage of such assets was reduced. On an Mcfe basis, general and administrative expenses were $.20 per Mcfe in the period ended June 30, 1999 and $.21 per Mcfe in the period ended June 30, 1998. Interest expense remained relatively flat at $2.9 million for the three months ended June 30, 1999 and $3.0 million in the same period of 1998 even though the Company had higher average balances outstanding in 1999. Savings of $301,000 realized as an interest rate swap accounted for the decline. The provision for federal and state income taxes for the three months ended June 30, 1999 and 1998 are based upon a 0% and 38% effective tax rate, respectively. No tax has been recorded in 1999 due to the adjustment to the Company's tax valuation allowance for the current periods' net income from operations. SIX MONTHS ENDED JUNE 30, 1999 AND 1998 Net loss for the six months ended June 30, 1999 and 1998 was $1.2 million or $.08 per share, and $.1 million or $.01 per share, respectively. The increased loss is due to lower oil and gas prices in the first quarter of 1999 and lower oil and gas production as compared to the six months ended June 30, 1998. Oil and gas revenues for the six months ended June 30, 1999 were $26.8 million, as compared to $39.7 million for the respective period in 1998. The 33% decrease in oil and gas revenues is partially due to the decline in oil and gas prices in the first quarter. Oil prices averaged $11.42 per barrel in the six month period ended June 30, 1999 as compared to $11.93 per barrel in the comparable period of 1998. Gas prices averaged $1.86 per mcf in the six month period ended June 30, 1999 as compared to $2.10 per mcf in the comparable period of 1998. Oil and gas hedges in place in 1998 resulted in $962,000 of additional oil and gas revenues in the period ended June 30, 1998 while a decrease in revenues of $1,643,000 was reflected in the same period of 1999. Production volumes reflect normal declines from primarily the offshore Gulf of Mexico properties. Oil production was down 13% compared to the same quarter of 1998 with 1,021,000 and 1,177,000 barrels for the six month periods ended June 30, 1999 and 1998, respectively. Gas production was down 24% compared to the same period of 1998 with 8,981 MMcf and 11,756 MMcf for the six month periods ended June 30, 1999 and 1998, respectively. 16 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net gas plant operating profit was $475,000 in the six months ended June 30, 1999 and $547,000 in the same period of 1998. Lower average natural gas liquid prices in 1999 as compared to 1998 was the reason for the decrease in net gas plant operating profit. Interest and other income increased from $.5 million at June 30, 1998 to $1.3 million at June 30, 1999 primarily as a result of the receipt of take or pay revenue contract settlements. Production expenses for the six months ended June 30, 1999 totaled $10.6 million, or 18% below the $12.9 million for the six months June 30, 1998. The decrease results from certain uneconomical properties being abandoned and the declining production in the Gulf of Mexico properties mentioned above. On an Mcfe basis, production expenses of $.70 per Mcfe for the six months ended June 30, 1999 were almost flat as compared to production expenses of $.69 per Mcfe for the six months ended June 30, 1998. The decreased oil and gas volumes mentioned above resulted in the increased production costs on an equivalency basis. Depreciation, depletion and amortization was $10.4 million for the six months ended June 30, 1999 and $17.6 million for the six month period ended June 30, 1998. The decline resulted from the $73.9 million impairment charge made at December 31, 1998 as well as decreased production volumes. Depreciation, depletion and amortization per Mcfe has declined from $.90 per Mcfe in 1998 to $.65 per Mcfe in 1999. General and administrative expenses totaled $2.9 million in the six months ended June 30, 1999 as compared to $4.6 million for the comparable period of fiscal 1998. A decrease in outsourcing costs from $2.3 million to $1.1 million was the major contribution to the decline. The Company is charged a management fee under its current outsourcing contract which is based upon a specified percentage of the average book value of the Company's total assets, excluding cash, plus a percentage of operating cash flows. Due to the $73.9 million impairment charge described above, the Company's total assets and resulting percentage of such assets was reduced. Additionally, the 1998 period included costs related to the closing of the Company's Dallas exploration office in March 1998 and certain transition costs related to the change of the Company's 1997 fiscal year. On an Mcfe basis, general and administrative expenses were $.19 per Mcfe in the period ended June 30, 1999 and $.25 per Mcfe in the period ended June 30, 1998. Interest expense remained relatively flat at $5.7 million for the six months ended June 30, 1999 and $6.0 million in the same period of 1998 even though the Company had higher average balances outstanding in 1999. Savings of $482,000 realized as an interest rate swap accounted for the decline. The provision for federal and state income taxes for the six months ended June 30, 1999 and 1998 are based upon a 0% and 36% effective tax rate, respectively. No tax accrual has been made in 1999 because of an increase in the Company's tax valuation allowance for the benefit for the current period's net loss from operations. 17 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SUBSEQUENT EVENTS In late July, the Board of Directors formed an Office of the Chief Executive to oversee the day-to-day running of the Company's operations. Directors J.P. Bryan and Townes Pressler will constitute the Office of the Chief Executive. Mr. Bryan will serve as Chairman and CEO and, with Mr. Pressler, will be actively involved in the daily direction and operations of the Company until a new CEO can be found. Mr. J. Darby Sere, previously Chairman and CEO and William C. Rankin, previously Senior Vice President and Chief Financial Officer left the Company to pursue other opportunities. The Company will immediately commence a search for a new Chief Financial Officer. Mr. Bryan is Senior Managing Director of and a holder of Common Stock of the parent corporation of Torch Energy Advisors, Inc. ("Torch"). The Company is party to an administrative services agreement with Torch, pursuant to which Torch performs certain administrative functions for the Company, including financial, accounting, legal and technical support. YEAR 2000 ISSUES The Year 2000 problem ("Y2k") refers to the inability of computer and other information technology systems to properly process date and time information. The problem was caused, in part, by the outdated programming practice of using two digits rather than four to represent the year in a date. The consequence of the Y2k problem is that information technology and embedded processing systems are at risk of malfunction, particularly during the transition between 1999 to 2000. The effects of Y2k are exacerbated by the interdependence of computer and telecommunication systems throughout the world. This interdependence also exists among the Company and its vendors, customers and business partners, as well as with government agencies. The risks of Y2k fall into three general areas: 1) Corporate Systems, 2) Field Systems and 3) Third Party Exposure. The Company is addressing each of these areas through a readiness process that follows the steps below: a) Planning and Awareness b) Inventory and Assessment c) Identify Potential Problems and their Business Impact d) Identify/Approve Solutions e) Test and Implement Solutions f) Contingency Planning The Company outsources a substantial portion of its information technology and field operations to Torch. The Company and Torch have jointly developed a plan to address the Company's Year 2000 issues. (As used in the remainder of this discussion, references to the Company include the Torch employees assisting the Company in its Year 2000 compliance program.) 18 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has formed a Y2k Team comprised of representatives from senior management, exploration, exploitation, accounting, legal and internal audit. The continuing progress of this Y2k Team is reported regularly to the Company's Board of Directors. The estimated total costs for Y2k readiness have been nominal. It is anticipated that such costs for complete Y2k readiness will continue to be nominal as much of these costs are borne by Torch under the terms of the existing outsourcing agreement. In addition, there have been no material capital expenditures for Y2k and there is not anticipated to be material capital expenditures because most major critical field operations do not have date sensitive equipment. CORPORATE SYSTEMS 1. Planning and Awareness. All employees have attended Y2k informational programs including a general discussion of what Y2k is and how it could affect the business. Employees of all levels of the organization have been asked to participate in the identification of potential Y2k risks. 2. Inventory and Assessment. The Company has completed an inventory of the traditional computing platforms including client/server systems, LAN systems and PC systems, as well as an inventory of all systems software and operating systems for each computing system. In addition, third party service interfaces, banking/treasury interfaces and telecommunications have been cataloged. Assessment of component compliance (compliant, not-compliant, expected date of compliance, etc.) has been completed and included research of product information on the Internet, contacting peer group companies and accessing information that peer group companies have already found. 3. Identification. The failure to identify and correct a material Y2k problem in the Corporate Systems could result in inaccurate or untimely financial information for management decision-making or financial reporting purposes. The severity of such problems may impact the duration during which quality information is available to management. At this time, management believes that any Y2k disruptions associated with its financial and administration systems will not have a material effect on the Company. 4. Identify/Approve Solutions. Based upon the assessments of components' compliance, solutions are determined. These solutions include: 1) fix or replace the non-compliant component, 2) buy patches or replacement items, 3) develop workarounds, 4) identify alternate automated processes, 5) design manual procedures and 6) develop business continuity plans for specific items or systems. 19 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 5. Test and Implement Solutions. Since April 1998 Torch has been working on a upgrade to its accounting software and is expected to achieve full Y2k compliance by August 1999. In addition, all network and desktop applications used by the Company have been inventoried and are generally Y2k compliant. The costs of all such risk assessments and remediation are borne by Torch under the terms of Bellwether's outsourcing agreements. 6. Contingency Planning. Notwithstanding the foregoing, should there be significant unanticipated disruptions in the Company's financial and administrative systems, a number of accounting processes that are currently automated will need to be performed manually. The Company is currently considering its options with respect to contingency arrangements for temporary staffing to accommodate such situations. FIELD SYSTEMS 1. Planning and Awareness. The Company's Y2k program has involved all levels of management of field and facility assets from production foremen and higher. Employees at all levels of the organization have been asked to participate in the identification of potential Y2k risk, which might otherwise go unnoticed by higher level employees and officers of Bellwether, and as a result, the Company believes that awareness of the issue is high. 2. Inventory and Assessment. This step entailed locating all embedded chip technology used in the field operations including safety systems, measurement devices, overflow valves, SCADA systems and other field processes that are date-or-time-sensitive. It is estimated that there are less than a hundred embedded components residing in the computer systems within Bellwether's operated oil and natural gas fields and processing plants. During the assessment stage a list of assets to be tested was assembled. Consideration was given to 1) issues of health and safety, 2) environmental concerns, 3) economic factors and 4) other business risks as appropriate. Vendors and manufacturers have been contacted as well as product research through the Internet and the use of peer group company shared information. To date, the majority of embedded components researched have been deemed either date- insensitive or Y2k compliant. However, the complexity of embedded systems is such that a small minority of non-compliant components, even a single non- compliant component, can corrupt an entire system. Now that the component level evaluation is substantially complete, a broader evaluation at the system level has commenced. Bellwether anticipates that the system level evaluation will be completed by the end of the third quarter 1999. 3. Identification. The failure to identify and correct a material Y2k problem could result in outcomes ranging from errors in data reporting to curtailments or shutdowns in production or discharges of materials onto the environment. The Company prioritized the remediation of embedded components and systems which are either known to be Y2k non-compliant or which have higher risk of Y2k failures. 20 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) To assist in this effort, Bellwether and Torch retained consultants knowledgeable and experienced in the assessment of Y2k issues impacting field operations. Bellwether gave extremely high priority to the remediation of any situation that could impact employee health and safety or environmental security. The cost of the assessment was not material to Bellwether's financial results. Despite these efforts, it is possible that there will be production disruptions or other Y2k related problems associated with Y2k non- compliance. Depending on the magnitude of any such disruptions or other problems, and the time and cost required to correct them, such failures could materially and adversely impact the Company's results of operations, liquidity and financial condition. 4. Identify/Approve Solutions. Based upon the assessment of field systems, regarding compliance or non-compliance, solutions were determined. These potential solutions included 1) fix or replace non-compliant items, 2) buy patches or replacement items, 3) develop workarounds, 4) identify alternative automated processes, 5) design manual procedures and 6) develop business continuity plans for specific items or systems. 5. Test and Implement Solutions. Once identified, assessed and prioritized, Bellwether is continuing to test, upgrade and certify those embedded components and systems in field process control units deemed to pose the greatest risk of significant non-compliance. It is important to note that in some circumstances, the procedures used to test embedded components for Y2k compliance themselves pose a risk of damaging the component or corrupting the system. Accordingly, there may be situations in which a decision not to test may be deemed the most prudent. The Company does not expect the cost of testing and upgrading its embedded chips to be material due to the number of components and the low cost of such components. If this assumption is incorrect, the Company may incur material costs in connection with testing and remedying Year 2000 problems. In addition, if the Company is not successful and ultimately experiences Y2k related failures, the costs attributable to lost production, damages to facilities and environmental damages may be material. The effort to address the Y2k situation is dynamic and may likely not be fully completed by December 31, 1999. 6. Contingency Planning. Should material production disruptions occur as a result of Y2k failures in the field operations, Bellwether's operating cash flow will be impacted. This contingency is being factored into deliberations on capital budgeting, liquidity and capital adequacy. It is management's intention to maintain adequate financial flexibility to sustain the Company during any such period of cash flow disruption. 21 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) THIRD PARTY EXPOSURES 1. Planning and Awareness. The Company has been involved in informational programs with its employees and the employees of Torch who have significant interaction with outside vendors, customers and business partners of the Company. All levels of employees in the organization have been asked to participate in the identification of potential third party Y2k risk, which might otherwise go unnoticed by higher level employees and officers of Bellwether, and as a result, awareness of the issue is considered high. 2. Inventory and Assessment. Surveys of general Y2k readiness have been sent to all vendors, customers and business partners of the Company. An assessment is made regarding the priority of risk associated with each third party, and how the third party's level of compliance directly affects day-to-day business. The Company's most critical customers are outside operators of wells, gas plants, refineries, natural gas marketers and pipelines. 3. Identification. Refineries are extremely complex operations containing hundreds or thousands of computerized processes. The failure on the part of a Bellwether refinery customer to identify and correct a material Y2k problem could result in material disruptions in the sale of Bellwether's production to that refinery. In many cases, affected Bellwether production may not be easily shifted to other markets, and markets may have similar effects. Although the Company has made inquiries to key third parties on the subject of Y2k readiness and will continue to do so, it has no ability to require responses to such inquiries or to independently verify their accuracy. Accordingly, management is unable to express any view about whether there will be material production disruptions associated with third party Y2k non- compliance. Depending on the magnitude of any such disruptions and the time required to correct them, such failures could materially and adversely impact the Company's results of operations, liquidity and financial condition. Other significant concerns include the integrity of global telecommunication systems, the readiness of commercial banks to execute electronic fund transfers and of the ability of the financial community to maintain an orderly market in Bellwether's securities. 4. Identify/Approve Solutions. By prioritizing the various third party risks mentioned above, a list of most critical third party vendors, customers and business partners has been determined. By cross-referencing the results of the Y2k readiness survey with the Company's priority list of third parties, solutions can be determined. These may involve field and/or office visits and more detailed meetings to access the third party's Y2k compliance. 22 BELLWETHER EXPLORATION COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 5. Test and Implement Solutions. Where the Company perceives significant risk of Y2k non-compliance that may have a material impact on the Company, and where the relationship between the Company and a vendor, customer or business partner permits, joint testing may be undertaken during 1999. Joint testing would occur following upgrades and other remediation to hardware, software and communications links, as applicable, with the intent of determining that the remediated system being tested will perform as expected after December 31, 1999. 6. Contingency Planning. Should material production disruptions occur as a result of Y2k failures of third parties, Bellwether's operating cash flow will be impacted. This contingency is being factored into deliberations on capital budgeting, liquidity and capital adequacy. It is management's intention to maintain adequate financial flexibility to sustain the Company during any such period of cash flow disruption. 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, legal proceedings, 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, gas plant operations and the effect of gas balancing and the Year 2000 problem, are forward-looking statements. There can be no assurances that such forward looking statements will prove to have been 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. 23 BELLWETHER EXPLORATION COMPANY 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. Since year end 1998, the Company has entered into two contracts which establish a maximum and minimum sales price ("collar"). The first establishes a collar for 30,000 MMBTU per day for July 1, 1999 through October 31, 1999 with a floor NYMEX quoted price of $2.20 per MMBTU and a ceiling NYMEX quoted price of $2.61 per MMBTU, and the second establishes a collar for 15,000 MMBTU per day for November 1, 1999 through March 31, 2000 with a floor NYMEX quoted price of $2.40 per MMBTU and a ceiling NYMEX quoted price of $3.10 per MMBTU. In addition, the Company has current contracts to hedge a total of 368 MBBLS of oil during the months of July through September 1999 at a weighted average NYMEX quoted price of $15.58 per barrel. The fair value at June 30, 1999 of these swap agreements was a loss of $1,171,000. A 10% change in prices would result in approximately $700,000 change in the loss. 24 BELLWETHER EXPLORATION COMPANY PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in Cause No. C-4417-96-G, A.R. Guerra, et al. v. Eastern Exploration, Inc., et al., in the 370th Judicial District Court of Hidalgo County, Texas. On May 11, 1999, the trial court granted plaintiffs' Motion for Summary Judgment and denied defendants' Motions for Summary Judgment. The Company was not notified of the trial court's judgment until May 18, 1999. The trial court awarded plaintiffs in excess of $5.8 million in damages plus interest. The Company has a 75% interest in the leases made the subject of the lawsuit, but the judgment is joint and several against all defendants. The majority of the damages awarded to plaintiffs consist of compensatory royalties assessed under a compensatory royalty clause in plaintiffs' 648-acre oil and gas lease. Defendants contend that the unambiguous meaning of the compensatory royalty clause is that, if a well is drilled within 1,200 feet of the 648- acre lease, lessee must either commence an offset well within 120 days of the offending well, or commence payment of compensatory royalties within 120 days of the offending well calculated on production from the well or wells drilled within 1,200 feet. Plaintiffs contend that the unambiguous meaning of the compensatory royalty clause is that (1) lessees duties under the clause were expanded to the entirety of the gas unit within which plaintiffs' 648-acre lease is located; (2) if a well is drilled within 1,200 feet of the gas unit in which plaintiffs' 648-acre lease is located, the compensatory royalty provisions are merely "triggered"; (3) once the compensatory royalty provisions are triggered, lessee has a retroactive duty to commence an offset well or commence payment of compensatory royalties within 120 days of the first well drilled in the common field or reservoir underlying plaintiffs' 648-acre lease, regardless of when that first well was drilled and regardless of whether that first well is more than 1,200 feet away from either the gas unit or the 648- acre lease. Plaintiffs claim that the compensatory royalty provisions were triggered when a well was allegedly drilled within 1,200 feet of the gas unit within which plaintiffs' 648-acre lease is located. Because defendants could not go back in time and commence an offset well within 120 days of the first well that was allegedly drilled in the common field or reservoir underlying plaintiffs' 648-acre lease, defendants had to go back in time and commence payment of compensatory royalties calculated on all wells allegedly drilled in the common field or reservoir. In granting plaintiffs' Motion for Summary Judgement, the trial court adopted this interpretation of the clause. The Company believes that the trial court's judgment is in error for the following reasons, among others: (1) plaintiffs interpretation is unreasonable as a matter of law; (2) the duties under the compensatory royalty clause did not expand to the entirety of the unit, and because it is undisputed that no well was ever drilled within 1,200 feet of 25 BELLWETHER EXPLORATION COMPANY PART II. OTHER INFORMATION (CONTINUED) plaintiffs' 648-acre lease, lessees' duties under the compensatory royalty clause never came into effect as a matter of law; and (3) even if the duties under the compensatory royalty clause did expand to the entirety of the unit, defendants timely drilled an offset well within 120 days of the well that was allegedly drilled within 1,200 feet of the gas unit in which plaintiffs' 648-acre lease is located, and therefore no compensatory royalties are due as a matter of law. Because the Company believes that the trial court's judgment is in error, the Company perfected an appeal of the judgment on August 9, 1999. The Company intends to vigorously prosecute the appeal, and believes, with its legal counsel, that a reversal of the judgment is more likely than not to occur. Such an appeal could, however, require Bellwether to secure a bond in the amount of up to the full amount of the judgment, although it is more likely Bellwether's bonding obligation will be in the $3.5 million range. 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 A Proxy statement was sent to all shareholders of record as of April 13, 1999 for the following matters which were voted on at the annual meeting of shareholders held on May 28, 1999: 1. J.P. Bryan, Habib Kairouz, A.K. McLanahan, Vincent H. Buckley, Dr. Jack Birks, and Townes Pressler were elected as directors with 12,201,094 shares voting in favor, 92,561 shares abstaining and no shares voting against. J. Darby Sere was elected with 12,201,077 shares voting in favor, 92,578 abstaining and no shares voting against. No other matters were brought up at the meeting. A copy of the Proxy Statement was filed with the Securities and Exchange Commission on April 23, 1999 and is incorporated herein by reference. ITEM 5. OTHER INFORMATION None. 26 BELLWETHER EXPLORATION COMPANY PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits. The following exhibits are filed with this Form 10-Q and they are identified by the number indicated. 10.15 Purchase and Sale Agreement dated June 11, 1999 between Bellwether Exploration Company as Buyer and Energen Resources MAQ, Inc. as Seller - Included herewith 10.16 Separation contract dated August 9, 1999 between the Company and J. Darby Sere - Included herewith 10.17 Separation contract dated August 9, 1999 between the Company and William C. Rankin - Included herewith 21.1 Subsidiaries of Bellwether Exploration Company - Included herewith 27 Financial Data Schedule - Included herewith b. Reports on Form 8-K. None. 27 SIGNATURES 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. BELLWETHER EXPLORATION COMPANY ------------------------------ (Registrant) Date: August 13, 1999 By: /s/ J.P. Bryan -------------------------- J.P. Bryan Chairman and Chief Executive Officer Date: August 13, 1999 By: /s/ J.P. Bryan -------------------------- J.P. Bryan Chief Financial Officer 28 EX-10.15 2 PURCHASE & SALE AGREEMENT DATED 06/11/99 PURCHASE AND SALE AGREEMENT BY AND BETWEEN ENERGEN RESOURCES MAQ, INC. AS SELLER AND BELLWETHER EXPLORATION COMPANY AS BUYER INDEX
PAGE ---- ARTICLE 1. DEFINITIONS........................................................... 1 ARTICLE 2. SALE AND PURCHASE..................................................... 7 ARTICLE 3. PURCHASE PRICE........................................................ 7 3.1 Purchase Price.................................................... 7 3.2 Earnest Money Deposit............................................. 7 3.3 Allocation........................................................ 7 3.4 Preferential Rights............................................... 7 3.5 Consents.......................................................... 8 ARTICLE 4. REVIEW BY BUYER....................................................... 8 4.1 Review of Records................................................. 8 4.2 Alleged Adverse Matters........................................... 8 4.3 Adjustment of Purchase Price for Title Defects.................... 9 4.4 Waiver............................................................ 10 ARTICLE 5. INSPECTION OF PROPERTIES.............................................. 10 ARTICLE 6. ACCOUNTING............................................................ 10 6.1 Revenues, Expenses and Capital Expenditures....................... 10 6.2 Taxes............................................................. 11 6.3 Obligations and Credits........................................... 11 6.4 Gas Imbalances.................................................... 11 6.5 Miscellaneous Accounting.......................................... 12 6.6 Final Accounting Settlement....................................... 12 6.7 Post-Final Accounting Settlement.................................. 12 6.8 Audit Rights...................................................... 13 ARTICLE 7. CASUALTY AND CONDEMNATION............................................ 13 ARTICLE 8. INDEMNITIES........................................................... 14 8.1 Seller's Indemnity Obligations (excluding Environmental Claims)... 14 8.2 Buyer's Indemnity Obligations (excluding Environmental Claims).... 14
-i-
PAGE ---- 8.3 Environmental Claims.............................................. 15 8.4 Asbestos and NORM................................................. 15 8.5 Notice and Cooperation............................................ 15 8.6 Defense of Claims................................................. 15 8.7 Waiver of Certain Damages......................................... 16 8.8. Limitation on Indemnities......................................... 16 ARTICLE 9. WARRANTIES AND DISCLAIMERS........................................... 16 9.1 Special Warranty of Title......................................... 16 9.2 Disclaimer - Representations and Warranties....................... 16 9.3 Disclaimer - Statements and Information........................... 17 ARTICLE 10. SELLER'S REPRESENTATIONS AND WARRANTIES............................. 17 10.1 Organization and Good Standing.................................... 17 10.2 Corporate Authority; Authorization of Agreement................... 17 10.3 No Violations..................................................... 18 10.4 Absence of Certain Changes........................................ 18 10.5 Operating Costs................................................... 18 10.6 Litigation and Other Disputes..................................... 18 10.7 Bankruptcy........................................................ 19 10.8 Material Contracts................................................ 19 10.9 Approvals and Preferential Rights................................. 19 10.10 Compliance with Law and Permits................................... 19 10.11 Environmental Compliance.......................................... 20 10.12 Status of Contracts............................................... 20 10.13 Production Burdens, Taxes, Expenses and Revenues.................. 20 10.14 Production Sales Matters.......................................... 20 10.15 Capital Commitments............................................... 21 10.16 Limitation on Representations..................................... 21 ARTICLE 11. BUYER'S REPRESENTATIONS AND WARRANTIES............................... 21 11.1 Organization and Good Standing.................................... 21 11.2 Corporate Authority; Authorization of Agreement................... 21 11.3 No Violations..................................................... 22 11.4 SEC Disclosure.................................................... 22 11.5 Independent Evaluation............................................ 22 11.6 Buyer's Reliance.................................................. 22 11.7 Qualified Leaseholder............................................. 22
-ii-
PAGE ---- ARTICLE 12. ADDITIONAL AGREEMENTS................................................ 23 12.1 Covenants of Seller............................................... 23 12.2 Notice of Loss.................................................... 23 12.3 Subsequent Operations............................................. 23 12.4 Buyer's Assumption of Obligations................................. 23 12.5 Records........................................................... 24 ARTICLE 13. ARBITRATION.......................................................... 24 ARTICLE 14. CONDITIONS PRECEDENT TO CLOSING...................................... 25 14.1 Conditions Precedent to Seller's Obligation to Close.............. 25 14.2 Conditions Precedent to Buyer's Obligation to Close............... 26 ARTICLE 15. TERMINATION.......................................................... 26 15.1 Grounds for Termination........................................... 26 15.2 Effect of Termination............................................. 27 15.3 Dispute over Right to Terminate................................... 27 15.4 Return of Documents............................................... 28 15.5 Confidentiality................................................... 28 ARTICLE 16. THE CLOSING.......................................................... 28 16.1. Preliminary Closing Statement..................................... 28 16.2 Obligations of Seller at Closing.................................. 28 16.3 Obligations of Buyer at Closing................................... 29 16.4 Site of Closing................................................... 29 ARTICLE 17. MISCELLANEOUS........................................................ 29 17.1 Notices........................................................... 29 17.2 Conveyance Costs.................................................. 30 17.3 Brokers' Fees..................................................... 30 17.4 Further Assurances................................................ 30 17.5 Survival of Representations and Warranties........................ 30 17.6 Amendments and Severability....................................... 30 17.7 Successors and Assigns............................................ 31 17.8 Headings.......................................................... 31 17.9 Governing Law..................................................... 31 17.10 No Partnership Created............................................ 31
-iii-
PAGE ---- 17.11 Public Announcements.............................................. 31 17.12 No Third Party Beneficiaries...................................... 31 17.13 Deceptive Trade Practices......................................... 31 17.14 Tax Deferred Exchange Election.................................... 32 17.15 Not to be Construed Against Drafter............................... 32 17.16 Entire Agreement.................................................. 32 17.17 Conspicuousness of Provisions..................................... 32 17.18 Execution in Counterparts......................................... 32 17.19 High Island Block 71.............................................. 32 EXHIBITS EXHIBIT A - DESCRIPTION OF PROPERTIES EXHIBIT B - NONE EXHIBIT C - ASSIGNMENT AND BILL OF SALE EXHIBIT D - CERTIFICATE EXHIBIT E - NON-FOREIGN AFFIDAVIT EXHIBIT F - LIST OF CONTRACTS EXHIBIT G - LITIGATION AND CLAIMS EXHIBIT H - ALLOCATION OF PURCHASE PRICE EXHIBIT I - GAS IMBALANCES EXHIBIT J - APPROVALS AND PREFERENTIAL RIGHTS EXHIBIT K - VIOLATIONS OF LAWS EXHIBIT L - PRODUCTION SALES MATTERS EXHIBIT M - CAPITAL COMMITMENTS EXHIBIT N - HI 71 FORM OF ASSIGNMENT
-iv- PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is dated June 11, 1999, by and between ENERGEN RESOURCES MAQ, INC., a Delaware corporation, with an office at 605 21st Street North, Birmingham, Alabama 35203-2707 (hereinafter referred to as "Seller") and BELLWETHER EXPLORATION COMPANY, a Delaware corporation, with an office at 1331 Lamar, Suite 1455, Houston, Texas 77010-3039 (hereinafter referred to as "Buyer"), and is based on the following premises: WHEREAS, Seller desires to sell, assign and convey to Buyer and Buyer desires to purchase and accept certain oil and gas properties and related interests; and WHEREAS, the parties have reached agreement regarding such sale and purchase. NOW, THEREFORE, for valuable consideration and the mutual covenants and agreements herein contained, Seller and Buyer agree as follows: ARTICLE 1. DEFINITIONS 1. Definitions: In this Agreement, capitalized terms have the meanings provided in this Article 1, unless expressly provided otherwise in other Articles. All defined terms include both the singular and the plural. All references to Articles or Sections refer to Articles or Sections in this Agreement, and all references to Exhibits refer to the Exhibits attached to this Agreement. The Exhibits which are attached hereto are incorporated in and made a part of this Agreement. "Accounting Referee" has the meaning set forth in Section 6.8. "Affiliate" means and includes any entity that, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the entity specified. "Alleged Adverse Matters" has the meaning set forth in Section 4.2. "Alleged Title Defect" means a Title Defect (as hereinafter defined) which is asserted by Buyer in accordance with Section 4.3. "Assignment and Bill of Sale" means a document in the form of Exhibit C. "Assumed Obligations" has the meaning set forth in Section 12.4. "Business Day" means a Day (as hereinafter defined) excluding Saturdays, Sundays and U.S. legal holidays. "Casualty Loss" means any loss, damage or reduction in value resulting from mechanical failure or defects, catastrophic occurrences, acts of God and any other losses which are not the result of normal wear and tear or of natural reservoir changes. "Certificate" means a document in the form of Exhibit D. "Claim" means any and all claims, demands, suits, causes of action, investigations, administrative proceedings, other legal proceedings, losses, damages, liabilities, judgments, assessments, settlements, fines, notices of violation, penalties, interest, obligations, responsibilities and costs (including attorneys' fees and costs of litigation) of any kind or character (whether or not asserted prior to the date hereof, and whether known or unknown, fixed or unfixed, conditional or unconditional, based on negligence, strict liability or otherwise, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise) which are brought by or owed to a Third Party (as hereinafter defined). "Close" or "Closing" means the consummation of the transfer of title to the Properties to Buyer, including execution and delivery of all documents provided herein. "Closing Date" means June 30, 1999, or such other date as may be mutually agreed upon by the parties or on which Closing occurs in accordance with the terms of this Agreement. "Day" means a calendar day consisting of twenty-four (24) hours from midnight to midnight. "Defensible Title" means, as to the Leases, such title held by Seller that, subject to and except for the Permitted Encumbrances (as hereinafter defined): (a) Entitles Seller to own and receive payment of revenues for not less than the "Net Revenue Interests" set forth on Exhibit A of all oil, gas and associated liquid and gaseous hydrocarbons produced, saved and marketed from the Leases; (b) Obligates Seller to bear costs and expenses relating to the ownership, operation, maintenance and repair of the wells and facilities located on or attributable to the Leases in an amount not greater than the "Working Interests" set forth on Exhibit A, unless there is a corresponding proportionate increase in the Net Revenue Interests; and (c) Is free and clear of all liens, encumbrances, burdens and defects that a reasonable and prudent person engaged in the business of ownership, development and operation of oil and gas properties with knowledge of all applicable facts and circumstances and the understanding of their legal significance would not be willing to accept with respect to portions of the Leases affected thereby. "Earnest Money Deposit" has the meaning set forth in Section 3.2. 2 "Effective Time" means January 1, 1999, at 7:00 a.m., local time where the Properties are located. "Environmental Claims" means all Claims for pollution or environmental damages of any kind, including without limitation, those relating to: (a) remediation and/or clean-up thereof, (b) damage to and/or loss of any property or resource, and/or (c) injury or death of any person(s) whomsoever, including without limitation Claims relating to breach of Environmental Laws, common law causes of action such as negligence, gross negligence, strict liability, nuisance or trespass, or fault imposed by statute, rule, regulation or otherwise (but specifically excluding any Claims relating to asbestos or NORM (as hereinafter defined), which are covered by Section 8.4 hereof), and including all costs associated with remediation and clean up, and fines and penalties associated with any of the foregoing. "Environmental Laws" means all laws, statutes, ordinances, permits, orders, judgments, rules or regulations which are promulgated, issued or enacted by a governmental entity having appropriate jurisdiction that, (a) relate to the prevention of pollution or environmental damage, (b) the remediation of pollution or environmental damage, or (c) the protection of the environment generally; including without limitation, the Clean Air Act, as amended, the Clean Water Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Federal Water Pollution Control Act, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Safe Drinking Water Act, as amended, the Toxic Substance and Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous and the Solid Waste Amendments Act of 1984, as amended, and the Oil Pollution Act of 1990, as amended. "Final Accounting Settlement" has the meaning set forth in Section 6.6. "Final Settlement Date" has the meaning set forth in Section 6.6. "Forest Imbalance Claim" has the meaning given to such term on Exhibit G. "Hydrocarbons" has the meaning given to such term in the definition of Properties. "Laws" means any and all applicable laws, statutes, ordinances, permits, decrees, orders, judgments, rules or regulations (including without limitation Environmental Laws) which are promulgated, issued or enacted by a governmental entity having appropriate jurisdiction. "Leases" has the meaning given to such term in the definition of Properties. "Material Contracts" means those contracts listed on Exhibit F. "NPDES Claim" has the meaning given to such term on Exhibit G. 3 "Non-Foreign Affidavit" means a document in the form of Exhibit E. "NORM" means naturally occurring radioactive materials. "Permitted Encumbrances" means: (a) Royalties, overriding royalties, production payments, reversionary interests, convertible interests, net profits interests, division orders and similar burdens encumbering the Properties as of the Effective Time to the extent the net cumulative effect of such burdens do not operate to (i) reduce the net revenue interests of the Properties to less than the net revenue interests set forth on Exhibit A or (ii) cause an increase in the working interest in any Property from that shown on Exhibit A without a proportionate increase in the net revenue interest for such Property; (b) Preferential purchase rights and consents to assignment and similar contractual provisions encumbering the Properties with respect to which, prior to Closing, (i) waivers or consents are obtained from the appropriate parties, or (ii) the appropriate time period for asserting such rights have expired without an exercise of such rights; (c) Preferential purchase rights encumbering the Properties which are exercised by a Third Party, if the affected Properties are withdrawn from this sale transaction and handled in accordance with Section 3.4; (d) All rights to consent by, required notices to, filings with, or other actions by governmental entities in connection with the sale or conveyance of the Properties, if the same are customarily obtained subsequent to the transfer of title; (e) Rights reserved to or vested in any governmental entity having appropriate jurisdiction to control or regulate the Properties in any manner whatsoever, and all Laws of any such governmental entity; (f) Easements, rights-of-way, servitudes, surface leases, sub-surface leases, pipelines, platforms, facilities, utility lines, telephone lines, power lines, and structures on, over and through the Properties, to the extent such rights, interests or structures do not materially interfere with the operation of the Properties; (g) Liens for taxes or assessments not yet due or not yet delinquent or, if delinquent, that are being contested by Seller in good faith in the normal course of business; (h) Liens of operators relating to obligations not yet due or not yet delinquent; (i) The Material Contracts; and 4 (j) Alleged Adverse Matters and Title Defects which Buyer has waived under Section 4.4. "Properties" means the following properties (real, personal or mixed) and rights (contractual or otherwise): (a) All of Seller's right, title and interest in, to and under or derived from the oil and gas leasehold interests, record title interests, operating rights interests, fee interests, mineral interests and overriding royalty interests described on Exhibit A (collectively, the "Leases"); (b) All of Seller's right, title and interest in and to, or derived from, all of the presently existing and valid unitization and pooling agreements and units (including all units formed by voluntary agreement and those formed under the rules, regulations, orders or other official acts of any governmental entity having appropriate jurisdiction) to the extent they relate to any of the interests which are expressly described on Exhibit A; (c) All of Seller's right, title and interest in and to all oil, gas and/or other liquid or gaseous hydrocarbons (collectively, the "Hydrocarbons") produced from or attributable to Seller's interest in the Leases and attributable to the period from and after the Effective Time; (d) All of Seller's right, title and interest in and to, or derived from, all of the presently existing and valid oil sales contracts, casinghead gas sales contracts, gas sales contracts, processing contracts, gathering contracts, transportation contracts, easements, rights-of-way, servitudes, surface leases and other contracts (including the Material Contracts), to the extent the same are assignable and relate to any of the interests which are expressly described on Exhibit A; (e) All of Seller's right, title and interest in and to all personal property and improvements (collectively, the "Equipment"), including without limitation, wells (whether producing, plugged and abandoned, shut- in, injection, disposal or water supply), tanks, boilers, platforms, buildings, fixtures, machinery, equipment, pipelines, utility lines, power lines, telephone lines, telegraph lines and other appurtenances located on, in, under and about the Leases, to the extent the same are situated upon and used or held for use by Seller solely in connection with the ownership, operation, maintenance and repair of the interests which are expressly described on Exhibit A, subject to the reservations stated below; (f) All of Seller's Records; (g) All franchises, licenses, permits, approvals, consents, certificates and other authorizations and other rights granted by governmental authorities and all certificates of convenience or necessity, immunities, privileges, grants and other rights that relate to the 5 Properties or the ownership or operation of any thereof, to the extent the same are assignable (the "Permits"); and (h) All (i) accounts, instruments and general intangibles (as such terms are defined in the Uniform Commercial Code of Texas) attributable to the Properties with respect to any period of time on or after the Effective Time, and (ii) liens and security interests in favor of Seller, whether choate or inchoate, under any law, rule or regulation or under any of the Material Contracts (a) arising from the ownership, operation or sale or other disposition on or after the Effective Time of any of the Properties or (b) arising in favor of Seller whether by contract or statute as the operator or non-operator of certain of the Properties. "Purchase Price" has the meaning set forth in Section 3.1. "Records" means all of Seller's books, records and files related to the Properties, including all (i) abstracts, title opinions, title reports, environmental site assessments, environmental compliance reports, lease and land files, surveys, analyses, compilations, correspondence, filings with and reports to regulatory agencies and other documents and instruments that in any manner relate to the Properties, (ii) computer databases that are owned by or licensed to Seller that relate to the Properties, (iii) geophysical, geological, engineering, exploration, production and other technical data, magnetic field recordings, digital processing tapes, field prints, summaries, reports and maps, whether written or in electronically reproducible form, that are in the possession of Seller and relate to the Properties and (iv) all other books, records, files and magnetic tapes containing title or other information that are in the possession of Seller and relate to the Properties (the "Data"), but specifically excluding (i) previous offers and economic analyses associated with the acquisition, sale or exchange of the Properties, (ii) interpretive information, (iii) personnel information, (iv) corporate, legal, financial and tax information, (v) information covered by a non-disclosure obligation, (vi) information covered by a legal privilege and (vii) any other information that Seller does not have the right to assign to Buyer. "Title Adjustment" has the meaning set forth in Section 4.3. "Title/Casualty Basket Amount" means the sum of U.S. $50,000. "Title Defect" means any lien, encumbrance, encroachment or defect associated with Seller's title to the Properties (excluding Permitted Encumbrances) that would cause Seller not to have Defensible Title. "Third Party" means any person or entity, governmental or otherwise, other than Seller and Buyer. 6 ARTICLE 2. SALE AND PURCHASE On the Closing Date, effective as of the Effective Time, and upon the terms and conditions herein set forth, Seller agrees to sell and assign the Properties to Buyer and Buyer agrees to buy and accept the Properties. ARTICLE 3. PURCHASE PRICE 3.1 Purchase Price. Subject to adjustments as set forth herein, the total purchase price for the Properties shall be Twenty-Two Million Two Hundred Fifty Thousand Dollars (US $22,250,000.00) (the "Purchase Price"), payable in full at Closing in immediately available funds. 3.2 Earnest Money Deposit. Upon the execution of this Agreement, Buyer shall pay to Seller a deposit in the amount of Three Million Dollars (US $3,000,000.00) (the "Earnest Money Deposit"). If Closing occurs, the Purchase Price shall be credited by the amount of the Earnest Money Deposit. If Closing does not occur, the Earnest Money Deposit shall be refunded to Buyer, unless (a) Closing does not occur because of Buyer's failure or refusal to Close in breach of this Agreement or (b) because the conditions precedent to Seller's obligation to Close provided in Section 14.1 are unmet at the time set for Closing, in which case Seller shall retain the Earnest Money Deposit as liquidated damages and not as a penalty. If, however, in the case of either (a) or (b) above, any conditions precedent to Buyer's obligation to Close provided in Section 14.2 are unmet at the time set for Closing, Seller shall not be entitled to retain the Earnest Money Deposit as hereinabove provided. In the event that Closing occurs after June 30, 1999, through no fault of Seller, interest shall be payable on the Purchase Price from June 30, 1999 through and including the Closing Date at the rate of ten percent (10%) per annum. 3.3 Allocation. Attached hereto as Exhibit H is Buyer's good faith allocation of the Purchase Price which shall be used in providing any required preferential purchase right notifications. 3.4 Preferential Rights. If any of the Properties are burdened with preferential purchase rights, the assignment of the Properties subject to such preferential rights shall be conditioned upon Seller obtaining the necessary waiver or expiration of such right, and this Agreement shall not constitute an assignment or attempted assignment thereof without such waiver or expiration. If the time for exercising any preferential purchase right has not expired and the holder thereof has not waived the same prior to the Closing Date, the Property affected by such preferential right shall be conveyed to Buyer at Closing, subject to the preferential right and without any reduction in the Purchase Price. If the holder of the preferential right elects to purchase the Property affected by the preferential right after Closing, Buyer shall be obligated to convey such Property to the holder of such preferential right and Buyer shall be entitled to the proceeds resulting therefrom. If, prior to Closing, a holder of a preferential purchase right notifies Seller that it intends to exercise its rights with respect to any of the Properties to which its preferential purchase right applies, the Properties covered by said preferential purchase right shall be excluded from the Properties to be conveyed to Buyer, and the Purchase Price shall be reduced by the value allocated to said Properties by Buyer in accordance with Section 3.3. If the holder of the preferential purchase right fails to consummate the purchase of the Properties, Seller shall promptly notify Buyer in writing. Within five (5) Business Days after Buyer's 7 receipt of such notice or the Closing Date, whichever is later, Seller shall sell to Buyer, and Buyer shall purchase from Seller, such Properties under the terms of this Agreement for a price equal to the aforesaid value allocated to such Properties. Notwithstanding the foregoing, Buyer shall have no obligation to purchase such Properties if Buyer is not notified in writing of the preferential purchase right holder's failure to consummate the purchase of such Properties within sixty (60) Days following Closing. 3.5 Consents. If any of the oil, gas or mineral leases which are part of the Properties require the consent of a Third Party to assign Seller's interest therein, the assignment of such lease(s) subject to consent requirements shall be conditioned upon Seller obtaining such consent prior to Closing (except for consents from governmental bodies customarily obtained after assignment which shall not be required to be obtained prior to Closing). With respect to any leasehold interest for which consent is not obtained prior to Closing, such interest shall not be conveyed to Buyer at Closing and the Purchase Price shall be reduced to account for exclusion of the affected Property. If Seller obtains the required consent(s) within sixty (60) days following Closing, Seller shall sell and Buyer shall purchase the interest(s) affected thereby under the terms of this Agreement for a price equal to the Purchase Price adjustment made therefor at Closing. There shall be no obligations of sale or purchase of the affected interest(s) in the Properties following sixty (60) days after the Closing Date. ARTICLE 4. REVIEW BY BUYER 4.1 Review of Records. Seller shall make available to Buyer Records in Seller's possession relating to the Properties. Buyer shall be entitled to review said Records and shall have a right to request a reasonable number of copies of such Records, at Buyer's expense. 4.2 Alleged Adverse Matters. If, as a result of Buyer's due diligence review and inspection of Seller's Records, Buyer discovers provisions of any contract(s) (including the Material Contracts) which would (as to each such contractual or other matter discovered) have a material adverse effect on the value or operation of the Properties or any portion thereof (collectively, the "Alleged Adverse Matters"), then as soon as reasonably practicable after Buyer's review of the applicable Records, but in no event later than ten (10) Business Days prior to the Closing Date, Buyer shall notify Seller in writing of any such Alleged Adverse Matters. For purposes hereof "material" means (i) as to each Alleged Adverse Matter a value or effect net to Seller's interest in the Properties greater than Twenty-Five Thousand Dollars (US $25,000) and (ii) as to all Alleged Adverse Matters a value or effect net to Seller's interest in the Properties greater than Two Hundred Fifty Thousand Dollars (US $250,000) in the aggregate. Buyer's notice of Alleged Adverse Matters shall include a description and full explanation of each such matter being claimed and a value which Buyer in good faith attributes to such matter. Seller may undertake to satisfy some, all or none of Buyer's Alleged Adverse Matters at Seller's sole cost and expense. Buyer and Seller shall meet at least three (3) Business Days prior to the Closing Date in an attempt to mutually agree on a proposed resolution with respect to any Alleged Adverse Matters which remain uncured. For all Alleged Adverse Matters which are established by agreement of the parties or pursuant to the arbitration procedures established 8 herein and not otherwise resolved by Seller prior to Closing, there shall be a reduction in the Purchase Price equal to the amount or value thereof, as agreed by the parties or decided by arbitration, and an adjustment therefor shall be made in the preliminary Closing statement or in the Final Accounting Statement, as appropriate. If the parties cannot reach resolution of Alleged Adverse Matters within the time period specified above, Closing shall not be delayed, postponed or canceled, but either party has the right, exercisable within sixty (60) days after the Closing Date, to refer the same to arbitration in accordance with Article 13. Subject to the terms of Article 13, the decision of the arbitrators regarding such dispute over Alleged Adverse Matters shall be final as between the parties. 4.3 Adjustment of Purchase Price for Title Defects. As soon as reasonably practicable after Buyer's review of the Records in accordance with Section 4.1, but in no event later than ten (10) Business Days prior to the Closing Date, Buyer shall notify Seller in writing of any Properties which are subject to Alleged Title Defects and/or whose net revenue interest and/or working interest is/are less than or greater than that amount specified on Exhibit A (collectively, the "Title Adjustments"). Seller also shall promptly notify Buyer in writing of any such instances of which Seller becomes aware. Notice of Title Defects or Title Adjustments shall include a description and full explanation of each Title Defect and Title Adjustment being claimed and a value which Buyer in good faith attributes to each. With respect to Alleged Title Defects, Seller may undertake to satisfy some, all or none of those raised by Buyer, at Seller's sole cost and expense. Buyer and Seller shall meet at least three (3) Business Days prior to the Closing Date in an attempt to mutually agree on a resolution with respect to any Alleged Title Defects or Title Adjustments which by such time have not been agreed between the parties in writing. It is recognized that good faith differences of opinion may exist between Buyer and Seller in connection with Alleged Title Defects or Title Adjustments, including without limitation, disputes as to (i) whether or not the alleged defect constitutes a Title Defect within the meaning of this Agreement, (ii) whether or not the magnitude of such defect is great enough that Buyer is contractually entitled to assert such Title Defect, (iii) whether or not the Title Defect was properly and timely asserted by Buyer pursuant to this Article, and (iv) the appropriate upward or downward adjustment, if any, to be made to the Purchase Price on account of such Title Defect. In determining whether a portion of a Property contains a Title Defect, it is the intent of the parties to include, when possible, only that portion of the Property adversely affected. If the value properly allocated to a Title Defect cannot be determined directly from Exhibit H because the Title Defect is included within, but does not totally comprise the Property to which the allocated value relates, Seller and Buyer shall attempt to proportionately reduce the allocated value on Exhibit H. Closing shall not be delayed, postponed or canceled because a resolution of a Title Defect or Title Adjustment is not agreed prior to the Closing Date, except to the extent that the Alleged Title Defect being asserted is failure of Seller's title in whole or in part to any portion(s) of the Properties (a "Material Defect"). To the extent that any portion(s) of the Properties are alleged to be affected by a Material Defect which remains on the scheduled Closing Date uncured or otherwise unresolved by the parties, such affected portion(s) of the Properties shall be excluded from the Properties conveyed to Buyer at Closing and the Purchase Price shall be reduced accordingly. If the parties cannot mutually agree on a Purchase Price adjustment for a Material Defect, Buyer shall have the right to (i) proceed to Closing and accept the Property with the Material Defect with no Purchase Price adjustment or (ii) terminate this Agreement as to the Property affected by the Material Defect and receive a 9 Purchase Price adjustment for such Property as set forth on Exhibit H or, where applicable, the proportionate allocated value. If any difference of opinion regarding an Alleged Title Defect (excluding any Material Defect) or Title Adjustment or value of the Title Defect (excluding any Material Defect) or Title Adjustment (collectively, the "Title Defect Dispute") is not resolved by mutual agreement of Buyer and Seller prior to the Closing Date, then either party has the right, exercisable within sixty (60) days after the Closing Date, to refer the same to arbitration in accordance with Article 13, but using one (1) mutually agreeable arbitrator who is an attorney licensed in the state in which the Properties are located and who has at least fifteen (15) years oil and gas title experience in such state. Subject to the terms of Article 13, the decision of the arbitrator regarding Title Defect Dispute(s) shall be final as between the parties. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IN NO EVENT SHALL EITHER PARTY HAVE ANY OBLIGATIONS HEREUNDER WITH RESPECT TO ANY TITLE DEFECTS OR TITLE ADJUSTMENTS EXCEPT TO THE EXTENT THAT (I) EACH SUCH TITLE DEFECT OR TITLE ADJUSTMENT EXCEEDS FIFTEEN THOUSAND DOLLARS ($15,000) AND (II) ALL SUCH TITLE DEFECTS AND TITLE ADJUSTMENTS, TOGETHER WITH THE VALUE OF ALL CASUALTY LOSSES AND/OR TAKINGS UNDER ARTICLE 7, EXCEED IN THE AGGREGATE THE TITLE/CASUALTY BASKET AMOUNT, AND EACH PARTY HEREBY WAIVES ALL UPWARD OR DOWNWARD ADJUSTMENTS TO THE PURCHASE PRICE FOR TITLE DEFECTS AND/OR TITLE ADJUSTMENTS THE INDIVIDUAL VALUE OF WHICH IS $15,000 OR LESS AND THE CUMULATIVE VALUE OF WHICH, TOGETHER WITH THE VALUE OF ALL CASUALTY LOSSES AND/OR TAKINGS UNDER ARTICLE 7, IS LESS THAN THE TITLE/CASUALTY BASKET AMOUNT. 4.4 WAIVER. EXCEPT FOR CLAIMS BUYER ASSERTS UNDER SELLER'S SPECIAL WARRANTY OF TITLE DESCRIBED IN SECTION 9.1 AND CLAIMS ASSERTED UNDER ARTICLE 8, ALL ALLEGED ADVERSE MATTERS, ALLEGED TITLE DEFECTS AND TITLE ADJUSTMENTS WHICH ARE NOT RAISED BY BUYER WITHIN THE TIME PERIODS PROVIDED IN SECTIONS 4.2 AND 4.3 OR WHICH ARE RAISED AND NOT THEREAFTER SUBMITTED TO ARBITRATION IN ACCORDANCE WITH SUCH SECTIONS SHALL BE DEEMED WAIVED BY BUYER FOR ALL PURPOSES, AND BUYER SHALL HAVE NO RIGHT TO SEEK AN ADJUSTMENT TO THE PURCHASE PRICE, MAKE A CLAIM AGAINST SELLER OR SEEK INDEMNIFICATION FROM SELLER ON ACCOUNT OF THE SAME. ALL UPWARD TITLE ADJUSTMENTS WHICH ARE NOT RAISED BY SELLER WITHIN THE TIME PERIOD PROVIDED IN SECTION 4.3 OR WHICH ARE RAISED AND NOT THEREAFTER SUBMITTED TO ARBITRATION IN ACCORDANCE WITH SUCH SECTION SHALL BE DEEMED WAIVED BY SELLER FOR ALL PURPOSES, AND SELLER SHALL HAVE NO RIGHT TO SEEK AN ADJUSTMENT TO THE PURCHASE PRICE, MAKE A CLAIM AGAINST BUYER OR SEEK INDEMNIFICATION FROM BUYER ON ACCOUNT OF THE SAME. ARTICLE 5. INSPECTION OF PROPERTIES Prior to entering into this Agreement, Seller has allowed Buyer access to the Properties for the purpose of conducting a physical and environmental inspection thereof. ARTICLE 6. ACCOUNTING 6.1 Revenues, Expenses and Capital Expenditures. All Hydrocarbons produced prior to the Effective Time (irrespective of whether payment for the same has been made or received) which 10 are attributable to the Properties shall belong to Seller, and all such Hydrocarbons produced from and after the Effective Time shall belong to Buyer. Seller shall be entitled to all revenues and related accounts receivable attributable to the ownership or operation of the Properties, and shall be responsible for all costs and expenses and related accounts payable attributable to the ownership or operation of the Properties, to the extent they relate to the time prior to the Effective Time. Buyer shall be entitled to all revenues and related accounts receivable attributable to the ownership or operation of the Properties, and shall be responsible for all costs and expenses and related accounts payable attributable to the ownership or operation of the Properties, to the extent they relate to the time from and after the Effective Time. The actual amounts or values associated with the above shall be accounted for in the Final Accounting Settlement. Buyer shall assume Seller's suspense funds associated with the acquired Properties as of the Effective Time, and these funds shall be accounted for in the Final Accounting Settlement. 6.2 Taxes. All taxes and assessments, including without limitation, excise, ad valorem, property, production and severance taxes and any other federal, state and local taxes and assessments attributable to the ownership or operation of the Properties prior to the Effective Time shall remain Seller's responsibility, and all deductions, credits and refunds pertaining to the aforementioned taxes and assessments, no matter when received, shall belong to Seller. All taxes and assessments, including without limitation, excise, ad valorem, property, production and severance taxes and any other federal, state and local taxes and assessments attributable to the ownership or operation of the Properties after the Effective Time shall be Buyer's responsibility, and all deductions, credits and refunds pertaining to the aforementioned taxes and assessments, no matter when received, shall belong to Buyer. The actual amounts or values associated with the above, if any, shall be accounted for in the Final Accounting Settlement. The parties agree that the transaction contemplated herein is an occasional sale of assets by Seller in which Seller does not trade in the ordinary course of its business. Accordingly, the parties will take commercially reasonable actions to establish the occasional sale exemption from any sales tax associated with the transaction contemplated herein. Notwithstanding the foregoing, Buyer shall be solely responsible for all transfer, sales, use or similar taxes resulting from or associated with the transaction contemplated under this Agreement. 6.3 Obligations and Credits. Any and all prepaid insurance premiums, utility charges, taxes, rentals and any other prepays, to the extent applicable to periods of time after the Effective Time and to the extent attributable to the Properties shall be reimbursed to Seller by Buyer; and accrued payables applicable to periods of time prior to the Effective Time, if any, and attributable to the Properties shall be the responsibility of Seller. The actual amounts or values associated with the above shall be accounted for in the Final Accounting Settlement. 6.4 Gas Imbalances. Seller's estimate of the aggregate gas imbalance as of the Effective Time for all the Properties (exclusive of the Forest Imbalance Claim) is 716,363 mcf overproduced (cumulative working interests), as more particularly set forth for each of the Properties on Exhibit I. On or before three (3) Business Days prior to the Closing Date, Seller shall provide Buyer with a revised gas imbalance schedule for all the Properties as of the Effective Time. There shall be a Purchase Price adjustment at Closing for the volumetric difference in the estimated and revised 11 imbalance calculated on Seller's net revenue interest at a price of $1.70 per mcf. To the extent that there is any difference between Seller's actual aggregate gas imbalance as of the Effective Time and the imbalance position settled at Closing, then an adjustment shall be made at the $1.70 per net mcf rate in the Final Accounting Settlement. There shall be no further gas imbalance adjustments after the Final Settlement Date. In the event of a Title Defect affecting all or a portion of the Properties, the aggregate gas imbalance shown above shall be adjusted to take into account the affected Property. Any Purchase Price adjustments for gas imbalances shall be made only on those Properties purchased by Buyer. 6.5 Miscellaneous Accounting. 6.5.1 A preliminary Closing statement will be prepared for Closing, as provided in Section 16.1. 6.5.2 In addition to the items set forth in Sections 6.1 and 6.2, any other amounts due between Buyer and Seller related to the ownership or operation of the Properties shall be accounted for in the Final Accounting Settlement. 6.6 Final Accounting Settlement. As soon as reasonably practicable, but in no event later than ninety (90) Days after Closing, Seller shall deliver to Buyer a post-Closing statement setting forth a detailed final calculation of all post-Closing adjustments applicable to the period between the Effective Time and the Closing Date ("Final Accounting Settlement"). As soon as reasonably practicable, but in no event later than thirty (30) Days after Buyer receives the post-Closing statement, Buyer shall deliver to Seller a written report containing any changes Buyer proposes to be made to such statement. As soon as reasonably practicable, but in no event later than thirty (30) days after Seller receives Buyer's proposed changes to the post-Closing statement, the parties shall meet and undertake to agree on the post-Closing adjustments. If the parties fail to agree on the post-Closing adjustments, resolution shall be handled in accordance with Section 6.8. The date upon which all amounts associated with the Final Accounting Settlement are agreed to by the parties, whether by decision of the Accounting Referee or otherwise, shall be herein called the "Final Settlement Date". Any amounts owed by either party to the other as a result of such post-Closing adjustments shall be paid within five (5) Business Days after the Final Settlement Date. The adjustments to the Purchase Price under this Article 6 and the payments under this Section 6.6 shall not be limited by or applied against the deductible amounts set forth in Article 8 hereof. 6.7 Post-Final Accounting Settlement. Any revenues received or costs and expenses paid by Buyer after the Final Accounting Settlement which are attributable to the ownership or operation of the Properties prior to the Effective Time shall be billed to or reimbursed to Seller, as appropriate. Any revenues received or costs and expenses paid by Seller after the Final Accounting Settlement which are attributable to the ownership or operation of the Properties after the Effective Time shall be billed to or reimbursed to Buyer, as appropriate. 12 6.8 Audit Rights. In order to verify the information provided by the parties under this Article 6, Buyer and Seller shall each have the right to conduct, at such party's sole expense, an audit of the other party's records relating thereto for a period of one (1) year after the Closing Date. OBJECTIONS OR EXCEPTIONS WHICH ARE NOT RAISED WITHIN SUCH ONE-YEAR AUDIT PERIOD SHALL BE CONCLUSIVELY DEEMED TO BE WAIVED BY THE PARTIES FOR ALL PURPOSES, AND NEITHER PARTY SHALL HAVE THE RIGHT TO MAKE A CLAIM AGAINST THE OTHER PARTY OR SEEK INDEMNIFICATION OR REIMBURSEMENT FROM THE OTHER PARTY ASSOCIATED WITH THE SAME. If within such fifteen (15) Days after receiving the results of a party's audit conducted in accordance with this Article, the parties still cannot reach agreement, the disputed items shall be resolved by submitting the same to Price Waterhouse Coopers, or if such firm declines to act in such capacity, by such other firm of independent nationally recognized accountants mutually acceptable to the parties (the "Accounting Referee"). The Accounting Referee shall be instructed to resolve the accounting dispute(s) within thirty (30) Days after having the relevant materials submitted to it for review. The decision of the Accounting Referee shall be binding and non-appealable by the parties. The fees and expenses associated with the Accounting Referee shall be borne equally by Buyer and Seller. ARTICLE 7. CASUALTY AND CONDEMNATION If a substantial part of the Properties shall be (a) destroyed prior to Closing by a Casualty Loss, or (b) taken in condemnation or if proceedings for such purposes shall be pending (collectively referred to as a "Taking"); then either Buyer or Seller may terminate this Agreement prior to the Closing. For the purpose of this Section 7.1, the term "substantial" shall be defined as ten percent (10%) of the unadjusted Purchase Price. If either party terminates this Agreement in accordance with this Section, neither party shall have any further obligations, except as provided in this Article and in Section 15.2.1. If neither party terminates this Agreement, this Agreement shall remain in full force and effect, and Seller and Buyer shall attempt to agree on a reduction in the Purchase Price, reflecting the reduction in the value of the Properties affected by the Casualty Loss and/or Taking. If the parties cannot agree on a reduction, the Seller's good faith calculation shall be used for purposes of Closing. Notwithstanding anything herein to the contrary, in no event shall either party have any obligations hereunder with respect to any Casualty Loss and/or Taking except to the extent that the value of all such Casualty Losses and/or Takings, together with the amount of all Title Defects and/or Title Adjustments allowed under Section 4.3, exceed in the aggregate the Title/Casualty Basket Amount, and Buyer hereby waives all downward adjustments to the Purchase Price for all Casualty Losses and/or Takings the cumulative value of which (together with the amount of all Title Defects and/or Title Adjustments allowed under Section 4.3) is less than the Title/Casualty Basket Amount. Unless otherwise agreed by the parties, Seller shall retain any and all sums paid to Seller, unpaid awards, insurance proceeds and other payments associated with or attributable to Casualty Losses and/or Takings. If there is a dispute over the value of any Casualty Loss and/or Taking, Buyer may submit the matter to arbitration in accordance with Article 13 within sixty (60) Days after Closing, or if a party 13 terminates this Agreement under this provision and the other party disputes the party's right to terminate hereunder, the disputing party may submit the matter to arbitration in accordance with Article 13 within sixty (60) Days after the date which had been scheduled for Closing. IF BUYER DISPUTES THE PURCHASE PRICE ADJUSTMENT FOR ANY CASUALTY LOSS AND/OR TAKING OR A PARTY DISPUTES TERMINATION, AND BUYER OR THE DISPUTING PARTY, AS APPLICABLE, DOES NOT INITIATE AN ARBITRATION PROCEEDING TO RESOLVE THE MATTER WITHIN THE APPLICABLE TIME PERIODS SPECIFIED IN THE FOREGOING SENTENCE, SUCH PARTY IN EITHER CASE SHALL BE DEEMED TO HAVE WAIVED ITS RIGHTS WITH RESPECT TO SUCH DISPUTE. ARTICLE 8. INDEMNITIES 8.1 SELLER'S INDEMNITY OBLIGATIONS (EXCLUDING ENVIRONMENTAL CLAIMS) EXCEPT FOR ENVIRONMENTAL CLAIMS WHICH SHALL BE HANDLED IN ACCORDANCE WITH SECTION 8.3, SELLER SHALL RELEASE BUYER AND BUYER'S AFFILIATES AND THEIR RESPECTIVE OFFICERS, DIRECTORS AND EMPLOYEES (COLLECTIVELY, THE "BUYER GROUP") FROM AND SHALL FULLY PROTECT, INDEMNIFY, AND DEFEND BUYER GROUP FROM AND AGAINST ANY AND ALL CLAIMS AND ANY AND ALL OCCURRENCES AND CONDITIONS WHICH WOULD CONSTITUTE CLAIMS BUT WHICH ARE ASSERTED BY SELLER, RELATING TO, ARISING OUT OF, OR CONNECTED WITH (I) THE BREACH BY SELLER OF THE REPRESENTATIONS CONTAINED IN ARTICLE 10 HEREOF, (II) THE MATTERS SET FORTH ON EXHIBIT G AND (III) SELLER'S OWNERSHIP OR OPERATION OF THE PROPERTIES PRIOR TO THE EFFECTIVE TIME, REGARDLESS OF ANY NEGLIGENCE OF ACT OR OMISSION BY BUYER GROUP; PROVIDED, HOWEVER, THAT, EXCEPT WITH RESPECT TO THE MATTERS DESCRIBED ON EXHIBIT G, PROPER NOTICE UNDER SECTION 8.5 SHALL HAVE BEEN SUBMITTED TO SELLER WITHIN NINE (9) MONTHS AFTER THE CLOSING DATE, AND FURTHER PROVIDED THAT BUYER SHALL BEAR SOLE RESPONSIBILITY FOR THE COSTS ASSOCIATED WITH ALL SUCH CLAIMS (IN AGGREGATE) UP TO TWO HUNDRED FIFTY THOUSAND DOLLARS (US $250,000). WITH RESPECT TO THE MATTERS DESCRIBED ON EXHIBIT G, THERE SHALL BE NO TIME LIMIT FOR BUYER TO ASSERT A CLAIM FOR INDEMNITY AND BUYER SHALL NOT BEAR RESPONSIBILITY FOR ANY OF THE COSTS ASSOCIATED WITH SUCH MATTERS. 8.2 BUYER'S INDEMNITY OBLIGATIONS (EXCLUDING ENVIRONMENTAL CLAIMS) EXCEPT FOR ENVIRONMENTAL CLAIMS WHICH SHALL BE HANDLED IN ACCORDANCE WITH SECTION 8.3, BUYER SHALL RELEASE SELLER AND SELLER'S AFFILIATES AND THEIR RESPECTIVE OFFICERS, DIRECTORS AND EMPLOYEES (COLLECTIVELY, THE "SELLER GROUP") FROM AND SHALL FULLY PROTECT, INDEMNIFY, AND DEFEND THE SELLER GROUP FROM AND AGAINST ANY AND ALL CLAIMS AND ANY AND ALL OCCURRENCES AND CONDITIONS WHICH WOULD CONSTITUTE CLAIMS BUT WHICH ARE ASSERTED BY BUYER RELATING TO, ARISING OUT OF, OR CONNECTED WITH (I) THE BREACH BY BUYER OF THE REPRESENTATIONS CONTAINED IN ARTICLE 11 HEREOF, (II) THE ASSUMED OBLIGATIONS AND (III) THE OWNERSHIP OR OPERATION OF THE PROPERTIES (A) PERTAINING TO THE PERIOD AFTER THE EFFECTIVE TIME, AND (B) PERTAINING TO THE PERIOD PRIOR TO THE EFFECTIVE TIME, UNLESS SUCH CLAIMS OR OCCURRENCES AND CONDITIONS SHALL HAVE BEEN SUBMITTED TO SELLER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREOF WITHIN NINE (9) MONTHS AFTER THE CLOSING DATE AND ARE IN THE AGGREGATE GREATER THAN TWO HUNDRED FIFTY THOUSAND DOLLARS (US $250,000). THIS INDEMNITY SHALL APPLY REGARDLESS OF ANY NEGLIGENCE OF ACT OR OMISSION BY SELLER GROUP. 14 8.3 ENVIRONMENTAL CLAIMS. BUYER SHALL RELEASE SELLER GROUP AND SHALL FULLY PROTECT, INDEMNIFY, AND DEFEND SELLER GROUP FROM AND AGAINST ANY AND ALL ENVIRONMENTAL CLAIMS (SPECIFICALLY EXCLUDING, HOWEVER, THE NPDES CLAIM) AND ANY AND ALL OCCURRENCES AND CONDITIONS WHICH WOULD CONSTITUTE ENVIRONMENTAL CLAIMS BUT WHICH ARE ASSERTED BY BUYER, RELATING TO, ARISING OUT OF OR CONNECTED WITH THE OWNERSHIP OR OPERATION OF THE PROPERTIES (I) PERTAINING TO THE PERIOD AFTER THE EFFECTIVE TIME, AND (II) PERTAINING TO THE PERIOD PRIOR TO THE EFFECTIVE TIME, UNLESS SUCH ENVIRONMENTAL CLAIMS OR OCCURRENCES AND CONDITIONS SHALL HAVE BEEN SUBMITTED TO SELLER IN ACCORDANCE WITH THE NOTICE PROVISIONS HEREOF WITHIN NINE (9) MONTHS AFTER THE CLOSING DATE AND ARE IN THE AGGREGATE GREATER THAN TWO HUNDRED FIFTY THOUSAND DOLLARS (US $250,000), IN WHICH CASE SELLER SHALL INDEMNIFY BUYER WITH RESPECT TO SUCH ENVIRONMENTAL CLAIMS AS PROVIDED IN SECTION 8.1 ABOVE. 8.4 Asbestos and NORM. The parties acknowledge that the Properties may contain asbestos and/or NORM, and that special procedures may be required for the assessment, remediation, removal, transportation or disposal of asbestos and NORM. Buyer agrees to assume any and all liability associated with or attributable to the assessment, remediation, removal, transportation and disposal of the asbestos or NORM associated with or attributable to the Properties and shall conduct said activities in accordance with all applicable Laws. 8.5 Notice and Cooperation. If a Claim is asserted against a party for which the party would be liable under the provisions of this Agreement, it is a condition precedent to the indemnifying party's obligations hereunder that the indemnified party gives the indemnifying party written notice of such Claim setting forth full particulars of the Claim, as known by the indemnified party, including a copy of the Claim (if it was a written Claim.) The indemnified party shall make a good faith effort to notify the indemnifying party within one (1) month of receipt of a Claim and shall in all events effect such notice within such time as will allow the indemnifying party to defend against such Claim and no later than three (3) calendar months after receipt of the Claim by the indemnified party. The notice of a Claim given hereunder is referred to as a "Claim Notice." 8.6 Defense of Claims. 8.6.1 Counsel. Upon receipt of a Claim Notice, the indemnifying party may assume the defense thereof with counsel selected by the indemnifying party and reasonably satisfactory to the indemnified party. The indemnified party shall cooperate in all reasonable respects in such defense. If any Claim involves Claims with respect to which Buyer indemnifies Seller and also Claims for which Seller indemnifies Buyer, each party shall have the right to assume the defense of and hire counsel for that portion of the Claim for which it has liability. The indemnified party shall have the right to employ separate counsel in any Claim and to participate in the defense thereof, provided the fees and expenses of counsel employed by an indemnified party shall be at the expense of the indemnified party unless otherwise agreed between the parties. 15 8.6.2 Settlement. If the indemnifying party does not notify the indemnified party within the earlier to occur of: (a) the time a response is due in the relevant litigation matter, or (b) three (3) calendar months after receipt of the Claim Notice, that the indemnifying party elects to undertake the defense thereof, the indemnified party has the right to defend, at the sole expense of the indemnifying party, the Claim with counsel of its own choosing, subject to the right of the indemnifying party to assume the defense of any Claim at any time prior to settlement or final determination thereof at the indemnifying party's sole expense. In such event, the indemnified party shall send a written notice to the indemnifying party of any proposed settlement of any Claim, which settlement the indemnifying party may accept or reject, in its reasonable judgment, within thirty (30) days of receipt of such notice, unless the settlement offer is limited to a shorter period of time in which case the indemnifying party shall have such shorter period of time in which to accept or reject the proposed settlement. Failure of the indemnifying party to accept or reject such settlement within the thirty (30)-day period shall be deemed to be its rejection of such settlement. The indemnified party may settle any matter over the objection of the indemnifying party but shall in so doing be deemed to have waived any right to indemnity therefor as to (and only as to) liabilities with respect to which the indemnifying party has recognized its liability. 8.7 WAIVER OF CERTAIN DAMAGES. EACH OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO SEEK, INDIRECT, CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES OF ANY KIND WITH RESPECT TO ANY CLAIM, OCCURRENCE, CONDITION OR DISPUTE, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR BREACH HEREOF; PROVIDED, HOWEVER, THAT THIS PROVISION DOES NOT DIMINISH OR AFFECT IN ANY WAY THE PARTIES' RIGHTS AND OBLIGATIONS UNDER ANY INDEMNITIES PROVIDED FOR IN THIS AGREEMENT. 8.8. LIMITATION ON INDEMNITIES. IN NO EVENT SHALL AN INDEMNIFYING PARTY HAVE ANY OBLIGATION OF INDEMNIFICATION TO THE OTHER PARTY, IF THE CLAIM, OCCURRENCE, CONDITION OR DISPUTE FOR WHICH INDEMNITY IS SOUGHT WAS CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED PARTY AND/OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, CONTRACTORS, SUBCONTRACTORS OR AFFILIATES. ARTICLE 9. WARRANTIES AND DISCLAIMERS 9.1 SPECIAL WARRANTY OF TITLE. SELLER SHALL WARRANT AND DEFEND TITLE TO THE PROPERTIES CONVEYED TO BUYER AGAINST EVERY PERSON WHOMSOEVER LAWFULLY CLAIMING THE PROPERTIES OR ANY PART THEREOF BY, THROUGH OR UNDER SELLER, BUT NOT OTHERWISE, AND SUBJECT TO THE PERMITTED ENCUMBRANCES. 9.2 DISCLAIMER - REPRESENTATIONS AND WARRANTIES. BUYER ACKNOWLEDGES AND AGREES THAT THE PROPERTIES ARE BEING SOLD, ASSIGNED AND CONVEYED FROM SELLER TO BUYER "AS-IS, WHERE-IS", AND WITH ALL FAULTS IN THEIR PRESENT CONDITION AND STATE OF REPAIR, WITHOUT RECOURSE. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER HEREBY 16 DISCLAIMS ANY AND ALL REPRESENTATIONS AND WARRANTIES CONCERNING THE PROPERTIES, EXPRESS, STATUTORY, IMPLIED OR OTHERWISE, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF TITLE (EXCEPT AS SET FORTH IN SECTION 9.1), THE QUALITY OF HYDROCARBON RESERVES, THE QUANTITY OF HYDROCARBON RESERVES, THE AMOUNT OF REVENUES, THE AMOUNT OF OPERATING COSTS, CONDITION (PHYSICAL OR ENVIRONMENTAL), QUALITY, COMPLIANCE WITH APPLICABLE LAWS, ABSENCE OF DEFECTS (LATENT OR PATENT), SAFETY, STATE OF REPAIR, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND BUYER EXPRESSLY RELEASES SELLER FROM THE SAME. 9.3 DISCLAIMER - STATEMENTS AND INFORMATION. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER DISCLAIMS ANY AND ALL LIABILITY AND RESPONSIBILITY FOR AND ASSOCIATED WITH THE QUALITY, ACCURACY, COMPLETENESS OR MATERIALITY OF THE RECORDS AND ANY OTHER INFORMATION PROVIDED AT ANY TIME (WHETHER ORAL OR WRITTEN) TO BUYER, ITS OFFICERS, AGENTS, EMPLOYEES AND REPRESENTATIVES IN CONNECTION WITH THE TRANSACTION CONTEMPLATED HEREIN, INCLUDING WITHOUT LIMITATION, QUALITY OF HYDROCARBON RESERVES, QUANTITY OF HYDROCARBON RESERVES, AMOUNT OF REVENUES, AMOUNT OF OPERATING COSTS, FINANCIAL DATA, CONTRACT DATA, ENVIRONMENTAL CONDITION OF THE PROPERTIES, PHYSICAL CONDITION OF THE PROPERTIES AND CONTINUED FINANCIAL VIABILITY OF THE PROPERTIES, AND BUYER EXPRESSLY RELEASES SELLER FROM THE SAME. ARTICLE 10. SELLER'S REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer that on the date hereof and as of the Closing Date: 10.1 Organization and Good Standing. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, and has all requisite corporate power and authority to own and lease the Properties. Seller is duly licensed or qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the Properties are located. 10.2 Corporate Authority; Authorization of Agreement. Seller has all requisite corporate power and authority to execute and deliver this Agreement, to consummate the transactions contemplated herein and to perform all of the terms and conditions to be performed by it as provided for in this Agreement. The execution and delivery of this Agreement by Seller, the performance by Seller of all of the terms and conditions to be performed by it and the consummation of the transactions contemplated herein have been duly authorized and approved by all necessary corporate action. This Agreement has been duly executed and delivered by Seller and constitutes the valid and binding obligation of Seller, enforceable against it in accordance with its terms, except as such 17 enforceability may be limited by bankruptcy, insolvency or other Laws relating to or affecting the enforcement of creditors' rights and general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). 10.3 No Violations. The execution and delivery of this Agreement by Seller does not, and the fulfillment and compliance with the terms and conditions hereof and the consummation of the transactions contemplated herein, will not: (a) Conflict with or require the consent of any person or entity under any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Seller; (b) Violate any provision of, or require any filing, consent or approval under any Law applicable to or binding upon Seller (assuming receipt of all consents and approvals of governmental entities customarily obtained subsequent to the transfers of title); (c) Conflict with, result in a breach of, constitute a default under or constitute an event that with notice or lapse of time, or both, would constitute a default under, accelerate or permit the acceleration of the performance required by, or require any consent, authorization or approval under, (i) any mortgage, indenture, loan, credit agreement or other agreement, evidencing indebtedness for borrowed money to which Seller is a party or by which Seller is bound or (ii) any order, judgment or decree of any governmental entity or tribal authority; or (d) Result in the creation or imposition of any lien or encumbrance upon the Properties. 10.4 Absence of Certain Changes. Between the execution date hereof and the Closing Date, there have not been and there shall not be without Buyer's prior written consent: (a) A sale, lease or other disposition of any material part of the Properties; (b) A mortgage, pledge or grant of a lien or security interest in any of the Properties; or (c) A contract or commitment to do any of the foregoing. 10.5 Operating Costs. To the best of Seller's knowledge, all costs incurred in connection with operation of the Properties have been fully paid and discharged by Seller, except normal expenses incurred in operating the Properties within the previous sixty (60) Days or as to which Seller has not yet been billed or as to which Seller is disputing in good faith. 10.6 Litigation and Other Disputes. Except the matters listed on Exhibit G (liability for which shall be retained by Seller), there is no action, suit or proceeding pending or, to the best of 18 Seller's knowledge, threatened against Seller or the Properties which would reasonably be expected to have a material adverse effect on Buyer or Buyer's interest in the Properties after Closing or to prevent the consummation of the transaction contemplated by this Agreement. For purposes of this provision, "material" means an impact of greater than Twenty-Five Thousand Dollars (US $25,000). 10.7 Bankruptcy. There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to the best of Seller's knowledge, threatened against Seller. 10.8 Material Contracts. To the best of Seller's knowledge, Exhibit F sets forth a list of the following contracts, agreements, and commitments to which any of the Properties are bound: (a) any agreement with any affiliate of Seller; (b) any agreement or contract of Seller for the sale, exchange or other disposition of Hydrocarbons produced from the Properties that is not cancelable without penalty on not more than 60 days prior written notice; (c) any agreement of Seller to sell, lease, farmout or otherwise dispose of any of its interests in any of the Properties other than conventional rights of reassignment; (d) any tax partnership agreement of Seller affecting any of the Properties; (e) any operating agreement to which Seller's interests in any of the Properties is subject; (f) any agreement pursuant to which Seller has not consented to, or forfeited, its rights to participate in future oil and gas operations; (g) any agreement pursuant to which Seller has received an advance payment, prepayment or similar deposit, and has a refund obligation, with respect to any gas or products purchased, sold, gathered, processed or marketed by or for Seller out of the Properties, (h) any contract that requires Seller to expend more than $200,000 in any year in connection with the Properties; (i) any option to purchase or call on the Hydrocarbons produced from the Properties; and (j) any lease, title retention agreement, or security interest affecting any of the Equipment. 10.9 Approvals and Preferential Rights. To the best of Seller's knowledge, except for those consents and approvals customarily obtained subsequent to the transfer of title, Exhibit J contains a complete and accurate list of all approvals, consents, filings and notifications required to be obtained, made or given by Seller for the assignment or transfer of the Properties (including, without limitation, the Permits) to Buyer and all preferential purchase rights that affect the Properties. 10.10 Compliance with Law and Permits. Except for those matters set forth on Exhibit K hereto and such other matters as would not have a material adverse effect on the value of the Properties, to the best of Seller's knowledge, Seller and those third parties operating any portion of the Properties, (a) are in material compliance with all laws, rules, regulations, ordinances, orders, decisions and decrees of all governmental authorities having jurisdiction with respect to the Properties or the ownership or operation of any thereof; (b) have obtained all necessary governmental permits, licenses, approvals, consents, certificates and other authorizations with regard to the ownership or operation of the Properties and have maintained the same in effect and no material violations exist in respect of such permits, licenses, approvals, consents, certificates or authorizations; and (c) are not aware of any facts, conditions or circumstances in connection with, related to or associated with the Properties or the ownership or operation of any thereof that could reasonably be expected to give rise to any claim or assertion that Seller, the Properties or the ownership or operation of any thereof is not in material compliance with any applicable law, rule, regulation, ordinance, order, decision or 19 decree of any governmental authority or with any term or conditions of any applicable permit, license, approval, consent, certificate or other authorization. 10.11 Environmental Compliance. Except for those matters set forth on Exhibit K hereto and such other matters as would not have a material adverse effect on the value of the Properties, to the best of Seller's knowledge, Seller and those third parties operating any portion of the Properties, (a) have obtained and maintained in effect all environmental and health and safety permits, licenses, approvals, consents, certificates and other authorizations necessary for the ownership or operation of the Properties ("Environmental Permits"); (b) are in material compliance with all applicable Environmental Laws and with all terms and conditions of all Environmental Permits, and all prior instances of noncompliance have been fully and finally resolved to the satisfaction of all governmental authorities with jurisdiction over such matters; (c) are not subject to any Environmental Claims arising from, based upon, associated with or related to the Properties or the ownership or operation of any thereof; (d) have not received any notice of any Environmental Claim or any violation, noncompliance or possible noncompliance with any Environmental Law or the terms or conditions of any Environmental Permit, arising from, based upon, associated with or related to the Properties or the ownership or operation of any thereof; and (e) are not otherwise aware of any facts, conditions or circumstances in connection with, related to or associated with the Properties or the ownership or operation of any thereof, that could reasonably be expected to give rise to any Environmental Claim or any claim or assertion that Seller, the Properties or the ownership or operation thereof is not in compliance with Environmental Laws or the terms or conditions of any Environmental Permit. 10.12 Status of Contracts. (a) All of the Material Contracts are in full force and effect, and (b) neither Seller nor, to the knowledge of Seller, any other party to the Material Contracts (i) is in breach of or default, or with the lapse of time or the giving of notice, or both, would be in breach or default, with respect to any of its obligations thereunder to the extent that such breaches or defaults would have a material adverse impact on any of the Properties or (ii) has given or threatened to give notice of any default under or inquiry into any possible default under, or action to alter, terminate, rescind or procure a judicial reformation of any Material Contract. 10.13 Production Burdens, Taxes, Expenses and Revenues. To the best of Seller's knowledge, (a) all rentals, royalties, excess royalty, overriding royalty interests and other payments due under or with respect to the Properties have been properly and timely paid, (b) all ad valorem, property, production, severance and other taxes based on or measured by the ownership of the Properties or the production of Hydrocarbons from the Properties have been properly and timely paid, (c) all expenses payable by Seller under the terms of the Material Contracts have been properly and timely paid except for such expenses as are being currently paid prior to delinquency or are being contested in good faith in the ordinary course of business and (d) all of the proceeds from the sale of Hydrocarbons are being properly and timely paid to Seller by the purchasers of production without suspension or indemnity other than standard division order indemnities. 10.14 Production Sales Matters. Except as set forth on Exhibit L, to the best of Seller's knowledge, (a) none of the purchasers under any production sales contracts is entitled to "makeup" 20 or otherwise receive deliveries of Hydrocarbons without paying at the time of such deliveries the full contract price therefor by reason of payments made prior to the Effective Time; (b) none of the purchasers under any production sales contracts has exercised any economic out provision; (c) none of the purchasers under any production sales contracts has curtailed its takes of natural gas in violation of such contracts; (d) none of the purchasers under any production sales contracts has given notice that it desires to amend the production sales contracts with respect to price or quantity of deliveries under take-or-pay provisions or otherwise; and (e) Seller is not obligated to pay any penalties or other payments under any gas transportation or other agreement as a result of the delivery of quantities of gas from the Properties in excess of the contract requirements. 10.15 Capital Commitments. Exhibit M contains a complete and accurate list as of the date of this Agreement of (a) all authorities for expenditures ("AFEs") to drill or rework wells or for capital expenditures pursuant to any of the Material Contracts that have been proposed by any person on or after the Effective Time, whether or not accepted by Seller or any other person, and (b) all AFEs and oral or written commitments to drill or rework wells or for other capital expenditures pursuant to any of the Material Contracts that are equal to or greater than US $200,000 and for which all of the activities anticipated in such AFEs or commitments have not been completed by the date of this Agreement. 10.16 Limitation on Representations. The representations contained in Sections 10.5 through 10.15 shall survive Closing for a period of nine (9) months after the Closing Date and shall thereupon terminate. Furthermore, the representations contained in Sections 10.5 through 10.15 are limited in scope to those matters that either occurred or that Seller received actual knowledge of during the time period extending from October 15, 1998 through the Closing Date. ARTICLE 11. BUYER'S REPRESENTATIONS AND WARRANTIES Buyer represents and warrants to Seller that on the date hereof and as of the Closing Date: 11.1 Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has all requisite corporate power and authority to own and lease the Properties. Buyer is duly licensed or qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the Properties are located. 11.2 Corporate Authority; Authorization of Agreement. Buyer has all requisite corporate power and authority to execute and deliver this Agreement, to consummate the transactions contemplated herein and to perform all the terms and conditions to be performed by it as provided for in this Agreement. The execution and delivery of this Agreement by Buyer, the performance by Buyer of all the terms and conditions to be performed by it and the consummation of the transactions contemplated herein have been duly authorized and approved by all necessary corporate action. This Agreement has been duly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as such enforceability 21 may be limited by bankruptcy, insolvency or other Laws relating to or affecting the enforcement of creditors' rights and general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). 11.3 No Violations. The execution and delivery of this Agreement by Buyer does not, and the fulfillment and compliance with the terms and conditions hereof and the consummation of the transactions contemplated herein, do not: (a) Conflict with or require the consent of any person or entity under any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Buyer; (b) Violate any provision of, or require any filing, consent or approval under any Law applicable to or binding upon Buyer; or (c) Conflict with, result in a breach of, constitute a default under or constitute an event that with notice or lapse of time, or both, would constitute a default under, accelerate or permit the acceleration of the performance required by, or require any consent, authorization or approval under, (i) any mortgage, indenture, loan, credit agreement or other agreement evidencing indebtedness for borrowed money to which Buyer is a party or by which Buyer is bound, or (ii) any order, judgment or decree of any governmental entity or tribal authority. 11.4 SEC Disclosure. Buyer is an experienced and knowledgeable investor and operator in the oil and gas business. Buyer is acquiring the Properties for its own account for use in its trade or business, and not with a view toward or for sale in connection with any distribution thereof, nor with any present intention of making a distribution thereof within the meaning of the Securities Act of 1933, as amended. 11.5 INDEPENDENT EVALUATION. AS OF CLOSING, BUYER REPRESENTS THAT IT IS SOPHISTICATED IN THE EVALUATION, PURCHASE, OPERATION AND OWNERSHIP OF OIL AND GAS PROPERTIES AND THAT IN MAKING ITS DECISION TO ENTER INTO THIS AGREEMENT AND TO CONSUMMATE THE TRANSACTION CONTEMPLATED HEREIN, BUYER HAS RELIED AND SHALL RELY SOLELY ON SELLER'S REPRESENTATIONS CONTAINED HEREIN AND ON ITS OWN INDEPENDENT INVESTIGATION AND EVALUATION OF THE PROPERTIES AND HAS SATISFIED ITSELF AS TO THE PHYSICAL CONDITION AND ENVIRONMENTAL CONDITION OF THE PROPERTIES. 11.6 BUYER'S RELIANCE. BUYER ACKNOWLEDGES AND AGREES THAT IT IS ENTITLED TO RELY ONLY ON THE EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT. 11.7 Qualified Leaseholder. Buyer meets the area-wide bonding and any other bonding requirements of the Minerals Management Service and other governmental authorities, and, after the Closing, Buyer anticipates that it will continue to be able to meet such bonding requirements. Buyer is and, after the Closing, is expected to continue to be, otherwise qualified to own the Properties. 22 The consummation of the transactions contemplated hereby will not cause Buyer to be disqualified to be an owner of federal oil, gas, and mineral leases in the Gulf of Mexico region, or to exceed any acreage limitation imposed by any law, statute, rule or regulation. Buyer is not aware of any fact that could reasonably be expected to cause the Minerals Management Service or other governmental authorities to fail to unconditionally approve the assignment of the Properties to Buyer. ARTICLE 12. ADDITIONAL AGREEMENTS 12.1 Covenants of Seller. From the date hereof until Closing, without first obtaining the consent of Buyer, Seller has not and will not: (a) waive any right of material value relating to the Properties; (b) convey, encumber, mortgage, pledge any of the Properties nor dispose of any of the Properties, other than the sale of production in the ordinary course of business and except as may be required in connection with the exercise of preferential rights affecting the Properties; (c) enter into, modify or terminate any contracts relating to the Properties; (d) vote to commit to any material project or material expenditure under any operating agreement affecting the Properties or elect to participate in any operation on the Properties requiring an expenditure of greater than Two Hundred Thousand Dollars (US $200,000) to Seller's interest, except to the extent required in an emergency to protect life or property from immediate harm or destruction; or (e) contract or commit itself to do any of the foregoing. 12.2 Notice of Loss. From the date hereof until Closing, Seller shall promptly notify Buyer of any loss or damage to the Properties, or any part thereof, known to Seller and in the aggregate exceeding Twenty-five Thousand Dollars (US $25,000) net to Seller's interest. 12.3 Subsequent Operations. Seller makes no representations or warranties to Buyer as to the transferability or assignability of operatorship of the Properties. Buyer acknowledges that the rights and obligations associated with operatorship of the Properties are governed by the applicable agreement(s) and that operatorship of the Properties shall be decided in accordance with the terms of said agreement(s); provided, however, Seller agrees to provide reasonable assistance to Buyer (at no expense to Seller) in connection with Buyer's effort to be designated as operator of the Properties. 12.4 Buyer's Assumption of Obligations. Except as otherwise expressly provided in this Agreement, Buyer agrees to assume and shall timely perform and discharge all duties and obligations of Seller insofar as the same relate to or arise out of Seller's interest in the Properties relating to the period of time after the Closing, including, without limitation, all duties and obligations of Seller 23 under all the Material Contracts (the "Assumed Obligations"), and Buyer shall indemnify and hold Seller harmless from and against any and all liabilities of whatsoever nature arising out of Buyer's failure to properly perform or discharge the Assumed Obligations, except to the extent the same relate to the breach of any representation or warranty of Seller as set forth in and limited by this Agreement, or the breach of, or failure to perform or satisfy any covenant of Seller set forth in this Agreement. Buyer agrees to accept full responsibility for Seller's proportionate share of the costs and expenses associated with or attributable to the plugging and abandonment of all wells, and the removal of all equipment, platforms and facilities conveyed to Buyer under this Agreement and the remediation, restoration and clean up of the Properties. In conducting the duties and obligations contained in this Section 12.4, Buyer shall comply with the applicable Laws of all governmental entities and tribal authorities having appropriate jurisdiction. Buyer shall not assume (i) any duties, obligations or liabilities with respect to or relating to any matter disclosed under, or that should have been disclosed, under Exhibit G and (ii) any obligation of Seller to pay or discharge any refunds, including interest and penalties, if any, that may be imposed by any governmental authority arising from the sale of Hydrocarbons and operation of the Properties prior to the Effective Time. 12.5 Records. Within thirty (30) Days after Closing, Seller shall furnish to Buyer all Records which are maintained by Seller, provided, however, that Seller is entitled to retain copies of any or all such Records and to retain as long as needed, the originals of any Records required in connection with any litigation or other proceedings listed on Exhibit G. Buyer agrees to maintain the Records received from Seller in accordance herewith for a period of six (6) years after the Closing Date and to afford Seller reasonable access to the Records as requested by Seller. If Buyer desires to dispose of any such Records prior to the end of the six (6) year period, Buyer shall offer in writing to Seller to deliver such Records to Seller; if Seller elects not to receive such Records or fails to respond to Buyer's notice within thirty (30) Business Days after receipt thereof, then Buyer may dispose of such Records within its discretion. ARTICLE 13. ARBITRATION ANY DISPUTE ARISING UNDER THIS AGREEMENT ("ARBITRABLE DISPUTE") SHALL BE REFERRED TO AND RESOLVED BY BINDING ARBITRATION IN BIRMINGHAM, ALABAMA BY THREE (3) ARBITRATORS, IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION; AND, TO THE MAXIMUM EXTENT APPLICABLE, THE FEDERAL ARBITRATION ACT (TITLE 9 OF THE UNITED STATES CODE). IF THERE IS ANY INCONSISTENCY BETWEEN THIS ARTICLE AND ANY STATUTE OR RULES, THIS ARTICLE SHALL CONTROL. ARBITRATION SHALL BE INITIATED (A) WITHIN THE APPLICABLE TIME LIMITS SET FORTH IN THIS AGREEMENT AND NOT THEREAFTER, PROVIDED THAT IF NO TIME LIMIT IS GIVEN, WITHIN THE TIME PERIOD ALLOWED BY THE APPLICABLE STATUTE OF LIMITATIONS, (B) BY ONE PARTY ("CLAIMANT") GIVING WRITTEN NOTICE TO THE OTHER OR ADVERSARIAL PARTY ("RESPONDENT") AND TO THE BIRMINGHAM REGIONAL OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"), ATTENTION: 24 REGIONAL VICE PRESIDENT, WITH A COPY TO THE ADMINISTRATOR OF THE AAA, THAT THE CLAIMANT ELECTS TO REFER THE ARBITRABLE DISPUTE TO ARBITRATION, AND THAT THE CLAIMANT HAS APPOINTED AN ARBITRATOR, WHO SHALL BE IDENTIFIED IN SUCH NOTICE. THE RESPONDENT SHALL NOTIFY THE CLAIMANT AND THE AAA WITHIN TEN (10) DAYS AFTER RECEIPT OF CLAIMANT'S NOTICE, IDENTIFYING THE ARBITRATOR WHO THE RESPONDENT HAS APPOINTED. THE TWO (2) ARBITRATORS SO CHOSEN SHALL SELECT A THIRD ARBITRATOR WITHIN TEN (10) DAYS AFTER THE SECOND ARBITRATOR HAS BEEN APPOINTED. UPON FAILURE OF A PARTY TO ACT WITHIN THE TIME SPECIFIED FOR NAMING AN ARBITRATOR, SUCH ARBITRATOR SHALL BE APPOINTED BY THE ADMINISTRATOR'S DESIGNEE. SELLER SHALL PAY THE COMPENSATION AND EXPENSES OF THE ARBITRATOR NAMED BY OR FOR IT, BUYER SHALL PAY THE COMPENSATION AND EXPENSES OF THE ARBITRATOR NAMED BY OR FOR IT, AND SELLER AND BUYER SHALL EACH PAY ONE-HALF OF THE COMPENSATION AND EXPENSES OF THE THIRD ARBITRATOR, PROVIDED HOWEVER THAT ALL COSTS CAN BE ASSESSED AGAINST THE LOSING PARTY, IF THE ARBITRATORS SO DECIDE. ALL ARBITRATORS MUST BE NEUTRAL PARTIES WHO HAVE NEVER BEEN OFFICERS, DIRECTORS OR EMPLOYEES OF THE PARTIES OR ANY OF THEIR AFFILIATES, MUST HAVE NOT LESS THAN FIFTEEN (15) YEARS EXPERIENCE IN THE OIL AND GAS INDUSTRY, AND MUST HAVE A FORMAL FINANCIAL/ACCOUNTING, ENGINEERING OR LEGAL EDUCATION. THE HEARING SHALL BE COMMENCED WITHIN THIRTY (30) DAYS AFTER THE SELECTION OF THE ARBITRATORS. THE PARTIES AND THE ARBITRATORS SHALL PROCEED DILIGENTLY AND IN GOOD FAITH IN ORDER THAT THE ARBITRAL AWARD SHALL BE MADE AS PROMPTLY AS POSSIBLE. THE INTERPRETATION, CONSTRUCTION AND EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF TEXAS, AND TO THE MAXIMUM EXTENT ALLOWED BY LAW, IN ALL ARBITRATION PROCEEDINGS THE LAWS OF TEXAS SHALL BE APPLIED, WITHOUT REGARD TO ANY CONFLICTS OF LAWS PRINCIPLES. ALL STATUTES OF LIMITATION AND OF REPOSE THAT WOULD OTHERWISE BE APPLICABLE SHALL APPLY TO ANY ARBITRATION PROCEEDING. THE TRIBUNAL SHALL NOT HAVE THE AUTHORITY TO GRANT OR AWARD INDIRECT, CONSEQUENTIAL, PUNITIVE, EXEMPLARY OR SPECIAL DAMAGES. ARTICLE 14. CONDITIONS PRECEDENT TO CLOSING 14.1 Conditions Precedent to Seller's Obligation to Close. Seller shall be obligated to consummate the sale of the Properties as contemplated by this Agreement on the Closing Date, provided the following conditions precedent have been satisfied or have been waived by Seller: 14.1.1 All representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects at and as of Closing as though such representations and warranties were made at and as of such time; 25 14.1.2 Buyer shall have complied in all material respects with all obligations and conditions contained in this Agreement to be performed or complied with by Buyer at or prior to the Closing; and 14.1.3 No suit, action or other proceedings shall be pending before any court or governmental entity in which it is sought by a person or entity (other than the parties hereto or any of their Affiliates, officers, directors, or employees) to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement, or to obtain substantial damages in connection with the transaction contemplated herein, nor shall there be any investigation by a governmental entity pending which might result in any such suit, action or other proceedings seeking to restrain, enjoin or otherwise prohibit the consummation of the transaction contemplated by this Agreement. 14.2 Conditions Precedent to Buyer's Obligation to Close. Buyer shall be obligated to consummate the purchase of the Properties as contemplated by this Agreement on the Closing Date, provided that the following conditions precedent have been satisfied or have been waived by Buyer: 14.2.1 All representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at and as of Closing as though such representations and warranties were made at and as of such time; 14.2.2 Seller shall have complied in all material respects with all obligations and conditions contained in this Agreement to be performed or complied with by Seller at or prior to the Closing; and 14.2.3 No suit, action or other proceedings shall be pending before any court or governmental entity in which it is sought by a person or entity (other than the parties hereto or any of their Affiliates, officers, directors, or employees) to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement, or to obtain substantial damages in connection with the transaction contemplated herein, nor shall there be any investigation by a governmental entity pending which might result in any such suit, action or other proceedings seeking to restrain, enjoin or otherwise prohibit the consummation of the transaction contemplated by this Agreement. ARTICLE 15. TERMINATION 15.1 Grounds for Termination. This Agreement may be terminated at any time prior to Closing: 15.1.1 By the mutual written agreement of Seller and Buyer; 15.1.2 By Seller if Buyer fails or refuses to Close in breach of this Agreement or if the conditions precedent to Seller's obligation to Close are unmet at the time set for Closing; 26 15.1.3 By Buyer if Seller fails or refuses to Close in breach of this Agreement or if the conditions precedent to Buyer's obligation to Close are unmet at the time set forth Closing; 15.1.4 By either Seller or Buyer pursuant to Article 7; 15.1.5 By either Seller or Buyer pursuant to Section 5.2.3(b)(iv). 15.1.6 By Seller if the Purchase Price would be adjusted downward by ten percent (10%) or more or by Buyer if the Purchase Price would be adjusted upward by ten percent (10%) in accordance with Article 4; or 15.17 By either party (provided the terminating party is not then in breach of any provisions of this Agreement), if Closing shall not have occurred within sixty (60) days following the originally scheduled Closing Date. 15.2 Effect of Termination. 15.2.1 Except as provided in Section 15.2.2 below, if this Agreement is terminated in accordance with Section 15.1, such termination shall be without liability of either party or any Affiliate, officer, director, or employee of such party, except for Seller's obligation (if applicable) to return the Earnest Money Deposit, as provided in Article 3, the obligations to arbitrate any dispute arising from such termination and the obligations provided in Sections 15.3, 15.4, 15.5, and 17.3. 15.2.2 If this Agreement is terminated because of Buyer's failure or refusal to Close in breach of this Agreement or because the conditions precedent to Seller's obligation to Close provided in Section 14.1 are unmet at the time set for Closing, Seller shall be entitled to retain the Earnest Money Deposit as liquidated damages to reimburse Seller for its out-of-pocket fees and expenses incurred in connection with the transactions contemplated by this Agreement, unless any of the conditions precedent to Buyer's obligation to Close provided in Section 14.2 are also unmet at the time set for Closing, in which case Seller shall return the Earnest Money Deposit to Buyer. 15.3 Dispute over Right to Terminate. If there is a dispute between the parties over either party's right to terminate this Agreement under Section 15.1, Closing shall not occur, as scheduled. The party which disputes the other party's right to terminate may initiate arbitration proceedings in accordance with Article 13 within thirty (30) Days after the date on which Closing was scheduled to occur and, if arbitration is so initiated, the dispute will be resolved through such arbitration proceeding. IF THE PARTY WHICH DISPUTES THE TERMINATION RIGHT DOES NOT INITIATE AN ARBITRATION PROCEEDING TO RESOLVE THE DISPUTE WITHIN THE TIME PERIOD SPECIFIED HEREINABOVE, SUCH PARTY SHALL BE DEEMED TO HAVE WAIVED ITS RIGHT TO OBJECT TO SUCH TERMINATION. 27 15.4 Return of Documents. If this Agreement is terminated, each party shall return to the party which owns or is otherwise entitled thereto all books, records, maps, files, papers and other property in such party's possession relating to the transaction contemplated by this Agreement. 15.5 Confidentiality. Notwithstanding the termination of this Agreement or any other provision of this Agreement to the contrary, the terms of the Confidentiality Agreement executed by Seller and Buyer, dated March 16, 1999, as amended by letter agreement dated May 24, 1999, shall remain in full force and effect. ARTICLE 16. THE CLOSING 16.1. Preliminary Closing Statement. At least five (5) Days prior to the Closing Date, Seller shall provide Buyer with a preliminary Closing statement setting forth the adjusted Purchase Price and wiring instructions designating the account or accounts to which the adjusted Purchase Price is to be delivered in accordance with Section 16.3.2. Within two (2) Business Days after receipt of the preliminary Closing statement from Seller, Buyer shall furnish Seller with Buyer's requested adjustments to such statement. Seller and Buyer shall attempt in good faith to resolve any differences between them, but if the parties are unable to agree, Seller's preliminary Closing statement shall be used for Closing. 16.2 Obligations of Seller at Closing. At the Closing, Seller shall deliver to Buyer, unless waived by Buyer, the following: 16.2.1 Documents substantially in the form of the Assignment and Bill of Sale attached hereto as Exhibit C, conveying all of Seller's right, title and interests in and to the Properties. The Assignment and Bill of Sale shall be executed and acknowledged in five (5) multiple originals or such greater number as agreed between the parties; 16.2.2 Evidence that all consents and approvals prerequisite to the sale and conveyance of the Properties (except for consents and approvals of governmental entities customarily obtained subsequent to the transfer of title or with respect to Properties which have been withdrawn from the transaction in accordance with the terms hereof) have been obtained, as well as evidence of waiver or lapse of any unexercised preferential purchase rights applicable to the Properties; 16.2.3 A Certificate substantially in the form of Exhibit D, executed by an authorized officer of Seller, certifying as to the matters specified in Section 14.2.1; 16.2.4 A Non-Foreign Affidavit substantially in the form of Exhibit E, executed by an authorized officer of Seller; and 16.2.5 Such other instruments as are necessary to carry out Seller's obligations under this Agreement. 28 16.3 Obligations of Buyer at Closing. At the Closing, Buyer shall deliver to Seller, unless waived by Seller, the following: 16.3.1 The Assignment and Bill of Sale referred to in Section 16.2.1, executed and properly acknowledged; 16.3.2 The adjusted Purchase Price, less the Earnest Money Deposit, by wire transfer in accordance with Article 3; 16.3.3 A Certificate substantially in the form of Exhibit D, executed by an authorized representative of Buyer, certifying as to the matters specified in Section 14.1.1. 16.3.4 Evidence of compliance with all requirements, if any, of the Minerals Management Service and the states in which the Properties are located for the posting of plugging or other applicable bonds relating to the ownership or operation of the Properties; and 16.3.5 Such other instruments as are necessary to carry out Buyer's obligations under this Agreement. 16.4 Site of Closing. Closing shall be held in Seller's offices in Birmingham, Alabama or any other location mutually agreed in writing by Seller and Buyer. ARTICLE 17. MISCELLANEOUS 17.1 Notices. All notices and other communications required, permitted or desired to be given hereunder must be in writing and sent by U.S. mail, properly addressed as shown below, and with all postage and other charges fully prepaid or by hand delivery or by facsimile transmission. Date of service by mail and hand delivery is the date on which such notice is received by the addressee and by facsimile is the date sent (as evidenced by fax machine confirmation of receipt), or if such date is not on a Business Day, then on the next date which is a Business Day. Each party may change its address by notifying the other party in writing. If to Seller Energen Resources MAQ, Inc. by mail or hand delivery: 605 21st Street North Birmingham, Alabama 35203 Attention: President If to Seller Energen Resources MAQ, Inc. by facsimile: Number: (205) 581-1858 Attention: President 29 If to Buyer Bellwether Exploration Company by mail or hand delivery: 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 Attention: J. Darby Sere', President If to Buyer Bellwether Exploration Company by facsimile: Number: (713) 652-2916 Attention: J. Darby Sere', President 17.2 Conveyance Costs. Buyer shall be solely responsible for filing and recording documents related to the transfer of the Properties from Seller to Buyer and for all costs and fees associated therewith, including filing the assignment of the Properties with appropriate federal, state and local authorities as required by applicable Law. Promptly following Buyer's receipt of the recorded documents, Buyer shall furnish Seller with all recording data and evidence of all required filings. 17.3 Brokers' Fees. Neither party has retained any brokers, agents or finders and none are affiliated with either party or authorized to act on behalf of either party in this matter. EACH PARTY AGREES TO RELEASE, PROTECT, INDEMNIFY, DEFEND AND HOLD THE OTHER HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS WITH RESPECT TO ANY COMMISSIONS, FINDERS' FEES OR OTHER REMUNERATION DUE TO ANY BROKER, AGENT OR FINDER CLAIMING BY, THROUGH OR UNDER SUCH PARTY. 17.4 Further Assurances. From and after Closing, at the request of Seller but without further consideration, Buyer will execute and deliver or use reasonable efforts to cause to be executed and delivered such other instruments of conveyance and take such other actions as Seller reasonably may request to more effectively put Seller in possession of any property which was not intended by the parties to be conveyed by Buyer. From and after Closing, at the request of Buyer but without further consideration, Seller shall execute and deliver or use reasonable efforts to cause to be executed and delivered such other instruments of conveyance and take such other actions as Buyer reasonably may request to more effectively put Buyer in possession of the Properties. If any of the Properties are incorrectly described, the description shall be corrected upon proof of the proper description. 17.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. UNLESS OTHERWISE EXPRESSLY LIMITED HEREIN, ALL REPRESENTATIONS, WARRANTIES, INDEMNITIES, COVENANTS AND AGREEMENTS CONTAINED IN THIS AGREEMENT, TO THE EXTENT NOT FULLY PERFORMED OR WAIVED PRIOR TO CLOSING, SHALL SURVIVE THE CLOSING INDEFINITELY. THE PARTIES HAVE MADE NO REPRESENTATIONS OR WARRANTIES EXCEPT THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT. 17.6 Amendments and Severability. No amendments or other changes to this Agreement shall be effective or binding on either of the parties unless the same shall be in writing and signed by both Seller and Buyer. The invalidity of any one or more provisions of this Agreement shall not affect 30 the validity of this Agreement as a whole, and in case of any such invalidity, this Agreement shall be construed as if the invalid provision had not been included herein. 17.7 Successors and Assigns. This Agreement shall not be assigned, either in whole or in part, without the prior express written consent of the non-assigning party. Assignment of this Agreement by either party shall not relieve the assigning party of liability hereunder in the event of non- performance or breach of this Agreement by such party's assignee. The terms, covenants and conditions contained in this Agreement shall be binding upon and shall inure to the benefit of Seller and Buyer and their respective successors and assigns, and such terms, covenants and conditions shall be covenants running with the land and with each subsequent transfer or assignment of the Properties. 17.8 Headings. The titles and headings set forth in this Agreement have been included solely for ease of reference and shall not be considered in the interpretation or construction of this Agreement. 17.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CHOICE OF LAW RULES WHICH MAY DIRECT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION. THIS PROVISION SURVIVES TERMINATION OF THIS AGREEMENT. 17.10 No Partnership Created. It is not the purpose or intention of this Agreement to create (and it shall not be construed as creating) a joint venture, partnership or any type of association, and the parties are not authorized to act as agent or principal for each other with respect to any matter related hereto. 17.11 Public Announcements. Neither the Seller Group nor the Buyer Group (as defined in Article 8) shall issue a public statement or press release with respect to the transaction contemplated herein (including the price and other terms) without the prior written consent of the other party, except as required by Law or listing agreement with a national security exchange and then only after prior consultation with the other party. 17.12 No Third Party Beneficiaries. Nothing contained in this Agreement shall entitle anyone other than Seller or Buyer or their authorized successors and assigns to any claim, cause of action, remedy or right of any kind whatsoever. 17.13 DECEPTIVE TRADE PRACTICES. AS PARTIAL CONSIDERATION FOR THE PARTIES AGREEING TO ENTER INTO THIS AGREEMENT, THE PARTIES EACH CAN AND DO EXPRESSLY WAIVE THE PROVISIONS OF ALL CONSUMER PROTECTION LAWS OF THE STATE OF ALABAMA, OR ANY OTHER STATE, APPLICABLE TO THIS TRANSACTION THAT MAY BE WAIVED BY THE PARTIES; IT IS NOT THE INTENT OF THE PARTIES TO WAIVE AND THE PARTIES SHALL NOT WAIVE ANY APPLICABLE LAW OR PROVISION THEREOF WHICH IS PROHIBITED BY LAW FROM BEING WAIVED. EACH PARTY REPRESENTS TO THE OTHER THAT SUCH PARTY HAS HAD AN ADEQUATE OPPORTUNITY TO REVIEW THE PRECEDING WAIVER PROVISION, INCLUDING THE OPPORTUNITY TO SUBMIT THE SAME TO LEGAL COUNSEL FOR REVIEW AND COMMENT, AND UNDERSTANDS THE RIGHTS BEING WAIVED HEREIN. 31 17.14 Tax Deferred Exchange Election. Either party may elect to structure the conveyance of the Properties as part of an exchange under Article 1031 of the Internal Revenue Code of 1986, as amended. The parties agree to execute all documents, conveyances or other instruments necessary to effectuate an exchange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ntire Agreement. This Agreement supersedes all prior negotiations, understandings, letters of intent and agreements (whether oral or written) and any contemporaneous oral agreements between the parties relating to the Properties and constitutes the entire understanding and agreement between the parties with respect to the sale and purchase of the Properties. 17.17 CONSPICUOUSNESS OF PROVISIONS. THE PARTIES ACKNOWLEDGE THAT THE PROVISIONS CONTAINED IN THIS AGREEMENT THAT ARE SET OUT IN "BOLD" SATISFY THE REQUIREMENT OF THE EXPRESS NEGLIGENCE RULE AND ANY OTHER REQUIREMENT AT LAW OR IN EQUITY THAT PROVISIONS CONTAINED IN A CONTRACT BE CONSPICUOUSLY MARKED OR HIGHLIGHTED. 17.18 Execution in Counterparts. This Agreement may be executed in counterparts, which shall when taken together constitute one valid and binding agreement. 17.19 High Island Block 71. Notwithstanding any provisions herein to the contrary, this Agreement may be partially assigned on a limited basis to a third party identified by Buyer insofar only as to High Island Block 71 and the Properties directly related thereto (the "HI 71 Properties") at Buyer's option, upon written notice to Seller no later than three (3) Business Days prior the Closing Date. In the event Buyer elects to assign its rights hereunder with respect to the HI 71 Properties: (i) Buyer shall provide to Seller all pertinent information necessary for Seller to prepare the Assignment and Bill of Sale to be delivered to and executed by the third party, which Assignment and Bill of Sale shall be in the form attached hereto as Exhibit N; (ii) Exhibit A of this Agreement shall be amended to delete the HI 71 Properties from the description of the Properties to which this Agreement is subject and Buyer shall have no obligations to Seller with respect thereto; and 32 (iii) Closing with the third party and Seller shall occur simultaneously with the Closing hereunder. The parties have executed this Agreement on the day and year first set forth above. ENERGEN RESOURCES MAQ, INC. By: /s/ James T. McManus, II ----------------------------- James T. McManus, II President BELLWETHER EXPLORATION COMPANY By: /s/ J. Darby Sere' ----------------------------- J. Darby Sere' President Energen Resources Corporation hereby joins in the execution of this Agreement for the sole purpose of evidencing its agreement to guarantee the obligations of Seller hereunder in the event, and only in the event, that Seller disposes of, in one or more transactions, fifty percent (50%) or more of its assets (excluding the sale of the Properties to Buyer) during the nine (9) month period following the Closing Date. ENERGEN RESOURCES CORPORATION By: /s/ James T. McManus, II ----------------------------- James T. McManus, II President 33 EX-10.16 3 J. DARBY SERE SEPARATION CONTRACT EXHIBIT 10.16 SEPARATION AGREEMENT It is hereby agreed by and between J. Darby Sere and his former employer, Bellwether Exploration Company (hereinafter "Bellwether"), that Mr. Sere has been released from his employment by Bellwether effective August 2, 1999 (hereinafter "Separation Date"), and that in order to resolve amicably all matters concerning his employment and release, Mr. Sere and Bellwether, in consideration of their mutual promises and other consideration itemized below, hereafter enter into the following agreement: 1. Nothing stated in this Agreement, or stated or done in connection herewith, shall constitute or indicate in any way any wrongdoing of any kind either by Mr. Sere or Bellwether. 2. Bellwether agrees that upon execution by Mr. Sere and receipt by its representative of this Agreement and the Release appended as Exhibit A and the expiration of the seven (7) day revocation period provided for herein, Bellwether will pay Mr. Sere the sum of One Million Ninety Six Thousand Two Hundred and 00/100's Dollars ($1,096,200.00) which represents payment for three times the sum of (1) Mr. Sere's current salary and (2) his last annual bonus. Mr. Sere shall also be paid an amount equal to fifteen percent of his base salary in lieu of outplacement services which is included in the $1,096,200.00 figure stated above. The payments made hereunder shall be less standard payroll deductions for Federal Income Tax and FICA. 3. Mr. Sere shall also receive, upon the expiration of the seven (7) day revocation period provided for herein, by reason of his execution of this agreement the following: -1- a. The immediate vesting of any of Mr. Sere's executive options to purchase securities of Bellwether which were not vested by their own terms on the date of termination and the extension of Mr. Sere's rights to exercise all of his options to purchase securities of Bellwether for a period equal to the lesser of (i) three years following the date of termination or (ii) the remaining term of the applicable option. The Compensation Committee of Bellwether shall execute minutes reflecting such agreement as seen in the attached Exhibit 3(a). b. Continued coverage, at Bellwether's cost, under Bellwether's medical, dental and health benefits (but not life or disability insurance) for a period of six (6) months from the date of termination. c. The payment of $2,688.78 being the total of any of Mr. Sere's unreimbursed expenses in the performance of his duties hereunder through the date of termination. d. Assignment of title to Mr. Sere's car, with Mr. Sere paying any resulting transfer or registration fees. Mr. Sere will be liable for any income taxes that may be due by reason of such sale or transfer, as the case may be. e. Bellwether hereby waives any recoupment rights against the split dollar life insurance policy for which it currently pays premiums on behalf of Mr. Sere. Mr. Sere shall be obligated to pay any further premiums on such life insurance policy and any taxes that may be due by him by reason of such assignment or -2- waiver. Bellwether shall execute whatever documents are necessary to effect this agreement with the insurance company. f. No later than September 3, 1999, Mr. Sere agrees to pay off in full an advance on Mr. Sere's behalf under a line of credit in favor of Bellwether, which advance is in the amount of $331,446.75 including accrued interest as of July 31, 1999, with the execution of a non- recourse loan from Bellwether to Mr. Sere in the amount of the advance plus the accrued interest to the date of execution pursuant to the terms set forth in the attached Exhibit 3(h). Such loan will be secured by a security interest in a sufficient number of shares of Bellwether common stock owned by Mr. Sere to fully collateralize the loan (approximately 65,000 shares as of August 2, 1999). A draft of the Stock Pledge Agreement is also attached as Exhibit 3(h). 4. No further payments or benefits of any kind (except those made pursuant to Bellwether's deferred compensation plan) shall be due Mr. Sere by Bellwether by reason of his employment or this agreement except those set forth above. 5. Mr. Sere acknowledges that during the course of his employment he has had access to certain trade secrets of Bellwether and that such trade secrets constitute valuable, highly confidential, special and unique property of Bellwether, which Mr. Sere agrees not to disclose. These "trade secrets" are drawings, specifications, computer programs, training manuals, engineering studies, compilations of product research, marketing techniques, and files, records and documents relating thereto. Also, the "trade secrets" include lists of customers who utilize -3- Bellwether's technical services, and related customer information. However, such customer lists do not include customers which Mr. Sere knew before he was employed by Bellwether; neither do such customer lists include customers which could readily be identified by someone outside the employ of Bellwether. 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. In this regard, it is expressly understood that the obligations of paragraph 7 of the June 1, 1998 Employment Agreement with Mr. Sere shall survive the termination of Mr. Sere's employment with the Bellwether and the execution of the attached release. 6. Employees and directors of Bellwether shall refrain from making any derogatory or disparaging remarks to any third party against Mr. Sere with respect to his employment by Bellwether, his performance, his character, or any such matters. Further, employees and directors of Bellwether shall refrain from discussions among themselves using any such derogatory or disparaging remarks. 7. Mr. Sere shall refrain from making any derogatory or disparaging remarks regarding his employment by Bellwether, or Bellwether's services, management, or operations to any third party other than members of Mr. Sere's immediate family. 8. Mr. Sere agrees that he will be reasonably available to consult and otherwise cooperate with Bellwether after the Separation Date with respect to matters of business for which Mr. Sere had any direct responsibility during his employment by Bellwether. However, any such consulting or request for consulting shall not interfere with Mr. Sere's endeavors after the Separation Date or with his subsequent employment. -4- 9. Mr. Sere acknowledges that he has been given a period of at least forty-five (45) days within which to consider this Agreement and the Release to be executed hereunder, and that these documents have been executed by him voluntarily, with full knowledge of all relevent information and after ample opportunity to consult with legal counsel. Mr. Sere is hereby advised to consult with an attorney prior to entering this Agreement and the Release to be executed hereunder. Mr. Sere and Bellwether further agree that Mr. Sere has a period of seven (7) days following his execution of this Agreement and the Release to be executed hereunder in which to revoke these documents by delivering to Bellwether's undersigned representative written notice of his revocation, and by returning the consideration conveyed herein, and that this Agreement and the Release executed hereunder shall not become effective or enforceable until such revocation period has expired. 10. This Agreement shall be binding on and inure to the benefit of Mr. Sere and Bellwether 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. 11. Bellwether and Mr. Sere agree that this Agreement and the Release shall be construed under the laws of Texas and, if necessary, litigated in Houston, Texas. IN WITNESS HEREOF, the parties to this Agreement have executed this instrument on the dates set forth below. Date: 8/9/99 /s/ J. Darby Sere ------ ----------------------------- J. Darby Sere -5- Bellwether Exploration Company Date: 9 Aug 99 By: /s/ Robert J. Bensh -------- ----------------------------- (Name) Robert J. Bensh (Title) Vice President, Capital Markets -6- EXHIBIT A RELEASE FOR VALUABLE CONSIDERATION PAID, receipt of which is hereby acknowledged, J. Darby Sere, for himself, his heirs, executors, administrators, and assigns, agrees to hereby release, acquit and forever discharge Bellwether Exploration Company as well as each of its officers, directors, stockholders, successors, assigns, divisions, subsidiaries, agents and employees (hereinafter collectively "Bellwether"), 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 Bellwether 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 his former employment by Bellwether, and all claims of every kind which may arise under the federal, state or local statutory or common law, including the federal Age Discrimination in Employment Act; provided, however, that nothing contained herein shall release Bellwether from the obligations spelled out in a Separation Agreement between him and Bellwether of even date. FOR VALUABLE CONSIDERATION GIVEN, receipt of which is hereby acknowledged, Bellwether Exploration Company (hereinafter collectively "Bellwether") do -1- hereby release, acquit, and forever discharge J. Darby Sere as well as his heirs, executors, administrators, and assigns, 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, which Bellwether ever had or now has or claims to have against J. Darby Sere 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, action or omission concerning J. Darby Sere's former employment by Bellwether, and all claims of every kind which may arise under any federal, state or local statutory or common law; provided however, that nothing contained herein shall release J. Darby Sere from the obligations spelled out in a Separation Agreement between him and Bellwether of even date. J. Darby Sere hereby acknowledges that he is executing this Release pursuant to the terms of the Separation Agreement identified above, that certain consideration provided to him pursuant to that Separation Agreement is in addition to what he would have been entitled to receive in the absence of such Agreement, that he has been advised to consult with an attorney in connection with both the Separation Agreement and this Release, that he has had at least forty-five (45) days in which to consider entering into the Separation Agreement and providing this Release, and that he will have seven (7) days following the execution of both the Separation -2- Agreement and this Release in which to revoke these documents by delivering his written revocation to the person who executed the Separation Agreement on behalf of Bellwether. J. Darby Sere and Bellwether 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 J. Darby Sere and Bellwether. IN WITNESS WHEREOF, I have signed this Release this the 9th day of August, 1999. /s/ J. Darby Sere ------------------------------------- J. Darby Sere IN WITNESS WHEREOF, I have signed this Release on behalf of Bellwether Exploration Company on this 9th day of August, 1999. /s/ Robert J. Bensh -------------------------------------- (Name) Robert J. Bensh (Title) Vice President, Capital Markets -3- EXHIBIT "3(a)" BELLWETHER EXPLORATION COMPANY Minutes of the Meeting of The Compensation Committee Of the Board of Directors August 2, 1999 A meeting of the Compensation Committee ("Committee") of the Board of Directors of Bellwether Exploration Company, a Delaware corporation ("Company") was held on August 2, 1999 via telephone conference. Messrs. A.K. McLanahan, Vincent H. Buckley and Dr. Jack Birks, constituting all of the members of the Committee, were present at such meeting, after having waived notice of such meeting. The meeting was called to order. The Committee discussed the previous grants of stock options to Mr. J. Darby Sere ("Mr. Sere") and Mr. William C. Rankin ("Mr. Rankin") under the 1994 Stock Incentive Plan and the 1996 Stock Incentive Plan, as the case may be, the dates and amounts of such grants being set forth more fully on Exhibit "A". The plans provide, in part, that recipients of such stock option grants must be in the continuous emloyment of the Company for the grants to remain effective. The above individuals are leaving the employment of the Company and in view of their valuable contributions to the Company, it is the opinion of the Committee that their option grants should continue, notwithstanding their departure from Company, for a period so indicated on the attached Exhibit "A". In furtherance thereof, upon motion duly made and seconded, the following resolutions were unanimously adopted by the Committee: RESOLVED, that the provisions of the 1994 and 1996 Stock Incentive Plans and the grants made thereunder to Mr. Sere and Mr. Rankin, be waived as to these provisions governing the termination of grants in the event that a stock option recipient ceases working for the Company; and FURTHER RESOLVED, that all stock options issued to Mr. Sere and Mr. Rankin immediately vest on August 2, 1999 with a termination date so indicated on Exhibit "A", and FURTHER RESOLVED, that the proper officers of the Company be, and each of them hereby are, authorized and directed, for and on behalf of the Company, to execute and deliver any and all documents and to take any and all steps and do any and all things which they may deem necessary or advisable in order to effectuate the purposes of the foregoing resolutions. IN WITNESS WHEREOF, the undersigned have executed these minutes as of the date first written above. /s/ Jack Birks --------------------------- Dr. Jack Burks /s/ Vincent H. Buckley --------------------------- Vincent H. Buckley --------------------------- A.K. McLanahan EXHIBIT "A" - -------------------------------------------------------------------------------- EXP. DATE NAME AMOUNT PLAN PRICE DATE GRANTED - -------------------------------------------------------------------------------- J. DARBY SERE 120,000 1994 $ 5.6250 8/2/02 6/30/94 25,000 1994 $ 5.75 8/2/02 5/26/95 55,000 1996 $ 6.2500 8/2/02 9/16/96 23,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 54,000 1996 $ 6.25 8/2/02 10/5/98 - -------------------------------------------------------------------------------- WILLIAM C. RANKIN 30,000 1994 $ 3.344 8/2/01 3/26/99 24,000 1996 $ 6.25 8/2/01 10/5/98 9,400 1996 $10.6250 8/2/01 11/21/97 9,400 1996 $10.6250 8/2/01 11/21/97 9,400 1996 $10.6250 8/2/01 11/21/97 9,400 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 - -------------------------------------------------------------------------------- EXHIBIT 3(i) (PART ONE) NONRECOURSE PROMISSORY NOTE $ __________ HOUSTON, TEXAS _______________, 1999 FOR VALUE RECEIVED, J. DARBY SERE ("Mr. Sere"), promises to pay to the order of BELLWETHER EXPLORATION COMPANY (together with any subsequent holder of this Note, "Bellwether"), at its offices at 1221 Lamar, Suite 1600, Houston, Texas 77020-3039, the sum of ___________________________________________ DOLLARS (or such lesser sum as shall then be outstanding hereunder), together with interest on the unpaid principal balance from time to time outstanding at SEVEN PERCENT (7%) per annum. All past-due principal and accrued interest thereon shall, at the option of Bellwether, bear interest from maturity (stated or by acceleration) until paid at the Highest Lawful Rate (as hereinafter defined). 1. Payments. The principal of this Note and all unpaid, accrued interest hereon is payable in full on the third anniversary of this Note. If any payment is due on a day which is not a Business Day, Mr. Sere shall be entitled to delay such payment until the next Business Day, but interest shall continue to accrue until the payment is in fact made. Each payment or prepayment hereon must be paid at the address of Bellwether set forth above in lawful and freely transferable money of the United States of America and in funds which are available for immediate use by Bellwether at such office by noon (Houston time) on the day due, without setoff or counterclaim. "BUSINESS DAY" means every day on which banks in Texas are open for banking business. 2. Prepayments. Mr. Sere may prepay the principal of and accrued interest on this Note from time to time at any time, in whole or in part, without premium or penalty. 3. Security. This Note is secured by a Stock Pledge Agreement from Mr. Sere to Bellwether dated ___________, 1999. 4. Order of Application. All payments and prepayments on this Note shall be applied by Bellwether as follows: first, to accrued interest; and second, to principal. 5. Default. The term "DEFAULT" means: (a) The failure or refusal of Mr. Sere to make any payment hereunder when due or to comply with any provision herein; (b) a default under any document relating to the security described in Paragraph 3; (c) the discovery by Bellwether that any statement by Mr. Sere herein or in connection herewith is false or misleading; or (d) Mr. Sere becomes insolvent, fails to pay his debts generally as they become due or becomes the subject of any proceeding under any debtor relief law. In the event of a Default, Bellwether may (i) declare the entire unpaid balance of this Note, or any part hereof, immediately due and payable, whereupon it shall be due and payable (provided that, upon the occurrence of a Default under clause (c) above, this Note shall automatically become due and payable without notice or other action of any kind), (ii) offset against this Note any sum or sums owed by Bellwether to Mr. Sere, and (iii) proceed to protect and enforce any other legal or equitable right or remedy. No delay on the part of Bellwether in the exercise of any power or right or single or partial exercise of any such power or right, under this Note or any other instrument executed in connection Page 1 of 3 herewith, shall operate as a waiver thereof. Enforcement of any security for this Note shall not constitute an election of remedies so as to preclude the exercise of any other remedy. 6. Waiver. Mr. Sere and each other party ever liable for the payment of any sum hereunder jointly and severally waive demand, presentment, protest, notice of nonpayment, notice of intention to accelerate, notice of protest and any and all lack of diligence or delay in collection or the filing of suit hereon which may occur, and agree that their liability regarding this note shall not be affected by any renewal, extension, indulgence or any release or change in security, and hereby consent to any and all renewals, extensions, indulgences, releases or changes, regardless of the number thereof. 7. Attorneys' Fees and Costs. In this Note is placed in the hands of an attorney for collection, or if this Note is collected in whole or in part through legal proceedings of any nature. Subject to the Nonrecourse Clause in Paragraph 13 below, Mr. Sere shall pay all costs of collection, including but not limited to reasonable attorneys' fees incurred by Bellwether whether or not suit is filed. 8. Notices. Any notice or demand given hereunder by Bellwether shall be deemed to have been given and received (a) when actually received by Mr. Sere, if delivered in person, or (b) if mailed to the address below (whether ever received or not), two Business Days after deposit in the U.S. Mail, postage prepaid. 9. Governing Law. This Note is intended to be performed in Texas and the laws of Texas shall govern its validity, enforcement and interpretation. Bellwether and Mr. Sere each hereby irrevocably submits to the nonexclusive jurisdiction of the state and federal courts of the State of Texas and irrevocably waives any objection to venue or claim of an inconvenient forum with respect to the district courts of Harris County, Texas, or the U.S. District Court for the Southern District of Texas (Houston Division) in any dispute related to this Note, and irrevocably consents to the service of process out of any of such courts by postage prepaid certified mail to its address below. 10. Headings. The headings herein are for convenience only and shall not be deemed a part hereof. 11. Successors and Assigns. All agreements in this note shall bind each party's successors and assigns (provided, however, that Mr. Sere may not, without the prior consent of Bellwether, assign any rights, powers or obligations under this note). 12. Maximum Interest Rate. Regardless of any provision contained herein or in any document related hereto, Bellwether shall never be entitled to receive, collect or apply as interest any amount in excess of the Highest Lawful Rate. In the event Bellwether ever receives, collects or applies as interest any such excess, it shall be deemed a partial prepayment of principal and treated hereunder as such and, if the principal hereof is paid in full, any remaining excess shall be refunded to Mr. Sere." HIGHEST LAWFUL RATE" means the maximum rate of interest which Bellwether is allowed to contract for, charge, take, reserve or receive under applicable law after taking into account, to the extent required by applicable law, any and all relevant payments or charges hereunder. Page 2 of 3 13. Nonrecourse Clause. Notwithstanding anything to the contrary contained herein or in the Stock Pledge Agreement or in any other instrument executed in connection herewith or therewith, there shall be no personal liability on Mr. Sere, or on his successors or assigns, to pay the indebtedness evidenced by this Note. Bellwether shall only look to the Collateral under the Stock Pledge Agreement to pay any principal and interest due under this Note, as well as any costs of collection or attorneys fees. 14. Entirety and Amendments. This Note represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements by the parties. There are no unwritten oral agreements between the parties. This note embodies the entire written agreement between the parties, supersedes all prior written agreements and understandings, if any, relating to the subject matter hereof, and may be amended only by an instrument in writing executed jointly by Bellwether and Mr. Sere. Address: 3618 Robinhood ----------------------------------- Houston, Texas 77005 J. DARBY SERE Page 3 of 3 EXHIBIT 3(ii) (Part Two) STOCK PLEDGE AGREEMENT THIS AGREEMENT is executed as of ___________, 1999, by J. Darby Sere ("Pledgor") for the benefit of BELLWETHER EXPLORATION COMPANY (together with its successors and assigns, "Bellwether"). FOR VALUABLE CONSIDERATION, the receipt and adequacy of which are hereby acknowledged, Pledgor agrees with Bellwether as follows: 1. Reference to Note. This agreement is being executed and delivered pursuant to the terms and conditions of the $________ Nonrecourse Promissory Note dated _______, 1999, made by Pledgor and payable to the order of Bellwether (as the same may hereafter be renewed, extended, amended or supplemented, the "Note"). 2. Security Interest. In order to secure the full and complete payment and performance of all indebtedness, liabilities and obligations owed by Pledgor to Bellwether under the Note and all indebtedness, liabilities and obligations of Pledgor arising under this agreement (the "Obligation") when due, Pledgor hereby grants to Bellwether a security interest in, and pledges and assigns to Bellwether, the following items and types of property (the "Collateral"): (a) 65,000 shares of Bellwether's common stock (the "Stock"), and (b) all cash and noncash proceeds of the Stock. 3. Representations and Warranties. Pledgor represents and warrants to Bellwether that: (a) Pledgor's address is as specified opposite its signature below and is where Pledgor is entitled to receive notices hereunder. (b) The Stock is duly authorized, validly issued, fully paid and non-assessable, and the transfer thereof is not subject to any restrictions other than restrictions imposed by applicable securities and corporate laws. (c) Pledgor owns the Stock free and clear of all liens. 4. Covenants. Pledgor shall: (a) Promptly notify Bellwether of any change in any fact or circumstances represented or warranted by Pledgor with respect to any of the Collateral. (b) Promptly notify Bellwether of any claim, action or proceeding affecting the security interest granted and the pledge and assignment made under Paragraph 2 (the "Security Interest") or title to all or any of the Collateral and, at the request of Bellwether, appear in and defend, at Pledgor's expense, any such action or proceeding. (c) Not sell or otherwise dispose of the Collateral. (d) Not create, incur or suffer to exist any other lien upon the Collateral. (e) At Pledgor's expense and Bellwether's request, file or cause to be filed such applications and take such other actions as Bellwether may request to obtain the consent or approval of any tribunal to Bellwether's rights hereunder, including, without limitation, the right to sell at the Collateral upon a Default (as defined in the Note) without additional consent or approval from such tribunal (and, because Pledgor agrees that Bellwether's remedies at law for failure of Pledgor to comply with this provision would be inadequate and that such failure would not be adequately compensable in damages, Pledgor agrees that its covenants in this provision may be specifically enforced). (f) From time to time, promptly execute and deliver to Bellwether all such other assignments, certificates, supplemental documents and financing statements, and do all other acts or things as Bellwether may reasonably request in order to more fully create, evidence, perfect, continue and preserve the priority of the Security Interest. (g) Not relocate Pledgor's address unless prior thereto Pledgor (i) gives Bellwether at least 30 days prior written notice of such relocation (such notice to include, without limitation, the name of the county or parish and state into which such relocation is to be made), and (ii) executes and delivers all such additional documents and performs all additional acts as Bellwether may request in its sole discretion in order to continue or maintain the existence and priority of the Security Interest in such Collateral. 5. Default; Remedies. If a Default exists, Bellwether may, at its election, exercise any and all rights available to a secured party under the Uniform Commercial Code as enacted in Texas or any other applicable jurisdiction, as amended at the time in question (the "UCC"), in addition to any and all other rights afforded by the Note, at law, in equity, or otherwise, including, without limitation, applying by appropriate judicial proceedings for appointment of a receiver for all or part of the Collateral (and Pledgor hereby consents to any such appointment). (a) Notice. Reasonable notification of the time and place of any public sale of the Collateral, or reasonable notification of the time after which any private sale or other intended disposition of the Collateral is to be made, shall be sent to Pledgor and to any other person entitled to notice under the UCC; provided that if any of the Collateral threatens to decline speedily in value or is of the type customarily sold on a recognized market, Bellwether may sell or otherwise dispose of the Collateral without notification, advertisement, or any other notice of any kind. It is agreed that notice sent or given not less than five calendar days prior to the taking of the action to which the notice relates is reasonable for the purposes of this subparagraph. (b) Sales of Securities. In connection with the sale of the Stock, Bellwether is authorized, but not obligated, to limit prospective purchasers to the extent deemed necessary by Bellwether to render such sale exempt from the registration requirements of the Securities Act of 1933, as amended, and any applicable state securities laws, and no sale so made in good faith by Bellwether shall be deemed not to be "commercially reasonable" because so made. (c) Application of Proceeds. Bellwether shall apply the proceeds of any sale or other disposition of the Collateral under this Paragraph 5 in the following order: First, to the payment of all its expenses incurred in retaking, holding and preparing any of the Collateral for sale(s) or other disposition, in arranging for such sale(s) or other disposition, and in actually selling or disposing of the same (all of which are part of the Obligation); second, toward repayment of amounts expended by Bellwether under Paragraph 6; and third, toward payment of the balance of the Obligation in such order and manner as Bellwether, in its discretion, may deem advisable. Any surplus remaining shall be delivered to Pledgor or as a court of competent 2 jurisdiction may direct. Bellwether shall only look to the Collateral to pay any principal and interest due under the Note, as well as any costs of collection or attorneys' fees. 6. Other Rights of Bellwether. (a) Performance. In the event Pledgor shall fail to perform any of its obligations hereunder with respect to the Collateral, then Bellwether may, at its option, but without being required to do so, take such action. Any sum expended or paid by Bellwether under this subparagraph (including, without limitation, court costs and attorneys' fees) shall bear interest from the dates of expenditure or payment at the Highest Lawful Rate (as defined in the Note) until paid and, together with such interest, shall be payable by Pledgor to Bellwether upon demand and shall be part of the Obligation. (b) Record Ownership of Securities. If a Default exists, Bellwether may have the Stock registered in its name, or in the name of its nominee or nominees. (c) Voting of Securities. So long as no Default has occurred, Pledgor shall be entitled to exercise all voting rights pertaining to the Stock. If a Default exists, the right to vote the Stock shall be vested exclusively in Bellwether. To this end, Pledgor irrevocably appoints Bellwether the proxy and attorney-in-fact of Pledgor, with full power of substitution, to vote and to act with respect to the Stock, subject to the understanding that such proxy may not be exercised unless a Default exists. The proxy herein granted is coupled with an interest, is irrevocable, and shall continue until the Obligation has been paid and performed in full. (d) Certain Proceeds. Any and all stock dividends or distributions in property made on in respect of the Stock, and any proceeds of the Stock, whether such dividends, distributions, or proceeds result from a subdivision, combination or reclassification of the outstanding capital stock of Bellwether or as a result of any merger, consolidation, acquisition or other exchange of assets to which Bellwether may be a party, or otherwise, shall be a part of the Collateral hereunder, shall, if received by Pledgor, be held in trust for the benefit of Bellwether, and shall forthwith be delivered to Bellwether (accompanied by proper instruments of assignment and/or stock and/or bond powers executed by Pledgor in accordance with Bellwether's instructions) to be held subject to the terms hereof. Any cash proceeds of Collateral which come into the possession of Bellwether may, at Bellwether's option, be applied in whole or in part to the Obligation (to the extent then due), be released in whole or in part to or on the written instructions of Pledgor for any general or specific purpose, or be retained in whole or in part by Bellwether as additional Collateral. 7. Miscellaneous. (a) Governing Law. This agreement is intended to be performed in Texas and the laws of Texas shall govern its construction, validity, enforcement and interpretation. (b) Term. Upon full and final payment and performance of the Obligation, this agreement shall thereafter terminate upon receipt by Bellwether of Pledgor's written notice of such termination. (c) Actions Not Releases. The Security Interest and Pledgor's obligations shall not be affected by the occurrence of any one or more of the following events: (i) The acceptance of any other security for the Obligation; (ii) any release, surrender, exchange, subordination or loss of any security for the Obligation; (iii) the modification of, amendment to, or waiver of compliance with any terms of the Note; (iv) the 3 insolvency, bankruptcy or lack of corporate or trust power of any party at any time liable for the payment of any or all of the Obligation; (v) any renewal, extension, or rearrangement of the payment of any or all of the Obligation or any adjustment, indulgence, forbearance or compromise that may be granted or given by Bellwether to Pledgor; (vi) any neglect, delay, omission, failure or refusal of Bellwether to take or prosecute any action in connection with any other instrument evidencing or securing the Obligation; (vii) the illegality, invalidity or unenforceability of all or any part of the Obligation against any party obligated with respect thereto by reason of the fact that the Obligation, or the interest paid or payable with respect thereto, exceeds the amount permitted by law, the act of creating the Obligation, or any part thereof, is ultra vires, or the persons creating same acted in excess of their authority, or for any other reason; or (viii) if any payment by any party obligated with respect thereto is held to constitute a preference under applicable laws or for any other reason Bellwether is required to refund such payment or pay the amount thereof to someone else. (d) Waivers. Pledgor waives (i) any right to require Bellwether to proceed against any other person, to exhaust its rights in the Collateral, or to pursue any other right which Bellwether may have; (ii) with respect to the Obligation, presentment and demand for payment, protest, notice of protest and nonpayment and notice of the intention to accelerate; and (iii) all rights of marshaling. (e) Financing Statement. Bellwether shall be entitled at any time to file this agreement (or a copy) as a UCC financing statement, but the failure of Bellwether to do so shall not impair the validity or enforceability of this agreement. (f) Amendments. This agreement may be amended only by an instrument in writing executed jointly by Pledgor and Bellwether. (g) Multiple Counterparts. This agreement has been executed in a number of identical counterparts, each of which shall be deemed an original for all purposes and all of which constitute, collectively, one agreement; but, in making proof of this agreement, it shall not be necessary to produce or account for more than one such counterpart. (h) Parties Bound; Assignment. This agreement shall be binding on each party's successors and assigns; provided that Pledgor may not, without the prior written consent of Bellwether, assign any rights, duties, or obligations hereunder. EXECUTED as of the day and year first herein set forth. ADDRESS: 3618 Robinhood _______________________________________ Houston, Texas 77005 J. DARBY SERE 4 EX-10.17 4 WILLIAM C. RANKIN SEPARATION CONTRACT EXHIBIT 10.17 SEPARATION AGREEMENT It is hereby agreed by and between William C. Rankin and his former employer, Bellwether Exploration Company (hereinafter "Bellwether"), that Mr. Rankin has been released from his employment by Bellwether effective August 2, 1999 (hereinafter "Separation Date"), and that in order to resolve amicably all matters concerning his employment and release, Mr. Rankin and Bellwether, in consideration of their mutual promises and other consideration itemized below, hereafter enter into the following agreement: 1. Nothing stated in this Agreement, or stated or done in connection herewith, shall constitute or indicate in any way any wrongdoing of any kind either by Mr. Rankin or Bellwether. 2. Bellwether agrees that upon execution by Mr. Rankin and receipt by its representative of this Agreement and the Release appended as Exhibit A and the expiration of the seven (7) day revocation period provided for herein, Bellwether will pay Mr. Rankin the sum of Four Hundred Eighty Six Thousand Five Hundred Forty and 00/100's Dollars ($486,540) which represents payment for two times the sum of (1) Mr. Rankin's current salary and (2) his last annual bonus. Mr. Rankin shall also be paid an amount equal to fifteen percent of his base salary in lieu of outplacement services which is included in the $486,540 figure stated above. The payments made hereunder shall be less standard payroll deductions for Federal Income Tax and FICA. 3. Mr. Rankin shall also receive, upon the expiration of the seven (7) day revocation period provided for herein, by reason of his execution of this agreement the following: -1- a. The immediate vesting of any of Mr. Rankin's executive options to purchase securities of Bellwether which were not vested by their own terms on the date of termination and the extension of Mr. Rankin's rights to exercise all of his options to purchase securities of Bellwether for a period equal to the lesser of (i) two years following the date of termination or (ii) the remaining term of the applicable option. The Compensation Committee of Bellwether shall execute minutes reflecting such agreement as seen in the attached Exhibit 3(a). b. Continued coverage, at Bellwether's cost, under Bellwether's medical, dental and health benefits (but not life or disability insurance) for a period of six (6) months from the date of termination. c. The payment of $335.17 being the total of any of Mr. Rankin's unreimbursed expenses in the performance of his duties hereunder through the date of termination. d. Assignment of title to Mr. Rankin's car, with Mr. Rankin paying any resulting transfer or registration fee. The pay-off on such automobile is currently $30,127.42. Mr. Rankin will be liable for any income taxes that may be due by reason of such sale or transfer, as the case may be. e. As consideration for this agreement, Bellwether also agrees that Mr. Rankin shall be assigned the computer that Mr. Rankin had been using during his tenure with Bellwether. -2- 4. No further payments or benefits of any kind (except those made pursuant to Bellwether's deferred compensation plan) shall be due Mr. Rankin by Bellwether by reason of his employment or this agreement except those set forth above. 5. Mr. Rankin acknowledges that during the course of his employment he has had access to certain trade secrets of Bellwether and that such trade secrets constitute valuable, highly confidential, special and unique property of Bellwether, which Mr. Rankin agrees not to disclose. These "trade secrets" are drawings, specifications, computer programs, training manuals, engineering studies, compilations of product research, marketing techniques, and files, records and documents relating thereto. Also, the "trade secrets" include lists of customers who utilize Bellwether's technical services, and related customer information. However, such customer lists do not include customers which Mr. Rankin knew before he was employed by Bellwether; neither do such customer lists include customers which could readily be identified by someone outside the employ of Bellwether. 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. In this regard, it is expressly understood that the obligations of paragraph 7 of the June 1, 1998 Employment Agreement with Mr. Rankin shall survive the termination of Mr. Rankin's employment with Bellwether and the execution of the attached release. 6. Employees and directors of Bellwether shall refrain from making any derogatory or disparaging remarks to any third party against Mr. Rankin with respect to his employment by Bellwether, his performance, his character, or any such matters. Further, employees and -3- directors of Bellwether shall refrain from discussions among themselves using any such derogatory or disparaging remarks. 7. Mr. Rankin shall refrain from making any derogatory or disparaging remarks regarding his employment by Bellwether, or Bellwether's service, management, or operations to any third party other than members of Mr. Rankin's immediate family. 8. Mr. Rankin agrees that he will be reasonably available to consult and otherwise cooperate with Bellwether after the Separation Date with respect to matters of business for which Mr. Rankin had any direct responsibility during his employment by Bellwether. However, any such consulting or request for consulting shall not interfere with Mr. Rankin's endeavors after the Separation Date or with his subsequent employment. 9. Mr. Rankin acknowledges that he has been given a period of at least forty-five (45) days within which to consider this Agreement and the Release to be executed hereunder, and that these documents have been executed by him voluntarily, with full knowledge of all relevant information and after ample opportunity to consult with legal counsel. Mr. Rankin is hereby advised to consult with an attorney prior to entering this Agreement and the Release to be executed hereunder. Mr. Rankin and Bellwether further agree that Mr. Rankin has a period of seven (7) days following his execution of this Agreement and the Release to be executed hereunder in which to revoke these documents by delivering to Bellwether's undersigned representative written notice of his revocation, and by returning the consideration conveyed herein, and that this Agreement and the Release executed hereunder shall not become effective or enforceable until such revocation period has expired. -4- 10. This Agreement shall be binding on and inure to the benefit of Mr. Rankin and Bellwether 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. 11. Bellwether and Mr. Rankin agree that this Agreement and the Release shall be construed under the laws of Texas and, if necessary, litigated in Houston, Texas. IN WITNESS HEREOF, the parties to this Agreement have executed this instrument on the dates set forth below. Date: August 9, 1999 /s/ William C. Rankin --------------------------------- William C. Rankin Bellwether Exploration Company Date: 9 August 1999 By: /s/ Robert J. Bensh ------------------------------ (Name) Robert J. Bensh (Title) Vice President, Capital Markets -5- EXHIBIT A RELEASE FOR VALUABLE CONSIDERATION PAID, receipt of which is hereby acknowledged, William C. Rankin, for himself, his heirs, executors, administrators, and assigns, agrees to hereby release, acquit and forever discharge Bellwether Exploration Company as well as each of its officers, directors, stockholders, successors, assigns, divisions, subsidiaries, agents and employees (hereinafter collectively "Bellwether"), 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 cause 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 Bellwether 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 his former employment by Bellwether, and all claims of every kind which may arise under any federal, state or local statutory or common law, including the federal Age Discrimination in Employment Act; provided, however, that nothing contained herein shall release Bellwether from the obligations spelled out in a Separation Agreement between him and Bellwether of even date. FOR VALUABLE CONSIDERATION GIVEN, receipt of which is hereby acknowledged, Bellwether Exploration Company (hereinafter collectively "Bellwether") do -1- hereby release, acquit, and forever discharge William C. Rankin as well as his heirs, executors, administrators, and assigns, 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, which Bellwether ever had or now has or claims to have against William C. Rankin 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, action or omission concerning William C. Rankin's former employment by Bellwether, and all claims of every kind which may arise under any federal, state or local statutory or common law; provided however, that nothing contained herein shall release William C. Rankin from the obligations spelled out in a Separation Agreement between him and Bellwether of even date. William C. Rankin hereby acknowledges that he is executing this Release pursuant to the terms of the Separation Agreement identified above, that certain consideration provided to him pursuant to that Separation Agreement is in addition to what he would have been entitled to receive in the absence of such Agreement, that he has been advised to consult with an attorney in connection with both the Separation Agreement and this Release, that he has had at least forty-five (45) days in which to consider entering into the Separation Agreement and providing this Release, and that he will have seven (7) days following the execution of both the Separation -2- Agreement and this Release in which to revoke these documents by delivering his written revocation to the person who executed the Separation Agreement on behalf of Bellwether. William C. Rankin and Bellwether 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 William C. Rankin and Bellwether. IN WITNESS WHEREOF, I have signed this Release this the 9th day of August, 1999. /s/ William C. Rankin ----------------------------- William C. Rankin IN WITNESS WHEREOF, I have signed this Release on behalf of Bellwether Exploration Company on this 9th day of August, 1999. /s/ Robert J. Bensh --------------------------------------- (Name) Robert J. Bensh (Title) Vice President, Capital Markets -3- EXHIBIT "3(a)" BELLWETHER EXPLORATION COMPANY Minutes of the Meeting of The Compensation Committee Of the Board of Directors August 2, 1999 A meeting of the Compensation Committee ("Committee") of the Board of Directors of Bellwether Exploration Company, a Delaware corporation ("Company") was held on August 2, 1999 via telephone conference. Messrs. A.K. McLanahan, Vincent H. Buckley and Dr. Jack Birks, constituting all of the members of the Committee, were present at such meeting, after having waived notice of such meeting. The meeting was called to order. The Committee discussed the previous grants of stock options to Mr. J. Darby Sere ("Mr. Sere") and Mr. William C. Rankin ("Mr. Rankin") under the 1994 Stock Incentive Plan and the 1996 Stock Incentive Plan, as the case may be, the dates and amounts of such grants being set forth more fully on Exhibit "A". The plans provide, in part, that recipients of such stock option grants must be in the continuous employment of the Company for the grants to remain effective. The above individuals are leaving the employment of the Company and in view of their valuable contributions to the Company, it is the opinion of the Committee that their option grants should continue, notwithstanding their departure from the Company, for a period so indicated on the attached Exhibit "A". In furtherance thereof, upon motion duly made and seconded, the following resolutions were unanimously adopted by the Committee. RESOLVED, that the provisions of the 1994 and 1996 Stock Incentive Plans and the grants made thereunder to Mr. Sere and Mr. Rankin, be waived as to those provisions governing the termination of grants in the event that a stock option recipient ceases working for the Company; and FURTHER RESOLVED, that all stock options issued to Mr. Sere and Mr. Rankin immediately vest on August 2, 1999 with a termination date so indicated on Exhibit "A"; and FURTHER RESOLVED, that the proper officers of the Company be, and each of them hereby are, authorized and directed, for and on behalf of the Company, to execute and deliver any and all documents and to take any and all steps and do any and all things which they may deem necessary or advisable in order to effectuate the purposes of the foregoing resolutions. IN WITNESS WHEREOF, the undersigned have executed these minutes as of the date first written above. /s/ Jack Birks ------------------------------- Dr. Jack Birks /s/ Vincent H. Buckley ------------------------------- Vincent H. Buckley ------------------------------- A. K. McLanahan EXHIBIT "A" EXP. DATE NAME AMOUNT PLAN PRICE DATE GRANTED ---- ------ ---- ----- ---- ------- J. DARBY SERE 120,000 1994 $ 5.6250 8/2/02 6/30/94 25,000 1994 $ 5.75 8/2/02 5/26/95 55,000 1996 $ 6.2500 8/2/02 9/16/96 23,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 8,000 1996 $12.3750 8/2/02 9/10/97 54,000 1996 $ 6.25 8/2/02 10/5/98 WILLIAM C. RANKIN 30,000 1994 $ 3.344 8/2/01 3/26/99 24,000 1996 $ 6.25 8/2/01 10/5/98 9,400 1996 $10.6250 8/2/01 11/21/97 9,400 1996 $10.6250 8/2/01 11/21/97 9,400 1996 $10.6250 8/2/01 11/21/97 9,400 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 15,600 1996 $10.6250 8/2/01 11/21/97 EX-21.1 5 LIST OF SUBSIDIARIES BELLWETHER EXPLORATION COMPANY EXHIBIT 21.1 SUBSIDIARIES OF BELLWETHER EXPLORATION COMPANY State (Country) of Incorporation Snyder Gas Plant Venture Texas West Monroe Gas Gathering Corporation Louisiana NGL-Torch Gas Plant Venture Texas Black Hawk Oil Company Delaware Bellwether International, Inc. Delaware Bellwether Cayman, Inc. The Cayman Islands EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 3-MOS DEC-31-1999 DEC-31-1999 JAN-01-1999 APR-01-1999 JUN-30-1999 JUN-30-1999 1,262 1,262 0 0 12,837 12,837 0 0 0 0 15,575 15,575 331,446 331,446 (208,985) (208,985) 142,447 142,447 12,520 12,520 100,000 100,000 0 0 0 0 142 142 13,185 13,185 142,447 142,447 26,751 14,024 28,495 15,264 21,069 10,777 29,656 15,141 2,868 1,474 0 0 5,719 2,890 (1,161) 123 0 0 (1,161) 123 0 0 0 0 0 0 (1,161) 123 (0.08) 0.01 (0.08) 0.01
-----END PRIVACY-ENHANCED MESSAGE-----