-----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, BIu4n3jQR4LadRN4v0iqfUyDu4TaZr4hcYV+o3YH7v+idr2xaQnFe3kef9rTuAIw g6pg6GT2XmaSX4alEKOMlA== 0000950129-99-003743.txt : 19990817 0000950129-99-003743.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950129-99-003743 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCEAN ENERGY INC /TX/ CENTRAL INDEX KEY: 0000320321 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741764876 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08094 FILM NUMBER: 99692272 BUSINESS ADDRESS: STREET 1: 1001 FANNIN STE 1600 CITY: HOUSTON STATE: TX ZIP: 77002-6714 BUSINESS PHONE: 7139514700 MAIL ADDRESS: STREET 1: 1001 FANNIN, SUITE 1600 CITY: HOUSTON STATE: TX ZIP: 77002-6714 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL ENERGY CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SEAGULL PIPELINE CORP DATE OF NAME CHANGE: 19830815 10-Q 1 OCEAN ENERGY, INC. - DATED JUNE 30, 1999 1 ================================================================================ 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 Commission file number: 1-8094 OCEAN ENERGY, INC. (Exact name of registrant as specified in its charter) TEXAS 74-1764876 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1001 FANNIN, SUITE 1600, HOUSTON, TEXAS 77002-6714 (Address of principal executive offices) (Zip code) (713) 265-6000 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) 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 12, 1999, 166,598,269 shares of Common Stock, par value $0.10 per share, were outstanding. ================================================================================ 2 OCEAN ENERGY, INC. INDEX
PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1999 and 1998............................................ 1 Consolidated Balance Sheets - June 30, 1999 and December 31, 1998.............................................................. 2 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998....................................................... 3 Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 1999 and 1998 ................................ 4 Notes to Consolidated Financial Statements......................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 18 Item 3. Quantitative and Qualitative Disclosures about Market Risks............................ 32 PART II. OTHER INFORMATION.......................................................................... 32 SIGNATURES........................................................................................... 34
On March 30, 1999, Ocean Energy, Inc., a Delaware corporation, merged with and into Seagull Energy Corporation, a Texas corporation, and the resulting company was renamed Ocean Energy, Inc. The merger was treated for accounting purposes as an acquisition of Seagull by Ocean in a purchase business transaction. As such, the financial results presented here are primarily those of Ocean Energy, Inc. on a stand-alone basis for the first quarter of 1999 and of the combined company for the second quarter of 1999, compared to Ocean's results in the first and second quarters of 1998 on a stand-alone basis. However, unless the context otherwise requires, the information set forth outside of Part I relates to the surviving Texas corporation, formerly known as Seagull Energy Corporation. (i) 3 ITEM. 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OCEAN ENERGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands, Except Per Share Data) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Oil and Gas Sales ..................................... $ 196,206 $ 132,909 $ 301,900 $ 273,965 Costs of Operations: Operating expenses ................................. 65,446 42,760 110,606 85,412 Depreciation, depletion and amortization ........... 89,509 74,727 148,117 147,498 Provision for loss on sale of Canadian assets ...... -- -- 28,500 -- Write-down of oil and gas properties ............... -- 218,392 -- 218,392 General and administrative ......................... 8,507 4,722 13,083 9,018 --------- --------- --------- --------- 163,462 340,601 300,306 460,320 --------- --------- --------- --------- Operating Profit (Loss) ............................... 32,744 (207,692) 1,594 (186,355) Other (Income) Expense: Interest expense ................................... 31,021 9,437 56,191 21,941 Merger expense ..................................... -- -- 40,652 39,000 Interest income and other .......................... 369 (322) (114) (808) --------- --------- --------- --------- Income (Loss) Before Income Taxes ..................... 1,354 (216,807) (95,135) (246,488) Income Tax Benefit .................................... (235) (81,961) (15,673) (83,509) --------- --------- --------- --------- Income (Loss) from Continuing Operations .............. 1,589 (134,846) (79,462) (162,979) Income from Discontinued Operations, Net of Income Taxes ....................................... 547 -- 547 -- --------- --------- --------- --------- Net Income (Loss) ..................................... 2,136 (134,846) (78,915) (162,979) Preferred Stock Dividend .............................. 836 -- 1,637 -- --------- --------- --------- --------- Net Income (Loss) Available to Common Shareholders .... $ 1,300 $(134,846) $ (80,552) $(162,979) ========= ========= ========= ========= Basic and Diluted Earnings (Loss): Per Common Share: Income (Loss) from Continuing Operations ......... $ 0.01 $ (1.34) $ (0.60) $ (1.62) Income from Discontinued Operations .............. -- -- -- -- --------- --------- --------- --------- Net Income (Loss) ................................ $ 0.01 $ (1.34) $ (0.60) $ (1.62) ========= ========= ========= ========= Weighted Average Number of Common Shares Outstanding: Basic ............................................ 166,441 100,569 134,991 100,351 ========= ========= ========= ========= Diluted .......................................... 168,371 100,569 134,991 100,351 ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. 1 4 OCEAN ENERGY, INC. CONSOLIDATED BALANCE SHEETS (Amounts in Thousands, Except Share Data)
JUNE 30, December 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents ....................................................... $ 46,366 $ 10,706 Accounts receivable, net ........................................................ 137,539 111,829 Inventories ..................................................................... 26,592 16,802 Prepaid expenses and other ...................................................... 22,172 14,444 ----------- ----------- Total Current Assets .......................................................... 232,669 153,781 Property, Plant and Equipment, at cost, full cost method for oil and gas properties: Evaluated oil and gas properties ................................................ 3,606,956 2,759,686 Unevaluated oil and gas properties excluded from amortization ................... 590,419 488,689 Other ........................................................................... 60,911 44,960 ----------- ----------- 4,258,286 3,293,335 Accumulated Depreciation, Depletion and Amortization ............................... 1,805,579 1,711,696 ----------- ----------- 2,452,707 1,581,639 Deferred Income Taxes .............................................................. 198,680 217,824 Noncurrent Assets of Discontinued Operations, net .................................. 221,255 -- Other Assets ....................................................................... 75,034 53,716 ----------- ----------- Total Assets ....................................................................... $ 3,180,345 $ 2,006,960 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and notes payable ...................................................... $ 214,838 $ 184,828 Accrued interest payable ........................................................ 47,796 36,206 Accrued liabilities ............................................................. 60,159 15,312 Current maturities of long-term debt ............................................ 836 836 ----------- ----------- Total Current Liabilities ..................................................... 323,629 237,182 Long-Term Debt ..................................................................... 1,798,845 1,371,890 Other Noncurrent Liabilities ....................................................... 149,680 20,945 Commitments and Contingencies ...................................................... -- -- Shareholders' Equity: Preferred stock, $1.00 par value; authorized 10,000,000 shares; issued 50,000 shares .......................................................... 1 1 Common stock, $.10 and $.01 par value, respectively; authorized 230,000,000 and 250,000,000 shares respectively; issued 166,534,703 and 101,753,646 shares, respectively .................................................................. 16,653 1,018 Additional paid-in capital ...................................................... 1,480,757 892,339 Accumulated deficit ............................................................. (580,666) (500,114) Other ........................................................................... (8,554) (16,301) ----------- ----------- Total Shareholders' Equity .................................................... 908,191 376,943 ----------- ----------- Total Liabilities and Shareholders' Equity ......................................... $ 3,180,345 $ 2,006,960 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 2 5 OCEAN ENERGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited)
Six Months Ended June 30, -------------------------- 1999 1998 ---------- ---------- OPERATING ACTIVITIES: Net loss .............................................................. $ (78,915) $ (162,979) Adjustments to reconcile net loss to net cash provided by operating activities: Income from Discontinued Operations ................................. (547) -- Depreciation, depletion and amortization ............................ 148,117 147,498 Provision for loss on sale of Canadian assets ....................... 28,500 -- Write-down of oil and gas properties ................................ -- 218,392 Deferred income taxes ............................................... (25,727) (86,100) Noncash Merger expenses ............................................. 21,047 -- Other ............................................................... 4,048 5,125 ---------- ---------- 96,523 121,936 Changes in operating assets and liabilities, net of acquisitions: Decrease in accounts receivable ................................... 33,214 10,644 Decrease in inventories, prepaid expenses and other ............... 19,549 4,174 Decrease in accounts and notes payable ............................ (87,966) (38,822) Increase in accrued expenses and other ............................ 41,199 12,798 ---------- ---------- Net Cash Provided by Continuing Operations .......................... 102,519 110,730 Net Cash Provided by Discontinued Operations ........................ 6,203 -- ---------- ---------- Net Cash Provided by Operating Activities ........................... 108,722 110,730 ---------- ---------- INVESTING ACTIVITIES: Capital expenditures .................................................. (144,082) (427,621) Capital expenditures of Discontinued Operations ....................... (2,171) -- Acquisition costs, net of cash acquired ............................... (5,605) -- Proceeds from sales of property, plant and equipment .................. 109,460 739 ---------- ---------- Net Cash Used In Investing Activities ............................... (42,398) (426,882) ---------- ---------- FINANCING ACTIVITIES: Proceeds from debt .................................................... 823,189 679,438 Principal payments on debt ............................................ (946,931) (364,480) Proceeds from deferred revenue ........................................ 100,000 -- Proceeds from sales of common stock ................................... 311 5,443 Deferred debt issue costs ............................................. (6,406) (1,590) Dividends paid ........................................................ (827) -- ---------- ---------- Net Cash Provided By (Used In) Financing Activities ................. (30,664) 318,811 ---------- ---------- Increase In Cash And Cash Equivalents ................................... 35,660 2,659 Cash And Cash Equivalents At Beginning Of Period ........................ 10,706 11,689 ---------- ---------- Cash And Cash Equivalents At End Of Period .............................. $ 46,366 $ 14,348 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 3 6 OCEAN ENERGY, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net income (loss) ............................ $ 2,136 $ (134,846) $ (78,915) $ (162,979) Other comprehensive income, net of tax: Foreign currency translation adjustment ... 9,741 (1,108) 10,720 (584) ---------- ---------- ---------- ---------- Comprehensive income (loss) .................. $ 11,877 $ (135,954) $ (68,195) $ (163,563) ========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 4 7 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. PRESENTATION OF FINANCIAL INFORMATION The consolidated financial statements of Ocean Energy, Inc. ("OEI" or "the Company"), a Texas corporation, included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Although certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted, management believes that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. Effective March 30, 1999, pursuant to the Agreement and Plan of Merger (the "Merger") dated November 24, 1998, as amended, Ocean Energy, Inc. ("Old Ocean") was merged with and into Seagull Energy Corporation ("Seagull"). Seagull is an international oil and gas company engaged primarily in exploration and development activities in the United States, Egypt, Cote d'Ivoire, Indonesia and the Russian Republic of Tatarstan. In conjunction with the Merger, Seagull amended its Articles of Incorporation to change its name to Ocean Energy, Inc. As a result of this Merger, each outstanding share of Old Ocean common stock was exchanged for one share of Seagull common stock, and as of March 30, 1999, the stockholders of Old Ocean owned approximately 61.5% of the outstanding common stock of the Company, with the shareholders of Seagull owning the remaining 38.5%. Certain reclassifications have been made to the historical results of the Company to conform the presentation used by the companies. Effective March 27, 1998, pursuant to the Agreement and Plan of Merger dated December 22, 1997, as amended, United Meridian Corporation ("UMC") was merged into Old Ocean (the "UMC Merger"). As a result of the UMC Merger, each outstanding share of UMC common stock was converted into 1.3 shares of Old Ocean common stock with approximately 46 million shares issued to the shareholders of UMC, representing approximately 46% of all of the issued and outstanding shares of Old Ocean. Old Ocean's shareholders received 2.34 shares of Old Ocean shares for each share outstanding immediately preceding the UMC Merger, representing approximately 54% of all of the then issued and outstanding shares. The UMC Merger was accounted for as a pooling of interests. Accordingly, the consolidated financial statements for periods prior to the UMC Merger were restated to conform accounting policies and combine the historical results of Old Ocean and UMC. Merger costs of $39 million relating to the UMC Merger consisted primarily of investment banking and other transaction fees, employee severance and relocation costs as well as the write-off of deferred financing costs. The accompanying consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and notes thereto of Old Ocean and Seagull for the year ended December 31, 1998. 5 8 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Property, Plant and Equipment - The Company capitalizes interest expense and certain employee-related costs that are directly attributable to oil and gas operations. For the three months ended June 30, 1999 and 1998, the Company capitalized interest expense in the amount of $13 million and $10 million, respectively, and certain employee-related costs in the amount of $10 million and $6 million, respectively. For the six months ended June 30, 1999 and 1998, the Company capitalized interest expense in the amount of $20 million and $15 million, respectively, and certain employee-related costs in the amount of $15 million and $11 million, respectively. Earnings Per Share - Options to purchase a weighted average of 17,597,000 and 11,447,000 shares of common stock for the six months ended June 30, 1999 and 1998, respectively, and 13,592,000 for the three months ended June 30, 1998, at prices ranging from $2.11 to $36.54 per share were outstanding but were not included in the computation of diluted loss per share because such options would have an antidilutive effect on the computation of diluted loss per share. These options expire at various dates from 1999 to 2009. The preferred stock conversion was also excluded from the computation because of its antidilutive effect. For the three months ended June 30, 1999, the amount of diluted weighted average shares has been increased by 1,930,000 shares to reflect the assumed effect of the exercise of stock options. Treasury Stock - The Company follows the average cost method of accounting for treasury stock transactions. Discontinued Operations - The Company operates in Alaska through a division of the Company and a wholly-owned subsidiary (collectively referred to herein as "ENSTAR"). ENSTAR is subject to regulation by the Regulatory Commission of Alaska ("the RCA") which has jurisdiction over, among other things, rates, accounting procedures and standards of service. In July, 1999 the Company committed to a plan to dispose of ENSTAR, and on July 15, 1999 the Company signed a purchase and sale agreement to sell ENSTAR. Closing is anticipated by year-end subject to approval from the RCA and to other customary closing conditions. Prior to the sale the results of operations and net assets of ENSTAR have been reflected as discontinued operations. Proceeds from the sale will be used to repay existing long-term debt. Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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, as amended, 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. NOTE 2. ACQUISITION AND DISPOSITION OF ASSETS Merger - On March 30, 1999, the shareholders approved the Merger. The Merger has been accounted for as a purchase under generally accepted accounting principles. Because Old Ocean 6 9 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) stockholders own a majority of the outstanding shares of common stock of the merged company, the accounting treatment of the Merger reflects Old Ocean acquiring Seagull in a "reverse purchase." Under this method of accounting, the merged company's historical results for periods prior to the Merger are the same as Old Ocean's historical results. At the date of the Merger, assets and liabilities of Old Ocean were recorded based upon their historical costs, and the assets and liabilities of Seagull were recorded at their estimated fair market values. The following is a calculation of purchase price: CALCULATION OF PURCHASE PRICE (IN THOUSANDS, EXCEPT PER SHARE DATA): Shares of common stock issued ..................................... 64,630 Average of OEI stock price three days before and after the merger announcement ............................................. $ 9.09 ---------- Fair value of stock issued ......................................... $ 587,484 Add: Capitalized Merger costs ...................................... 64,054 ---------- Purchase Price ..................................................... $ 651,538 ==========
Capitalized merger costs consisted primarily of severance costs of Seagull ($22 million), value of Seagull stock options maintained by OEI ($17 million), investment banking fees ($10 million), and other transaction fees and professional expenses ($15 million). In addition, merger costs of $41 million were expensed in the first quarter of 1999. These costs consisted primarily of Old Ocean's severance costs ($21 million), the write-off of certain costs relating to Old Ocean's information technology system ($14 million) and compensation expense related to the vesting of Old Ocean's restricted stock ($6 million). The allocation of purchase price to specific assets and liabilities is based on certain estimates of fair values and costs which will be adjusted to actual amounts as determined. Such adjustments are not expected to be material. Disposition of Canada - On April 15, 1999, the Company completed a sale of its Canadian oil and gas assets, realizing net proceeds of $63 million which were used to repay existing long-term debt. A loss of $28.5 million on the sale was provided for at March 31, 1999. The Canadian assets disposed of contributed revenue of $7 million and $9 million for the six months ended June 30, 1999 and 1998, respectively, and had operating profit of $2 million (excluding the provision for loss on the sale) and $1 million, respectively. Disposition of ENSTAR - On July 15, 1999, the Company signed a purchase and sale agreement to sell ENSTAR. The Company anticipates closing the sale of ENSTAR by year-end, receiving net proceeds of approximately $285 million. ENSTAR contributed revenue of $17 million for the six months ended June 30, 1999 and operating profit of $2 million. ENSTAR's 7 10 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) net income was $0.5 million, net of income tax expense of $0.6 million, for the same period. The net assets to be disposed of comprise net current assets of $5 million, property, plant and equipment of $273 million, and other long-term assets of $7 million, before liabilities to be assumed of $59 million. Disposition of Arkoma and Gulf of Mexico Assets - As discussed in Note 8, the Company has signed purchase and sale agreements to divest its working interest in certain properties located in the Arkoma Basin in Arkansas and Oklahoma and in three shelf Gulf of Mexico fields. On a pro forma basis, the Arkoma and Gulf of Mexico assets to be disposed of contributed revenue of $25 million and $37 million for the six months ended June 30, 1999 and 1998, respectively, and had operating profit of $6 million and $16 million, respectively. The following table presents the unaudited pro forma results (in thousands, except per share data) of the Company as though the Merger, the sale of ENSTAR, and the sales of the Canadian, Gulf of Mexico and Arkoma assets had occurred on January 1, 1998: UNAUDITED PRO FORMA INFORMATION
Six Months Ended June 30, ---------------------------- 1999 1998 ----------- ----------- Revenues ....................................... $ 326,294 $ 398,442 Net loss available to common shareholders ...... $ (13,402) $ (149,492) Basic and diluted loss per share ............... $ (0.08) $ (0.91)
8 11 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The above pro forma amounts have been determined as follows: o the Seagull-OEI Merger is assumed to have occurred as of January 1, 1998; o certain costs that Seagull had expensed under the successful efforts method of accounting are capitalized under the full cost method of accounting; o depreciation, depletion and amortization expense of Seagull is calculated in accordance with the full cost method of accounting applied to the adjusted basis of the properties acquired using the purchase method of accounting; o a decrease in interest expense results from the revaluation of Seagull debt under the purchase method of accounting, including the elimination of amortization of historical debt issuance costs; o the sale of the Canadian oil and gas assets is assumed to have occurred as of January 1, 1998; o the planned sales of ENSTAR and of the Gulf of Mexico and Arkoma assets are assumed to have occurred on January 1, 1998; o the proceeds from the asset sales were used to pay down debt at January 1, 1998; and, o the related income tax effects of these adjustments are recorded based on the applicable statutory tax rate. NOTE 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Six Months Ended June 30, --------------------------- 1999 1998 ----------- ----------- (amounts in thousands) Cash paid during the period for: Interest ....................................... $ 57,584 $ 21,869 Income taxes ................................... $ 6,244 $ 1,249
As discussed in Note 2, the Merger was completed through the issuance of common stock. Therefore, the Merger increased property, plant and equipment by $1.3 billion, debt by $563 million, other liabilities by $207 million, and equity by $595 million through a non-cash transaction that was not reflected in the statement of cash flows. However, $1.8 million of the $5.6 million of acquisition costs reflected in "investing activities" in the statement of cash flows represents the cash expenses paid in connection with the Merger, less the cash of Seagull on the date of the Merger. 9 12 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. FINANCIAL INSTRUMENTS The Company hedges certain of its production through master swap agreements which provide for separate contracts tied to the NYMEX light sweet crude oil and natural gas futures contracts. In addition, the Company occasionally engages in combined contracts that have agreed-upon price floors and ceilings (collars). Oil and gas revenues have been (decreased) increased by $(5) million and $11 million for the six months ended June 30, 1999 and 1998, respectively, as a result of the derivative contracts. At June 30, 1999, Collars were in place for portions of the Company's oil production for the remainder of 1999 at floors of $12.00 and $15.00 and ceilings of $15.00, $18.85 and $19.00 per barrel. Contracted volumes total 60,000 barrels of oil per day. The contracted ceilings would limit revenue increases to be realized by the Company if NYMEX prices were to exceed these levels. All collars in place related to gas production were settled in early July at a cost of $.9 million. While derivative financial instruments are intended to reduce the Company's exposure to declines in the market price of natural gas and crude oil, these derivative financial instruments will limit the Company's loss/gain from decreases/increases in the market price of natural gas and crude oil below/above the floors/ceilings. As a result, gains and losses on derivative financial instruments are generally offset by similar changes in the realized price of natural gas and crude oil. Gains and losses from these financial instruments are recognized in revenues for the periods to which the derivative financial instruments relate. NOTE 5. DEBT Long-term debt consisted of the following at June 30, 1999 and December 31, 1998 (in thousands):
JUNE 30, 1999 December 31, 1998 ------------- ----------------- Credit Facility (average interest rate of 6.4%), due 2004 .. $ 500,000 $ -- OEI credit facility (average interest rate of 7.0%) ........ -- 357,000 Public notes of Old Ocean .................................. 1,009,330 1,009,274 Public notes assumed in the Merger: 7 7/8% senior notes, due 2003 ........................... 98,351 -- 7 1/2% senior notes, due 2027 ........................... 124,724 -- 8 5/8% senior subordinated notes, due 2005 .............. 99,520 -- Other ...................................................... 26,460 6,452 ------------ ------------ 1,858,385 1,372,726 Less: current maturities ................................... (836) (836) Debt of discontinued operations to be assumed .............. (58,704) -- ------------ ------------ $ 1,798,845 $ 1,371,890 ============ ============
Concurrently with the closing of the Merger on March 30, 1999, the Company entered into an $800 million credit facility (the "Credit Facility") which replaced the existing credit facilities 10 13 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) of both Old Ocean and Seagull. The Credit Facility consists of a $500 million five-year revolving facility and a renewable $300 million 364-day facility. The Credit Facility bears interest, at the Company's option, at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at a competitive bid. Financing fees of approximately $6 million were incurred related to the Credit Facility. As of June 30, 1999, borrowings outstanding against the Credit Facility totaled $500 million and Letters of Credit totaled $39 million, leaving $261 million of available credit. The Credit Facility contains certain covenants and restrictive provisions including limitations on the incurrence of additional debt and payment of dividends and the maintenance of certain financial ratios. Under the most restrictive of these provisions, approximately $38 million was available for payment of cash dividends on common stock or to repurchase common stock as of June 30, 1999. As a result of the Merger, the liabilities of both Seagull and Old Ocean became the liabilities of the Company. Accordingly, the financial statements of the Company include an aggregate of approximately $563 million of outstanding Seagull debt assumed at March 30, 1999. As discussed above, Seagull's existing revolving credit facility was replaced by the Credit Facility. The remaining Seagull debt was recorded at a discount as follows: the 7 1/2% Senior Notes at a discount of $26 million, the 7 7/8% Senior Notes at a discount of $2 million, and the 8 5/8% Senior Subordinated Notes at a discount of $1 million. NOTE 6. OTHER NONCURRENT LIABILITIES In 1999, the Company entered into a prepaid crude oil sales contract to deliver approximately 5,600 barrels of crude oil per day beginning in February 2000 through May 2003. In exchange for the crude oil to be provided, the Company received an advance payment of approximately $100 million in June 1999. The Company has the option to satisfy contract delivery requirements with crude oil purchased from third parties or from oil it produces. The obligation associated with the future delivery of the crude oil has been recorded as deferred revenue, included in other accrued and other noncurrent liabilities, and will be amortized into revenue as scheduled deliveries of crude oil are made. 11 14 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7. SUPPLEMENTAL GUARANTOR INFORMATION Ocean Energy, Inc., a Louisiana corporation and wholly-owned subsidiary of the Company ("Ocean Louisiana"), has unconditionally guaranteed the full and prompt performance of the Company's obligations under certain of the notes and related indentures, including the payment of principal, premium (if any) and interest. None of the referenced indentures place significant restrictions on a wholly-owned subsidiary's ability to make distributions to the parent. In order to provide meaningful financial data relating to the guarantor (i.e., Ocean Louisiana on an unconsolidated basis), the following condensed consolidating financial information has been provided following the policies set forth below: 1) Investments in subsidiaries are accounted for by the Company on the cost basis. Earnings of subsidiaries are therefore not reflected in the related investment accounts. 2) Certain reclassifications were made to conform all of the financial information to the financial presentation on a consolidated basis. The principal eliminating entries eliminate investments in subsidiaries and intercompany balances. 12 15 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (Amounts in Thousands)
Unconsolidated ------------------------------------------- Guarantor Non-Guarantor Consolidated OEI Subsidiary Subsidiaries OEI ---------- ---------- ------------- ------------ 1999 Revenues .............................................. $ -- $ 65,550 $ 130,656 $ 196,206 Costs of Operations: Operating expenses ................................. -- 26,467 38,979 65,446 Depreciation, depletion and amortization ..................................... 1,061 27,002 61,446 89,509 General and administrative ......................... 4,363 4,144 -- 8,507 ---------- ---------- ------------ ------------ Operating Profit (Loss) ............................... (5,424) 7,937 30,231 32,744 Interest Expense ...................................... 30,487 649 (115) 31,021 Interest Income and Other ............................. (1,543) 5,249 (3,337) 369 ---------- ---------- ------------ ------------ Income (Loss) Before Taxes ............................ (34,368) 2,039 33,683 1,354 Income Tax Provision (Benefit) ........................ 9,885 (30,185) 20,065 (235) ---------- ---------- ------------ ------------ Income (Loss) from Continuing Operations ......................................... (44,253) 32,224 13,618 1,589 Income from Discontinued Operations, net of income taxes .................... -- -- 547 547 ---------- ---------- ------------ ------------ Net Income (Loss) ..................................... $ (44,253) $ 32,224 $ 14,165 $ 2,136 ========== ========== ============ ============ 1998 Revenues .............................................. $ -- $ 84,190 $ 48,719 $ 132,909 Costs of Operations: Operating expenses ................................. -- 25,609 17,151 42,760 Depreciation, depletion and amortization ..................................... -- 44,317 30,410 74,727 Write-down of oil and gas properties ..................................... -- 218,392 -- 218,392 General and administrative ......................... 60 4,501 161 4,722 ---------- ---------- ------------ ------------ Operating Profit (Loss) ............................... (60) (208,629) 997 (207,692) Interest Expense ...................................... 4,028 8,924 (3,515) 9,437 Interest Income and Other ............................. -- 322 (644) (322) ---------- ---------- ------------ ------------ Income (Loss) Before Taxes ............................ (4,088) (217,875) 5,156 (216,807) Income Tax Benefit .................................... (78) (77,520) (4,363) (81,961) ---------- ---------- ------------ ------------ Net Income (Loss) ..................................... $ (4,010) $ (140,355) $ 9,519 $ (134,846) ========== ========== ============ ============
13 16 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Amounts in Thousands)
Unconsolidated ------------------------------------------- Guarantor Non-Guarantor Consolidated OEI Subsidiary Subsidiaries OEI ---------- ---------- ------------- ------------ 1999 Revenues .............................................. $ -- $ 114,350 $ 187,550 $ 301,900 Costs of Operations: Operating expenses ................................. -- 50,936 59,670 110,606 Depreciation, depletion and amortization ..................................... 1,061 57,330 89,726 148,117 Provision for loss on sale of Canadian assets .................................. -- -- 28,500 28,500 General and administrative ......................... 4,363 8,474 246 13,083 ---------- ---------- ------------ ------------ Operating Profit (Loss) ............................... (5,424) (2,390) 9,408 1,594 Interest Expense ...................................... 44,971 13,126 (1,906) 56,191 Merger Expense ........................................ -- 40,652 -- 40,652 Interest Income and Other ............................. (1,544) 1,762 (332) (114) ---------- ---------- ------------ ------------ Income (Loss) Before Taxes ............................ (48,851) (57,930) 11,646 (95,135) Income Tax Provision (Benefit) ........................ (17,831) (21,144) 23,302 (15,673) ---------- ---------- ------------ ------------ Loss from Continuing Operations ....................... (31,020) (36,786) (11,656) (79,462) Income from Discontinued Operations, net of income taxes .................... -- -- 547 547 ---------- ---------- ------------ ------------ Net Loss .............................................. $ (31,020) $ (36,786) $ (11,109) $ (78,915) ========== ========== ============ ============ 1998 Revenues .............................................. $ -- $ 167,685 $ 106,280 $ 273,965 Costs of Operations: Operating expenses ................................. -- 53,064 32,348 85,412 Depreciation, depletion and amortization ..................................... -- 81,134 66,364 147,498 Write-down of oil and gas properties ..................................... -- 218,392 -- 218,392 General and administrative ......................... 60 8,542 416 9,018 ---------- ---------- ------------ ------------ Operating Profit (Loss) ............................... (60) (193,447) 7,152 (186,355) Interest Expense (Income) ............................. 8,057 19,473 (5,589) 21,941 Merger Expense ........................................ -- 39,000 -- 39,000 Interest Income and Other ............................. -- 438 (1,246) (808) ---------- ---------- ------------ ------------ Income (Loss) Before Taxes ............................ (8,117) (252,358) 13,987 (246,488) Income Tax Benefit .................................... (21,900) (57,752) (3,857) (83,509) ---------- ---------- ------------ ------------ Net Income (Loss) ..................................... $ 13,783 $ (194,606) $ 17,844 $ (162,979) ========== ========== ============ ============
14 17 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS AT JUNE 30, 1999 AND DECEMBER 31, 1998 (Amounts in Thousands)
Unconsolidated -------------------------------------------- Guarantor Non-Guarantor Eliminating Consolidated OEI Subsidiary Subsidiaries Entries OEI ----------- ----------- ------------- ------------ ------------ JUNE 30, 1999 ASSETS Current Assets ......................... $ 10,486 $ 53,401 $ 168,782 $ -- $ 232,669 Intercompany Investments ............... 3,011,680 (207,864) (352,001) (2,451,815) -- Property, Plant and Equipment, Net ................................. 11,144 599,641 1,841,922 -- 2,452,707 Other Assets ........................... 59,779 208,537 226,653 -- 494,969 ----------- ----------- ------------ ------------ ------------ Total Assets ........................... $ 3,093,089 $ 653,715 $ 1,885,356 $ (2,451,815) $ 3,180,345 =========== =========== ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities .................... $ 104,132 $ 109,554 $ 109,943 $ -- $ 323,629 Long-Term Debt ......................... 1,791,203 -- 7,642 -- 1,798,845 Other Liabilities ...................... 103,173 11,390 35,117 -- 149,680 Shareholders' Equity ................... 1,094,581 532,771 1,732,654 (2,451,815) 908,191 ----------- ----------- ------------ ------------ ------------ Total Liabilities and Shareholders' Equity ................ $ 3,093,089 $ 653,715 $ 1,885,356 $ (2,451,815) $ 3,180,345 =========== =========== ============ ============ ============ DECEMBER 31, 1998 ASSETS Current Assets ......................... $ -- $ 49,680 $ 104,101 $ -- $ 153,781 Intercompany Investments ............... 1,645,933 174,608 (410,255) (1,410,286) -- Property, Plant and Equipment, Net ................................. -- 674,598 907,041 -- 1,581,639 Other Assets ........................... 24,686 214,868 31,986 -- 271,540 ----------- ----------- ------------ ------------ ------------ Total Assets ........................... $ 1,670,619 $ 1,113,754 $ 632,873 $ (1,410,286) $ 2,006,960 =========== =========== ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities .................... $ 31,271 $ 187,878 $ 18,033 $ -- $ 237,182 Long-Term Debt ......................... 1,009,274 357,000 5,616 -- 1,371,890 Other Liabilities ...................... -- 981 19,964 -- 20,945 Shareholders' Equity ................... 630,074 567,895 589,260 (1,410,286) 376,943 ----------- ----------- ------------ ------------ ------------ Total Liabilities and Shareholders' Equity ................ $ 1,670,619 $ 1,113,754 $ 632,873 $ (1,410,286) $ 2,006,960 =========== =========== ============ ============ ============
15 18 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Amounts in Thousands)
Unconsolidated ------------------------------------------- Guarantor Non-Guarantor Consolidated OEI Subsidiary Subsidiaries OEI ---------- ---------- ------------- ------------ 1999 Cash Flows from Operating Activities: Net Loss ........................................... $ (31,020) $ (36,786) $ (11,109) $ (78,915) Adjustments to reconcile net loss to net cash from operating activities ............................. (15,446) 36,031 154,853 175,438 Changes in assets and liabilities .................. (273,931) 374,464 (94,537) 5,996 ---------- ---------- ------------ ------------ Net Cash Provided by (Used in) Continuing Operations ......................................... (320,397) 373,709 49,207 102,519 Net Cash Provided by Discontinued Operations ......................................... -- -- 6,203 6,203 ---------- ---------- ------------ ------------ Net Cash Provided By (Used in) Operating Activities ......................................... (320,397) 373,709 55,410 108,722 Cash Flows Used in Investing Activities ......................................... (2,057) (10,339) (30,002) (42,398) Cash Flows Provided by (Used in) Financing Activities ......................................... 330,680 (363,370) 2,026 (30,664) ---------- ---------- ------------ ------------ Net Increase in Cash and Cash Equivalents ........................................ 8,226 -- 27,434 35,660 Cash and Cash Equivalents: Beginning of Period ................................ -- -- 10,706 10,706 ---------- ---------- ------------ ------------ End of Period ...................................... $ 8,226 $ -- $ 38,140 $ 46,366 ========== ========== ============ ============ 1998 Cash Flows from Operating Activities: Net Income (Loss) .................................. $ 13,783 $ (194,606) $ 17,844 $ (162,979) Adjustments to reconcile net income (loss) to net cash from operating activities ............................. (21,091) 245,953 60,053 284,915 Changes in assets and liabilities .................. 1,865 (91,262) 78,191 (11,206) ---------- ---------- ------------ ------------ Net Cash Provided By (Used In) Operating Activities ............................... (5,443) (39,915) 156,088 110,730 Cash Flows Used in Investing Activities ......................................... -- (271,413) (155,469) (426,882) Cash Flows Provided By Financing Activities ......................................... 5,443 310,910 2,458 318,811 ---------- ---------- ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents ................................... -- (418) 3,077 2,659 Cash and Cash Equivalents: Beginning of Period ................................ 2 2,653 9,034 11,689 ---------- ---------- ------------ ------------ End of Period ...................................... $ 2 $ 2,235 $ 12,111 $ 14,348 ========== ========== ============ ============
16 19 OCEAN ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8. SUBSEQUENT EVENTS As discussed in Note 2, on July 15, 1999, the Company announced that it had signed a purchase and sale agreement for the sale of ENSTAR. On August 2, 1999, the Company announced that it had signed a purchase and sale agreement to divest its working interest in certain properties located in the Arkoma Basin in Arkansas and Oklahoma. Expected gross proceeds of $235.3 million will be used to reduce the Company's outstanding debt. The transaction is expected to close by mid-September. On July 26, 1999, the Company announced that it had signed a purchase and sale agreement to divest its working interest in three shelf Gulf of Mexico fields. Expected net proceeds from the Gulf of Mexico asset sale will be approximately $66 million, and will be used to reduce the Company's outstanding debt. The transaction is expected to close by mid-August 1999. 17 20 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist in understanding the Company's financial position, results of operations and cash flows for each of the periods indicated. As discussed in Note 1, effective March 30, 1999, Ocean Energy, Inc. ("Old Ocean") was merged with and into Seagull Energy Corporation ("Seagull"). In conjunction with the Merger, Seagull amended its Articles of Incorporation to change its name to Ocean Energy, Inc. In addition, effective March 27, 1998, United Meridian Corporation ("UMC") was merged into Old Ocean ("UMC Merger"). The UMC Merger was accounted for as a pooling of interests. Accordingly, the consolidated financial statements for periods prior to the UMC Merger were restated to conform accounting policies and combine the historical results of Old Ocean and UMC. The Company's accompanying unaudited consolidated financial statements and the notes thereto and the consolidated financial statements and notes thereto included in the Annual Reports on Form 10-K for the year ended December 31, 1998 of Old Ocean and Seagull contain detailed information that should be referred to in conjunction with the following discussion. RESULTS OF OPERATIONS (Amounts in Thousands)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- OIL AND GAS OPERATIONS: Revenues: Natural gas ................................. $ 87,982 $ 58,283 $ 135,006 $ 115,934 Oil and NGLs ................................ 108,224 74,626 166,894 158,031 ---------- ---------- ---------- ---------- 196,206 132,909 301,900 273,965 Operating expenses ............................ 65,446 42,760 110,606 85,412 Depreciation, depletion and amortization ...... 87,129 73,654 144,300 145,380 Provision for loss on sale of Canadian assets ..................................... -- -- 28,500 -- Write-down of oil and gas properties .......... -- 218,392 -- 218,392 ---------- ---------- ---------- ---------- Operating profit (loss) ...................... 43,631 (201,897) 18,494 (175,219) CORPORATE ........................................ (10,887) (5,795) (16,900) (11,136) ---------- ---------- ---------- ---------- Total operating profit (loss) ................. $ 32,744 $ (207,692) $ 1,594 $ (186,355) ========== ========== ========== ==========
The Company's $240 million and $188 million improvement in operating profit for the three and six months periods ending June 30, 1999 compared to the same periods in 1998 is principally due to the absence of the $218 million write-down of oil and gas properties that was recorded in the second quarter of 1998. Other factors affecting the Company's 1999 operations included the March 30, 1999 Merger, the sale of Canadian assets (for which a loss of $28.5 million was recorded), and oil and gas prices which, on the average, have been lower for the first six months of 1999 compared to the first six months of 1998. Revenues - Oil revenues increased $9 million, or 6%, to $167 million for the six months ended June 30, 1999, from $158 million for the six months ended June 30, 1998. For the second 18 21 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS quarter of 1999, oil revenues increased $33 million, or 44%, to $108 million for 1999 compared to $75 million for the second quarter of 1998. These increases are the result of sales of production from properties acquired in the Merger, partially offset by a decrease in the average realized price for oil during the six months ended June 30, 1999. The average realized price for oil decreased 10% to $12.79 for the first six months of 1999 compared to $14.19 for the same period in 1998. However, the average realized price for oil increased to $15.03 for the second quarter of 1999 compared to $13.31 for the second quarter of 1998. Daily oil production increased to 72,078 Bbl in the first six months of 1999 as compared to 61,513 Bbl for the same period in 1998. For the second quarter of 1999, daily oil production increased to 79,145 Bbl as compared to 61,624 Bbl for the second quarter of 1998. The production increase was also due to the acquisition of producing properties in the Merger. Natural gas revenues increased $19 million, or 16%, to $135 million for the six months ended June 30, 1999, from $116 million for the six months ended June 30, 1998. Gas revenues increased $30 million, or 52%, to $88 million for the second quarter of 1999 as compared to $58 million for the second quarter of 1998. These increases are primarily due to sales of production from properties acquired in the Merger offset by slightly lower average gas prices realized during the period. The average realized price for natural gas decreased 9% to $1.81 per Mcf in the first six months of 1999 as compared to $1.99 in the first six months of 1998 and decreased 4% to $1.90 for the second quarter of 1999 compared to $1.97 for the second quarter of 1998. Daily natural gas production for the first six months of 1999 was 411.0 MMcf, an increase of 28% over 1998 volumes due also to the acquisition of producing properties in the Merger. Daily production increased 57% over 1998 volumes for the second quarter of 1999 to 510.0 MMcf. For the six months ended June 30, 1999 and 1998, oil and gas revenues have been (decreased) increased by $(5) million and $11 million, respectively, as a result of derivative contracts. 19 22 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXPLORATION AND PRODUCTION OPERATING DATA
Three Months Ended June 30, --------------------------------------------------- Net Daily Production Unit Price 1999 1998 1999 1998 ------ ------ --------- --------- Gas Sales (1): Domestic (2) ......... 465.0 278.6 $ 1.92 $ 2.06 Canada (3) ........... 6.4 27.2 $ 1.51 $ 1.28 Cote d'Ivoire (2) .... 32.1 19.5 $ 1.63 $ 1.65 Egypt (2) ............ 1.1 -- $ 2.76 $ -- Indonesia (2) ........ 5.4 -- $ 1.97 $ -- ------ ------ Total .................. 510.0 325.3 $ 1.90 $ 1.97 ====== ====== Oil and NGL Sales(1): Domestic (2) ......... 38,722 41,973 $ 15.50 $ 14.19 Canada (3) ........... 187 1,213 $ 12.47 $ 11.23 Cote d'Ivoire (2) .... 4,975 2,015 $ 18.75 $ 13.83 Equatorial Guinea .... 19,516 16,423 $ 14.84 $ 11.14 Egypt (2) ............ 11,495 -- $ 15.48 $ -- Russia (2) ........... 4,146 -- $ 5.95 $ -- Indonesia (2) ........ 104 -- $ 12.72 $ -- ------ ------ Total .................. 79,145 61,624 $ 15.03 $ 13.31 ====== ======
Six Months Ended June 30, --------------------------------------------------- Net Daily Production Unit Price 1999 1998 1999 1998 ------ ------ --------- --------- Gas Sales (1): Domestic (2) ......... 358.9 275.6 $ 1.84 $ 2.08 Canada (3) ........... 21.1 26.1 $ 1.54 $ 1.30 Cote d'Ivoire (2) .... 27.8 20.0 $ 1.71 $ 1.68 Egypt (2) ............ .5 -- $ 2.76 $ -- Indonesia (2) ........ 2.7 -- $ 1.97 $ -- ------ ------ Total .................. 411.0 321.7 $ 1.81 $ 1.99 ====== ====== Oil and NGL Sales(1): Domestic (2) ......... 39,263 42,186 $12.43 $14.76 Canada (3) ........... 708 1,201 $11.27 $12.04 Cote d'Ivoire (2) .... 4,734 2,168 $14.57 $14.81 Equatorial Guinea .... 19,458 15,958 $13.07 $12.77 Egypt (2) ............ 5,779 -- $15.48 $ -- Russia (2) ........... 2,084 -- $ 5.95 $ -- Indonesia (2) ........ 52 -- $12.72 $ -- ------ ------ Total .................. 72,078 61,513 $12.79 $14.19 ====== ======
(1) Natural gas is stated in MMcf and $ per Mcf. Oil and NGLs are stated in Bbl and $ per Bbl. (2) The Company's Egyptian, Russian and Indonesian operations, and a portion of its domestic and Cote d'Ivoirian operations were acquired as a result of the Merger on March 30, 1999. (3) The Company's Canadian operations were sold April 15, 1999. 20 23 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Expenses - Total operating expenses increased $26 million, or 31%, to $111 million for the six months ended June 30, 1999 from $85 million for the comparable 1998 period. Operating expenses for the second quarter of 1999 increased $22 million, or 51%, to $65 million for the second quarter of 1999 compared to $43 million for the second quarter of 1998. These increases primarily result from the acquisition of additional producing properties in the Merger, as well as from fluctuations in normal operating expenses, including operating expenses associated with increased production from new facilities. Operating expenses increased 6% to $4.35 per BOE for the six months ended June 30, 1999, compared to $4.10 per BOE in the comparable 1998 period. Operating expenses for the second quarter of 1999 and 1998 were $4.38 per BOE and $4.06 per BOE, respectively. Depreciation, Depletion and Amortization Expense - Depreciation, depletion and amortization (DD&A) expense related to oil and gas operations remained relatively constant at $144 million for the six months ended June 30, 1999 compared to $145 million for the same period in 1998. DD&A expense was $87 million for the second quarter of 1999 compared to $74 million for the second quarter of 1998. For both the second quarter and six months of 1999 versus 1998, additional DD&A expense related to properties acquired in the Merger was offset by the effects of the non-cash impairments of oil and gas properties recognized by the Company in 1998. DD&A for oil and gas operations per BOE decreased $1.31, or 19%, to $5.67 per BOE for the six months ended June 30, 1999, from $6.98 per BOE for the comparable 1998 period. This variance is primarily attributable to the effect of the non-cash impairments of oil and gas properties recognized by the Company in 1998. Provision for Loss on Sale of Canadian Assets - On April 15, 1999, the Company completed a sale of its Canadian oil and gas assets, realizing net proceeds of $63 million which were used to repay existing long-term debt. A loss of $28.5 million on the sale was provided for during the first quarter of 1999. Write-down of Oil and Gas Properties - At June 30, 1998, the Company recognized a non-cash impairment of oil and gas properties in the amount of $218.4 million pursuant to the ceiling limitation required by the full cost method of accounting for oil and gas properties. The write-down was primarily the result of the precipitous decline in world crude oil prices experienced during the second quarter of 1998. General and Administrative Expenses - General and administrative expenses increased $4 million for both the three and six months ended June 30, 1999 compared to the same periods in 1998. General and administrative expense was $9 million and $13 million for the three and six month periods ending June 30, 1999, versus $5 million and $9 million for the comparable periods in 1998. Approximately $1 million of the increase is due to expense relating to compensation plans that are tied directly to the market price of the Company's common stock. As a result of the Merger, the combined Company expects to realize a decline in proforma 21 24 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS general and administrative expense as cost savings related to personnel reduction, office consolidations and reduced combined expenses for professional fees and other expense items are realized. OTHER Interest Expense - Interest increased $34 million to $56 million for the six months ended June 30, 1999 from $22 million in the comparable 1998 period. Interest expense for the second quarter of 1999 increased $22 million to $31 million from $9 million for 1998. This increase is primarily the result of an increase in debt levels in 1999 resulting from the higher capital spending program throughout 1998. Interest expense for the remainder of 1999 will continue to be higher than 1998 levels due to the inclusion of the outstanding debt of Seagull of approximately $563 million in the Company's financial statements. However, proceeds from the sales of certain non-core oil and gas assets, including Canada, were used to repay existing long-term debt during the first six months of 1999. In addition, proceeds from the pending sales of ENSTAR and of assets located in the Gulf of Mexico and onshore in Arkansas and Oklahoma will be used to repay existing long-term debt. The timing of the closings of these transactions will affect total interest expense for the remainder of 1999. Merger Expense - Merger expenses of $41 million associated with the Merger between Old Ocean and Seagull have been recorded in the first quarter of 1999. Merger expenses of $39 million associated with the March 1998 merger between Old Ocean and UMC were recorded in the first quarter of 1998. Income Tax Benefit - An income tax benefit of $16 million was recognized for the six months ended June 30, 1999, compared to a benefit of $84 million for the six months ended June 30,1998. The deferred income tax provision or benefit was derived primarily from changes in deferred income tax assets and liabilities recorded on the balance sheet. The Company currently believes that it is more likely than not that the net deferred tax asset will be realized. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA The following table sets forth summary unaudited pro forma condensed combined financial and operating data which are presented to give effect to the Merger and to the sales of ENSTAR and of the Canadian, Gulf of Mexico and Arkoma assets as if they had occurred as of January 1, 1998. The information does not purport to be indicative of actual results, if the Merger had been in effect for the periods indicated, or of future results. The information was prepared based on the following assumptions: 22 25 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS o The Seagull-OEI Merger is assumed to have occurred as of January 1, 1998; o certain costs that Seagull had expensed under the successful efforts method of accounting are capitalized under the full cost method of accounting; o depreciation, depletion and amortization expense of Seagull is calculated in accordance with the full cost method of accounting applied to the adjusted basis of the properties acquired using the purchase method of accounting; o a decrease in interest expense results from the revaluation of Seagull debt under the purchase method of accounting, including the elimination of amortization of historical debt issuance costs; o the sale of the Canadian oil and gas assets is assumed to have occurred as of January 1, 1998; o the planned sales of ENSTAR and of the Gulf of Mexico and Arkoma assets are assumed to have occurred on January 1, 1998; o the proceeds from the asset sales were used to pay down debt at January 1, 1998; and, o the related income tax effects of these adjustments are recorded based on the applicable statutory tax rate. 23 26 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNAUDITED PRO FORMA INFORMATION (Amounts in Thousands, Except Per Unit Data)
Six Months Ended June 30, -------------------------- 1999 1998 ---------- ---------- UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME: Oil and Gas Sales .......................................... $ 326,294 $ 398,442 Cost of Operations: Operating expenses ...................................... 123,482 135,284 Depreciation, depletion and amortization ................ 162,310 197,423 Write-down of oil and gas properties .................... -- 218,392 General and administrative .............................. 17,374 15,458 ---------- ---------- 303,166 566,557 ---------- ---------- Operating Profit (Loss) .................................... 23,128 (168,115) Other (Income) Expense: Interest expense ........................................ 45,317 14,999 Merger expense (1) ...................................... -- 39,000 Interest income and other ............................... (4,927) (3,077) ---------- ---------- Loss Before Income Taxes ................................... (17,262) (219,037) Income Tax Benefit ......................................... (5,497) (69,545) ---------- ---------- Net Loss ................................................... (11,765) (149,492) Preferred Stock Dividend ................................... 1,637 -- ---------- ---------- Net Loss Available to Common Shareholders .................. $ (13,402) $ (149,492) ========== ========== Loss Per Common Share: Basic and Diluted ....................................... $ (0.08) $ (0.91) ========== ========== Weighted Average Number of Common Shares Outstanding: Basic and Diluted ....................................... 166,413 163,387 ========== ========== CAPITAL EXPENDITURES: Oil and Gas Operations .................................. $ 163,197 $ 491,934 Corporate ............................................... 6,513 9,349 ---------- ---------- Total (2) ............................................... $ 169,710 $ 501,283 ========== ==========
(1) Excludes approximately $41 million of merger expenses recorded in the quarter ended March 31, 1999. During 1998, the Company recorded $39 million in merger expenses related to the UMC Merger, which was accounted for as a pooling transaction. (2) Includes capitalized interest of $21 million and $18 million and capitalized employee-related costs of $16 million and $16 million, respectively. 24 27 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS UNAUDITED PRO FORMA INFORMATION (Amounts in Thousands, Except Per Unit Data)
Six Months Ended June 30, -------------------------- 1999 1998 ---------- ---------- OPERATIONS DATA: Net daily natural gas production (MMcf): Domestic .............................................. 422.6 486.0 Cote d'Ivoire ......................................... 32.6 29.9 Other international ................................... 7.4 10.6 ---------- ---------- Total ........................................... 462.6 526.5 ========== ========== Average natural gas prices ($ per Mcf): Domestic .............................................. $ 1.78 $ 2.01 Cote d'Ivoire ......................................... $ 1.68 $ 1.64 Other international ................................... $ 2.20 $ 2.37 Weighted average ...................................... $ 1.78 $ 2.00 Net daily oil and NGL production (Bbl): Domestic .............................................. 38,782 44,374 Egypt ................................................. 10,816 10,794 Cote d'Ivoire ......................................... 5,223 3,272 Russia ................................................ 4,168 3,989 Equatorial Guinea ..................................... 19,458 15,956 Other international ................................... 79 209 ---------- ---------- Total .............................................. 78,526 78,594 ========== ========== Average oil and NGL prices ($ per Bbl): Domestic .............................................. $ 12.27 $ 14.57 Egypt ................................................. $ 13.35 $ 12.95 Cote d'Ivoire ......................................... $ 14.19 $ 13.91 Russia ................................................ $ 6.29 $ 9.56 Equatorial Guinea ..................................... $ 13.07 $ 12.77 Other international ................................... $ 13.22 $ 16.86 Weighted average .................................. $ 12.43 $ 13.71 Net daily production (MBOE): ............................ 155.6 166.3 ========== ========== Average costs ($ per BOE): Operating expenses ...................................... $ 4.38 $ 4.49 General and administrative .............................. 0.62 0.51 Interest expense ........................................ 1.61 0.50 ---------- ---------- Cash costs ........................................ 6.61 5.50 Depletion, depreciation and amortization ................ 5.76 6.56 ---------- ---------- All-in costs ..................................... $ 12.37 $ 12.06 ========== ==========
25 28 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Liquidity - Concurrently with the closing of the Merger on March 30, 1999, the Company entered into an $800 million credit facility (the "Credit Facility") which combined the existing credit facilities of both Old Ocean and Seagull. The Credit Facility consists of a $500 million five-year revolving facility and a renewable $300 million 364-day facility with a one-year term loan option. The Credit Facility bears interest, at the Company's option, at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at a competitive bid. Financing fees of approximately $6 million were incurred related to the Credit Facility. As of June 30, 1999, borrowings outstanding against the facility totaled $500 million and Letters of Credit totaled $39 million, leaving $261 million of available credit. The Company's debt to total capitalization ratio has decreased to 66% at June 30, 1999, from 78% at December 31, 1998. During the first six months of 1999, the Company has used proceeds from property sales to pay down amounts outstanding under the Credit Facility. The Company also intends to use proceeds from the sales of ENSTAR and of the Gulf of Mexico and Arkoma assets to make additional repayments of existing long-term debt. The ability of the Company to satisfy its obligations and fund planned capital expenditures will be dependent upon its future performance. Such future performance is subject to many conditions that are beyond the Company's control, particularly oil and gas prices, and the Company's ability to obtain additional debt and equity financing, if necessary. The Company currently expects that its cash flow from operations and availability under the Credit Facility will be adequate to execute its 1999 business plan. However, no assurance can be given that the Company will not experience liquidity problems from time to time or on a long-term basis. If the Company's cash flow from operations and availability under the Credit Facility are not sufficient to satisfy its cash requirements, there can be no assurance that additional debt or equity financing will be available to meet its requirements. Effects of Leverage - The Company has outstanding indebtedness of approximately $1.8 billion as of June 30, 1999. The Company's level of indebtedness has several important effects on its future operations, including (i) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest on its indebtedness and will not be available for other purposes, (ii) the covenants contained in the various indentures require the Company to meet certain financial tests, and contain other restrictions that limit the Company's ability to borrow additional funds or to dispose of assets and may affect the Company's flexibility in planning for, and reacting to, changes in its business, including possible acquisition activities and (iii) the Company's ability to obtain additional financing in the future for working capital, expenditures, acquisitions, general corporate or other purposes may be impaired. None of the indentures place significant restrictions on a wholly-owned subsidiary's ability to make distributions to the parent company. 26 29 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company believes it is currently in compliance with all covenants contained in the respective indentures. CAPITAL EXPENDITURES (Amounts in Thousands)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Oil and Gas Operations: Leasehold acquisitions .............................. $ 8,672 $ 26,658 $ 12,571 $ 35,465 Exploration costs ................................... 40,854 60,145 49,845 147,094 Development costs ................................... 40,194 131,758 76,213 239,429 ---------- ---------- ---------- ---------- 89,720 218,561 138,629 421,988 Corporate ............................................. 2,636 4,306 5,453 5,633 ---------- ---------- ---------- ---------- Total Continuing Operations ........................... 92,356 222,867 144,082 427,621 Discontinued Operations ............................... 2,171 -- 2,171 -- ---------- ---------- ---------- ---------- $ 94,527 $ 222,867 $ 146,253 $ 427,621 ========== ========== ========== ==========
The Company's capital expenditure budget for 1999 is expected to be approximately $350-400 million (excluding proved property acquisitions). Actual capital spending may vary from the capital expenditure budget. The Company will evaluate its level of capital spending throughout the year based upon drilling results, commodity prices, cash flows from operations and property acquisitions. The Company makes, and will continue to make, substantial capital expenditures for the acquisition, exploration, development, production and abandonment of its oil and natural gas reserves. The Company has historically funded its expenditures from cash flows from operating activities, bank borrowings, sales of equity and debt securities, sales of non-strategic oil and natural gas properties, sales of partial interests in exploration concessions and project finance borrowings. The Company intends to finance 1999 capital expenditures primarily with funds provided by operations. 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, as amended, 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. ENVIRONMENTAL Compliance with applicable environmental and safety regulations by the Company has not required any significant capital expenditures or materially affected its business or earnings. The 27 30 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company believes it is in substantial compliance with environmental and safety regulations and foresees no material expenditures in the future; however, the Company is unable to predict the impact that compliance with future regulations may have on capital expenditures, earnings and competitive position. YEAR 2000 Historically, most computer systems (including microprocessors embedded into field equipment and other machinery) utilized software that recognized a calendar year by its last two digits. Beginning in the year 2000, these systems will require modification to distinguish twenty-first century dates from twentieth century dates ("Year 2000 issues"). Accordingly, the Company has initiated a comprehensive plan to address the Year 2000 issues associated with its operations and business (the "Year 2000 plan"). The Company's Board of Directors has been briefed about the Year 2000 problem generally and as it may affect the Company. The Board has created a committee consisting of senior executives and a representative from the Board to oversee the adoption and implementation of the Year 2000 plan covering all of the Company's business units. The plan has been developed with an aim towards taking reasonable steps to prevent the Company's mission-critical functions from being impaired due to the Year 2000 problem. The plan includes several phases - (i) assessment of all of the Company's systems and technology; (ii) implementation and testing of modifications to or replacements of existing systems and technology, both financial and operational; (iii) communication with key business partners regarding Year 2000 issues; and (iv) contingency planning. In planning and developing the project, the Company has considered both its information technology ("IT") and its non-IT systems. The term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, telephone systems, scanning equipment, and other miscellaneous systems. Non-IT systems include alarm systems, fax machines, monitors for field operations, and other miscellaneous systems. Both IT and non-IT systems may contain embedded technology, which complicates the Company's Year 2000 identification, assessment, remediation, and testing efforts. In those cases where the Company has identified equipment and software that is not Year 2000 ready, the Company is in the process of replacing or upgrading such items so they will calculate dates correctly in the new century. Furthermore, as new equipment and software are purchased in the ordinary course of business, the Company ensures that such purchases are Year 2000 ready. During 1997, the Company utilized both internal and external resources to test, reprogram or replace many of its IT systems, primarily financial and operational software, for necessary modifications identified in its assessment of Year 2000 issues. As of the date of this filing, the Company estimates that approximately 95% of its Year 2000 plan related to these IT systems has 28 31 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS been implemented and anticipates that the remainder of the plan, including any necessary remedial action, will be completed by September 30, 1999. During September 1998, the Company began utilizing internal and external resources to evaluate its vulnerability to Year 2000 issues related to its non-IT systems, primarily field operational systems and equipment. With this evaluation now complete, the Company has found no significant Year 2000 issues related to its non-IT systems. The Company has employed outside engineering firms to inventory and evaluate embedded chips in control, metering and monitoring devices on the Company's producing properties. Such devices are extensively used in offshore operations. While some remedial work has been required, it was not extensive and is essentially complete. The Company has also initiated formal communications with all of its key business partners to determine the extent to which the Company is vulnerable to those third parties' potential failure to remediate their own Year 2000 issues. Key business partners were identified in four categories of companies including: (a) major vendors and contractors (including banks and other financial service companies); (b) major customers; (c) utility companies; and (d) third party operators of major oil and gas properties. Questionnaires were sent to the Company's key business partners to confirm their Year 2000 activities and follow-up letters, telephone calls, and meetings are being used, as appropriate, to obtain additional information. During the fourth quarter of 1998, the Company began developing contingency plans for its financial and operational systems. The Company's contingency plans are being designed to minimize the disruptions or other adverse effects resulting from Year 2000 incompatibilities regarding these systems, and to facilitate the early identification and remediation of Year 2000 problems that first manifest themselves after January 1, 2000. The failure to correct a material Year 2000 issue could result in an interruption in, or a failure of, certain normal business activities, resulting in a material, adverse affect on the Company's results of operations, liquidity and financial position. The Company's remediation efforts are expected to reduce significantly the Company's level of uncertainty about Year 2000 compliance and the possibility of interruptions of normal operations. However, there can be no guarantee that other companies' systems, on which the Company's systems rely, will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Disruptions to the oil and gas transportation networks controlled by third-party carriers could result in reduced production volumes delivered to market. In addition, risks associated with foreign operations may increase with the uncertainty of Year 2000 compliance by foreign governments and their supporting infrastructures. The Company's Year 2000 task force members have been asked to investigate the compliance 29 32 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS activities of certain third parties and foreign governments to determine the risks to the Company. This investigation is in progress. In a recent Securities and Exchange Commission release regarding Year 2000 disclosures, the Securities and Exchange Commission stated that public companies must disclose the most reasonably likely worst case Year 2000 scenario. Analysis of the most reasonably likely worst case Year 2000 scenarios the Company may face leads to contemplation of the following possibilities which, though unlikely in some or many cases, must be included in any consideration of worst cases: widespread failure of electrical, gas, and similar supplies by utilities serving the Company domestically and internationally; widespread disruption of the services of communications common carriers domestically and internationally; similar disruption to means and modes of transportation for the Company and its employees, contractors, suppliers, and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of the Company's mission-critical information (computer) hardware and software systems, including both internal business systems and systems (such as those with embedded chips) controlling operational facilities such as onshore and offshore oil and gas rigs, oil and gas pipelines and gas plants domestically and internationally, the effects of which would have a cumulative material adverse impact on the Company. Among other things, the Company could face substantial claims by customers or loss of revenues due to service interruptions, inability to fulfill contractual obligations, inability to account for certain revenues or obligations or to bill customers accurately and on a timely basis, and increased expenses associated with litigation, stabilization of operations following mission-critical failures, and the execution of contingency plans. The Company could also experience an inability by customers, traders, and others to pay, on a timely basis or at all, obligations owed to the Company. Under these circumstances, the adverse effect on the Company, and the diminution of the Company's revenues, would be material, although not quantifiable at this time. Further in this scenario, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on the Company, and the diminution of the Company's revenues, from a domestic or global recession or depression is also likely to be material, although not quantifiable at this time. The total costs for the Year 2000 compliance review, evaluation, assessment and remediation efforts are not expected to be in excess of $1.0 million. Of this amount, approximately $560,000 had been incurred as of June 30, 1999. DEFINED TERMS Natural gas is stated herein in billion cubic feet ("Bcf"), million cubic feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural gas liquids ("NGL") are stated in barrels ("Bbl") or thousand barrels ("MBbl"). MMcfe and Mcfe represent the equivalent of one million and one thousand cubic feet of natural gas, respectively. Oil, condensate and NGL are converted to gas at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy 30 33 OCEAN ENERGY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS content. MMBOE, MBOE and BOE represent one million barrels, one thousand barrels and one barrel of oil equivalent, respectively, with six Mcf of gas converted to one barrel of liquid. FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this document, including, without limitation, statements regarding the financial position, business strategy, production and reserve growth and other plans and objectives for the future operations of the Company are forward-looking statements. Although the Company believes that such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will in fact occur. Important factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements are subject to risks and uncertainties and include information concerning cost savings from the Merger, integration of the businesses of Old Ocean and Seagull, the risks that the sales of the ENSTAR business unit, Arkoma assets and Gulf of Mexico assets do not close, general economic conditions and possible or assumed future results of operations of the Company, estimates of oil and gas production and reserves, drilling plans, future cash flows, anticipated capital expenditures, the Company's realization of its deferred tax assets, the level of future expenditures for environmental costs, and management's strategies, plans and objectives as set forth herein. When used in this document, the words "believes," "expects," "anticipates," "intends" or similar expressions are intended to identify such forward-looking statements. The following important factors, in addition to those discussed elsewhere in this document could affect the future results of the energy industry in general and could cause those results to differ materially from those expressed in such forward-looking statements: o Risks incident to the drilling and operation of oil and gas wells; o Future production and development costs; o The effect of existing and future laws and regulatory actions; o The political and economic climate in the foreign jurisdictions in which the Company conducts oil and gas operations; o The effect of changes in commodity prices, hedging activities and conditions in the capital markets; o A significant delay in the expected closing of the Arkoma asset sale or the ENSTAR sale (or a failure to consummate either sale); and o Competition from others in the energy industry. 31 34 OCEAN ENERGY, INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The Company has entered into various derivative financial instruments for its 1999 oil and gas production. As a result of the derivative contracts, the Company recorded a net decrease in oil and gas revenues of $5 million during the first six months of 1999. It is estimated based upon quoted prices at June 30, 1999, the potential effect of the derivative contracts during the second half of 1999 is an $11 million net decrease in revenues. Assuming a 10% decrease in oil and gas prices, this potential effect of the derivatives contracts would be reduced by $10 million. Assuming a 10% increase in oil and gas prices, this potential effect of the derivatives contracts would be increased $21 million. In 1999, the Company entered into a prepaid crude oil sales contract to deliver approximately 5,600 barrels of crude oil per day beginning in February 2000 through May 2003. In exchange for the crude oil to be provided, the Company received an advance payment of approximately $100 million in June 1999. The Company has the option to satisfy contract delivery requirements with crude oil purchased from third parties or from oil it produces. The obligation associated with the future delivery of the crude oil has been recorded as deferred revenue and will be amortized into revenue as scheduled deliveries of crude oil are made. The obligation is included in other accrued and other noncurrent liabilities and deferred revenue on the consolidated balance sheet. The Company also evaluated the potential effect that reasonably possible near term changes in interest rates may have on the Company's Credit Facility. The Credit Facility represents approximately 28% of the Company's total debt as of June 30, 1999 and is the only floating rate debt. Based upon an analysis, utilizing the actual interest rates in effect and balances outstanding as of June 30, 1999 and assuming a 10% increase in interest rates, the potential increase in annual interest expense is approximately $3 million. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders of the Company held on May 25, 1999, the shareholders voted as follows: 1. To elect five directors to serve until the 2002 Annual meeting of Shareholders; 2. To amend the Company's Articles of Incorporation to reduce the number of authorized shares of common stock from 450,000,000 shares to 230,000,000 shares and to reduce the 32 35 OCEAN ENERGY, INC. number of authorized shares of preferred stock from 50,000,000 shares to 10,000,000 shares; 3. To approve the Ocean Energy, Inc. 1999 Long-Term Incentive Plan; and 4. To ratify the appointment of KPMG LLP as independent auditors of the Company for the fiscal year ended December 31, 1999. Votes cast were as follows:
Broker For Against Non-Votes Abstained ------------ ---------- --------- --------- Election as a Director of the Company of: Milton Carroll .......................... 137,939,827 -- -- 724,377 Thomas D. Clark, Jr. .................... 137,093,585 -- -- 1,570,619 Peter J. Fluor .......................... 137,937,907 -- -- 726,297 Robert L. Howard ........................ 137,942,879 -- -- 721,325 Charles F. Mitchell, M.D. ............... 137,046,128 -- -- 1,618,076 Amendment of Articles of Incorporation ..... 126,926,397 11,587,303 -- 150,504 Approval of 1999 Long-term Incentive Plan .. 92,081,743 46,340,732 -- 241,729 Ratification of Selection of KPMG LLP as Independent Auditors For 1999 ........ 138,287,152 227,824 -- 149,228
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: *3.1 Articles of Amendment to the Articles of Incorporation of the Company. 4.1 Amendment No. 3 to Amended and Restated Rights Agreement, dated as of May 19, 1999, by and between the Company and BankBoston, N.A. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 1999). *#10.1 1999 Long-Term Incentive Plan. *10.2 Purchase and Sale Agreement dated June 15, 1999, between the Company, as Seller, and SEMCO ENERGY, Inc., as Purchaser, for ENSTAR. *10.3 Purchase and Sale Agreement dated July 30, 1999, between the Company as Seller, and Cross Timbers Oil Company, as Purchaser, for the sale of the Arkoma properties. *#10.4 Form of Employment Agreement between the Company and, individually, Robert K. Reeves and Richard G. Zepernick. *#10.5 Form of Employment Agreement between the Company and William L. Transier *#10.6 Second Amendment to Employment and Consulting Agreement by and between the Company and Barry J. Galt. *#10.7 Form of Employment Agreement between the Company and William S. Flores, Jr. *#10.8 Severance Agreement between the Company and Richard F. Barnes. *27.1 Financial Data Schedule. * Filed herewith. # Identifies management contracts and compensatory plans or arrangements. (b) On May 21, 1999, the Company filed a Current Report on Form 8-K dated May 19, 1999 with respect to the Amendment and Restatement of the Company's Rights Agreement. The 33 36 OCEAN ENERGY, INC. items reported in such Current Report were Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). On June 23, 1999, the Company, as administrator for the Ocean Energy, Inc. 401(k) Savings Plan ("Savings Plan"), filed a Current Report on Form 8-K dated June 23, 1999 with respect to a change in auditors for the Savings Plan. The items reported in such Current Report were Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). 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. OCEAN ENERGY, INC. By: /s/ William L. Transier ------------------------------- William L. Transier Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 16, 1999 By: /s/ Gordon L. McConnell ------------------------------- Gordon L. McConnell Vice President and Controller (Principal Accounting Officer) Date: August 16, 1999 34 37 OCEAN ENERGY, INC. INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- *3.1 Articles of Amendment to the Articles of Incorporation of the Company. 4.1 Amendment No. 3 to Amended and Restated Rights Agreement, dated as of May 19, 1999, by and between the Company and BankBoston, N.A. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 21, 1999). *#10.1 1999 Long-Term Incentive Plan. *10.2 Purchase and Sale Agreement dated June 15, 1999, between the Company, as Seller, and SEMCO ENERGY, Inc., as Purchaser, for the sale of ENSTAR. *10.3 Purchase and Sale Agreement dated July 30, 1999, between the Company as Seller, and Cross Timbers Oil Company, as Purchaser, for the sale of the Arkoma properties. *#10.4 Form of Employment Agreement between the Company and, individually, Robert K. Reeves and Richard G. Zepernick. *#10.5 Form of Employment Agreement between the Company and William L. Transier *#10.6 Second Amendment to Employment and Consulting Agreement by and between the Company and Barry J. Galt. *#10.7 Form of Employment Agreement between the Company and William S. Flores, Jr. *#10.8 Severance Agreement between the Company and Richard F. Barnes. *27.1 Financial Data Schedule.
* Filed herewith # Identifies management contracts and compensatory plans or arrangements. EX-3.1 2 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF OCEAN ENERGY, INC. Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, the undersigned corporation adopts the following articles of amendment to its articles of incorporation: FIRST: The name of the corporation is Ocean Energy, Inc. SECOND: The first paragraph of Article FOUR shall be amended to read in its entirety as follows: The total number of shares of stock that the corporation shall have authority to issue is 240,000,000 shares, divided into 10,000,000 shares of Preferred Stock of the par value of $1.00 per share, and 230,000,000 shares of Common Stock of the par value of $.10 per share. Each share of Common Stock shall be entitled to one vote. THIRD: The above described amendment to Article FOUR was adopted by the shareholders of the corporation on May 25, 1999. FOURTH: At the close of business on April 26, 1999, the record date for the determination of shareholders entitled to notice of and to vote at the shareholders' meeting where such adoption occurred, there were outstanding 165,898,205 shares of Common Stock and 50,000 shares of the Company's Series C Convertible Preferred Stock (the "Convertible Preferred Stock"). Each shareholder was entitled to one vote for each share of Common Stock, and 66.96 votes for each share of Convertible Preferred Stock, for a total of 169,246,205 votes. FIFTH: As described more fully in the table set forth below, an aggregate of 126,926,397 votes were cast in favor of the amendment and an aggregate of 11,587,303 votes were cast against the amendment:
- -------------------------------------------------------------------------------- For Against ------------------------------- ----------------------------- Shares Votes Shares Votes ------------ ------------ ----------- -------------- Common 123,578,397 123,578,397 11,587,303 11,587,303 Stock - -------------------------------------------------------------------------------- Series C Preferred 50,000 3,348,000 0 0 Stock - -------------------------------------------------------------------------------- Total 123,628,397 126,926,397 11,587,303 11,587,303 - --------------------------------------------------------------------------------
SIXTH: The amendment effects no change in the amount of stated capital of the corporation. 2 DATED: June 1, 1999. OCEAN ENERGY, INC. By: ------------------------------------- James T. Hackett President and Chief Executive Officer -2- EX-10.1 3 1999 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.1 OCEAN ENERGY, INC. 1999 LONG-TERM INCENTIVE PLAN SECTION 1. Purpose of the Plan. The Ocean Energy, Inc. 1999 Long-Term Incentive Plan (the "Plan") is intended to promote the interests of Ocean Energy, Inc., a Texas corporation (the "Company"), by encouraging employees of the Company, its subsidiaries and affiliated entities and Directors (as defined below) to acquire or increase their equity interest in the Company and to provide a means whereby employees may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company thereby advancing the interests of the Company and its shareholders. The Plan is also contemplated to enhance the ability of the Company, its subsidiaries and affiliated entities to attract and retain the services of individuals who are essential for the growth and profitability of the Company. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Performance Award, Phantom Shares, Bonus Shares or Cash Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. 2 "Bonus Shares" shall mean an award of Shares granted pursuant to Section 6(e) of the Plan. "Cash Award" shall mean an award payable in cash granted pursuant to Section 6(g) of the Plan. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations thereunder. "Committee" shall mean the Compensation Committee of the Board, which shall be comprised solely of two or more Directors who are "outside directors" within the meaning of section 162(m) of the Code and "Non-Employee Directors" within the meaning of Rule 16b-3. "Director" shall mean a member of the Board who is not also an Employee. "Employee" shall mean any employee of the Company or an Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, with respect to Shares, the closing price of a Share quoted on the New York Stock Exchange Composite Tape, or if the Shares are not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed, or if the Shares are not listed on any such stock exchange, the last sale price, or if none is reported, the highest closing bid quotation on the National Association of Securities Dealers, Inc., Automated Quotations System or any successor system then in use on the Date of Grant, or if none are available on such day, on the next preceding day on which the Shares were publicly traded. In the event the Shares are not publicly traded at the time a determination of its fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee. "Incentive Stock Option" or "ISO" shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. 3 "Non-Qualified Stock Option" or "NQO" shall mean an option granted under Sections 6(a) or 6(h) of the Plan that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Participant" shall mean any individual granted an Award under the Plan. "Performance Award" shall mean any right granted under Section 6(d) of the Plan. "Person" shall mean individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Phantom Shares" shall mean an Award of the right to receive Shares issued at the end of a Restricted Period which is granted pursuant to Section 6(f) of the Plan. "Restricted Period" shall mean the period established by the Committee with respect to an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant. "Restricted Stock" shall mean any Share, prior to the lapse of restrictions thereon, granted under Section 6(c) of the Plan. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission, or any successor thereto. 4 "Shares" or "Common Shares" or "Common Stock" shall mean the common stock of the Company, $0.10 par value, and such other securities or property as may become the subject of Awards of the Plan. "Spread" shall mean, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a Share on the date such right is exercised over the exercise price of such Stock Appreciation Right. "Stock Appreciation Right" or "Right" shall mean any right to receive the spread of Shares granted under Section 6(b) of the Plan. "Substitute Award" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by (i) a company acquired by the Company or one or more of its Affiliates, or (ii) a company with which the Company or one or more of its Affiliates combines. To the extent reasonably practical, as determined by the Committee in its sole discretion, Substitute Awards shall contain the same terms and conditions as the award they replace. SECTION 3. Administration. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to an eligible Participant; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award, including such terms and conditions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; 5 (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award Agreement in the manner and to the extent it shall deem expedient to carry it into effect. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any shareholder, any Employee and any Director. SECTION 4. Shares Available for Awards. (a) Shares Available. Subject to adjustment as provided in Section 4(c) and below, the number of Shares with respect to which Awards may be granted under the Plan shall be 3,000,000. If any Shares covered by an Award granted under the Plan, or to which such an Award relates, are forfeited, or if an Award otherwise terminates or is canceled without the delivery of Shares or of other consideration, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of Shares with respect to which Awards may be granted, to the extent of any such forfeiture, termination or cancellation, shall again be, or shall become, Shares with respect to which Awards may be granted. (b) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. Any of such Shares which remain unissued and which are not subject to outstanding Awards at the termination of the Plan shall cease to be subject to the Plan but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. (c) Adjustments. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee in its discretion to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust 6 any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that with respect to Awards of Incentive Stock Options and Awards intended to qualify as performance based compensation under Section 162(m)(4)(C) of the Code, no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or would cause such Award to fail to so qualify under Section 162(m) of the Code, as the case may be, or any successor provisions thereto; and provided, further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number. SECTION 5. Eligibility and Award Limits. Other than Awards granted to Directors pursuant to Section 6(h) of the Plan, any Employee shall be eligible to be designated a Participant. However, no Employee may receive Share-denominated Awards during the term of the Plan that, in the aggregate, are with respect to more than 33-1/3% of all Shares that may be made subject to Awards under the Plan. The maximum amount of compensation (including the Fair Market Value of any Shares) that may be paid to any Participant with respect to any single Performance Award or Cash Award in any calendar year shall be $1.5 million. With respect to any Restricted Stock Award, Phantom Stock Award, or Cash Award granted in tandem with, and expressed as a percentage of, a Share-denominated Award which is intended to qualify as "performance-based compensation," the maximum payment to any Participant with respect to such Award in any calendar year shall be an amount (in cash and/or in Shares) equal to the Fair Market Value of the number of Shares subject to such Award. The limitations set forth in the preceding sentences shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of Shares, to the extent required under Section 162(m) of the Code and applicable interpretive authority thereunder, any Shares subject to Options that are canceled or repriced. Further, Restricted Stock, Performance Awards, Phantom Shares and Bonus Shares paid in Shares may not, in the aggregate, exceed 20% of all Shares that may be the subject of Awards under the Plan. SECTION 6. Awards. (a) Options. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the purchase price therefor and the 7 conditions and limitations applicable to the exercise of the Option, including the following terms and conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan. (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee at the time each Option is granted, but shall not be less than the Fair Market Value of a Share on such date, unless such Option is a Substitute Award. (ii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, and the method or methods by which, and the form or forms (which may include, without limitation, cash, already-owned Shares, outstanding Awards, Shares that would otherwise be acquired upon exercise of the Option, a "cashless-broker" exercise (through procedures approved by the Company), other securities or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made. (iii) Special Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to employees of the Company and its subsidiaries, within the meaning of Section 424(f) of the Code. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Shares with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury regulations and other administrative pronouncements, which of a Participant's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Participant of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of the Code, unless (1) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Shares subject to the Option and (2) such Option by its terms is not exercisable after the expiration of five years from the date of grant. 8 (iv) Expiration. Except as provided in Section 6(a)(iii), each Option shall expire ten (10) years from the date of grant thereof, and, unless provided otherwise in the Award Agreement, shall be subject to earlier termination as follows: Options, to the extent exercisable as of the date a Participant ceases to be an Employee, must be exercised within three (3) months of such date unless such event results from death, disability or retirement, in which case all outstanding Options held by such Participant may be exercised in full by the optionee, the optionee's legal representative, heir or devisee, as the case may be, within two (2) years from the date of the Participant's death, disability or retirement; provided, however, that no such event shall extend the expiration date of an Option beyond the 10th anniversary of its date of grant. Options that are not exercisable on termination of employment shall be automatically canceled on termination of employment. For purposes hereof, (x) "disability" means the Participant is receiving benefits under a long-term disability plan of the Company or, if the Company does not maintain such a plan, a determination by the Committee, upon the basis of medical evidence satisfactory to it, that the Participant is totally disabled, whether due to a physical or mental condition, such that he is expected to be unable to continue his employment for a continuous period of 12 or more months, and (y) "retirement" means a termination of employment on or after the Participant has reached age 65 or, with the consent of the Committee, on or after reaching age 55. (b) Stock Appreciation Rights. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof. A Stock Appreciation Right may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to another Award. A Stock Appreciation Right granted in tandem with or in addition to another Award may be granted either at the same time as such other Award or at a later time. (i) Grant Price. The grant price of a Stock Appreciation Right shall be determined by the Committee on the date of grant, but shall not be less than the Fair Market Value of a Share on such date (or such greater exercise price as may be required if such Stock Appreciation Right is granted in connection with an Incentive Stock Option that must have an exercise price equal to 110% of the Fair Market Value of a Share on the date of grant pursuant to Section 6(a)(iii)), unless such Stock Appreciation Right is a Substitute Award. (ii) Other Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or 9 after the grant of a Stock Appreciation Right, the term, methods of exercise, methods of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. (iii) Expiration. Each Stock Appreciation Right shall expire ten (10) years from the date of grant thereof, or, if granted in tandem with another Award, upon the expiration of such tandem Award, if earlier, and, unless provided otherwise in the Award Agreement, shall be subject to earlier termination as follows: Stock Appreciation Rights, to the extent exercisable as of the date a Participant ceases to be an Employee, must be exercised within three (3) months of such date unless such event results from death, disability or retirement, in which case all outstanding Stock Appreciation Rights held by such Participant may be exercised in full by the Participant, the Participant's legal representative, heir or devisee, as the case may be, within two (2) years from the date of the Participant's death, disability or retirement; provided, however, that no such event shall extend the expiration date of a Stock Appreciation Right beyond the 10th anniversary of its date of grant. Stock Appreciation Rights that are not exercisable on termination of employment shall be automatically canceled on termination of employment. For purposes hereof, "disability" and "retirement" shall have their respective meanings as set forth in Section 6(a)(iv). (c) Restricted Stock. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Employees to whom Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each such Participant, the duration of the Restricted Period during which, and the conditions, including performance goals, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. (i) Dividends. Dividends paid on Restricted Stock may be paid directly to the Participant, may be subject to risk of forfeiture and/or transfer restrictions during any period established by the Committee or sequestered and held in a bookkeeping cash account (with or without interest) or reinvested on an immediate or deferred basis in additional shares of Common Stock, which credit or shares may be subject to the same restrictions as the underlying Award or such other restrictions, all as determined by the Committee in its discretion. 10 (ii) Registration. Any Restricted Stock may be evidenced in such manner as the Committee shall deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. (iii) Forfeiture and Restrictions Lapse. Except as otherwise determined by the Committee or the terms of the Award that granted the Restricted Stock, upon termination of a Participant's employment (as determined under criteria established by the Committee) for any reason during the applicable Restricted Period, all Restricted Stock shall be forfeited by the Participant and re-acquired by the Company. The Committee may, when it finds that a waiver would be in the best interests of the Company and not cause such Award, if it is intended to qualify as performance-based compensation under Section 162(m) of the Code, to fail to so qualify under Section 162(m) of the Code, waive in whole or in part any or all remaining restrictions with respect to such Participant's Restricted Stock. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the holder of Restricted Stock promptly after the applicable restrictions have lapsed or otherwise been satisfied. (iv) Transfer Restrictions. During the Restricted Period, Restricted Stock will be subject to the limitations on transfer as provided in Section 6(i)(iii). (d) Performance Awards. The Committee shall have the authority to determine the Employees who shall receive a Performance Award, which shall be denominated as a cash amount at the time of grant and confer on the Participant the right to receive payment of such Award, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish with respect to the Award. (i) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount of any payment or transfer to be made pursuant to any Performance Award. 11 (ii) Payment of Performance Awards. Performance Awards may be paid (in cash and/or in Shares, in the sole discretion of the Committee) in a lump sum or in installments following the close of the performance period, in accordance with procedures established by the Committee with respect to such Award. (e) Bonus Shares. The Committee shall have the authority, in its discretion, to grant Bonus Shares to eligible Employees. Each Bonus Share shall constitute a transfer of an unrestricted Share to the Participant, without other payment therefor, as additional compensation for the Participant's services to the Company. (f) Phantom Shares. The Committee shall have the authority to grant Awards of Phantom Shares to eligible Employees upon such terms and conditions as the Committee may determine. (i) Terms and Conditions. Each Phantom Share Award shall constitute an agreement by the Company to issue or transfer a specified number of Shares or pay an amount of cash equal to the Fair Market Value of a specified number of Shares, or a combination thereof to the Participant in the future, subject to the fulfillment during the Restricted Period of such conditions, including performance goals, if any, as the Committee may specify at the date of grant. During the Restricted Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Phantom Shares and shall not have any right to vote such shares. (ii) Dividends. Any Phantom Share award may provide that any or all dividends or other distributions paid on Shares during the Restricted Period be credited in a cash bookkeeping account (without interest) or that equivalent additional Phantom Shares be awarded, which account or shares may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine. (g) Cash Awards. The Committee shall have the authority to determine the Employees to whom Cash Awards shall be granted, the amount, and the terms or conditions, if any, as additional compensation for the Employee's services to the Company or its Affiliates. A Cash Award may be granted (simultaneously or subsequently) separately or in tandem with another Award and may entitle a Participant to receive a specified amount of cash from the Company upon such other Award becoming taxable to the Participant, which cash amount may be based on a formula relating to the anticipated taxable income associated with such other Award and the payment of the Cash Award. 12 (h) Granting of Options to Directors. Each individual who serves as a Director on the date the Plan is approved by the shareholders of the Company (the "Approval Date") or who is elected or appointed as a Director for the first time after such date shall receive, as of the Approval Date of the Plan or the date of his election or appointment, whichever is applicable, and without the exercise of the discretion of any person or persons, a Non-Qualified Stock Option (an "Initial Grant") exercisable for 10,000 Shares (subject to adjustment in the same manner as provided in Section 7 hereof with respect to Shares subject to Options then outstanding). As of the date of the annual meeting of the shareholders of the Company ("Annual Meeting") in each year after 1999 that the Plan is in effect, each Director who is in office immediately after such meeting and who is not then entitled to receive an Initial Grant pursuant to the preceding provisions of this Section 6(h) shall receive, without the exercise of the discretion of any person or persons, a Non-Qualified Stock Option exercisable for 6,000 Shares (an "Annual Grant") (subject to adjustment in the same manner as provided in Section 7 hereof with respect to shares of Stock subject to Options then outstanding). (i) Other Terms and Conditions. The following provisions are applicable to Options granted pursuant to this Section 6(h): A. Subject to the following provisions, (1) an Initial Grant shall become exercisable for 50% of the Shares covered thereby on the date of grant, and for the remaining 50% thereof on the first Annual Meeting following its date of grant and (2) an Annual Grant shall become exercisable for one-third of the Shares covered thereby on the first Annual Meeting following the date of grant, and thereafter, for an additional one-third of the Shares covered thereby on each of the second and third Annual Meetings following the date of grant. B. The purchase price of a Share covered under an Option granted under this Section 6(h) shall be the Fair Market Value of a Share on the date of grant. C. To the extent that the right to exercise an Option has accrued and is in effect, the Option may be exercised in full at one time or in part from time to time by giving written notice, signed by the optionee exercising the Option, to the Company, stating the number of Shares with respect to which the Option is being exercised, accompanied by payment in full for such Shares, which payment may be in cash, already-owned Shares, a "cashless-broker" exercise (through procedures approved by the Company), or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price in which payment of the exercise price 13 with respect thereto may be made or deemed to have been made; provided however, that (i) no Option shall be exercisable after ten (10) years from the date on which it was granted, and (ii) there shall be no such exercise at any one time for fewer than one hundred (100) Shares or for all of the remaining Shares then purchasable by the optionee exercising the Option, if fewer than one hundred (100) Shares. D. Each Option shall expire ten (10) years from the date of grant thereof, subject to earlier termination as follows: Options, to the extent exercisable as of the date a Director optionee ceases to serve as a director of the Company, must be exercised within three (3) months of such date unless such event results from death, disability or retirement, as determined by the Committee, in which case all outstanding Options held by such Director may be exercised in full by the optionee, the optionee's legal representative, heir or devisee, as the case may be, within two (2) years from the date of death, disability or retirement; provided, however, that no such event shall extend the normal expiration date of such Options. Options not exercisable on termination as provided above shall be automatically canceled on termination. E. Upon exercise of the Option, delivery of a certificate for fully paid and nonassessable Shares shall be made at the corporate office of the Company to the optionee exercising the Option either at such time during ordinary business hours after fifteen (15) days but not more than thirty (30) days from the date of receipt of the notice by the Company as shall be designated in such notice, or at such time, place and manner as may be agreed upon by the Company and the optionee exercising the Option. (ii) Number of Available Shares. In the event that the number of Shares available for grants under the Plan is insufficient to make all grants provided for in this Section 6(h) hereby made on the applicable date, then all Directors who are entitled to a grant on such date shall share ratably in the number of Shares then available for grant under the Plan, and shall have no right to receive a grant with respect to the deficiencies in the number of available Shares and the grants under this Section 6(h) shall terminate. (i) General. (i) Awards May Be Granted Separately or Together. Awards to Employees may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards 14 or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (ii) Forms of Payment by Company Under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iii) Limits on Transfer of Awards. (A) Except as provided in (C) below, each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant's lifetime, or, if permissible under applicable law, by the Participant's guardian or legal representative or by a transferee receiving such Award pursuant to a qualified domestic relations order (a "QDRO") as determined by the Committee. (B) Except as provided in (C) below, no Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution (or, in the case of Restricted Stock, to the Company) or, if permissible under applicable law, pursuant to a QDRO and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate. (C) Notwithstanding anything in the Plan to the contrary, except to the extent specifically provided otherwise by the Committee in an Award Agreement, Non-Qualified Stock Options may be transferred by the optionee to one or more permitted transferees; provided that (i) there may be no consideration given for such transfer, (ii) the optionee (or such optionee's estate or representative) shall remain obligated to satisfy all employment tax and other withholding tax obligations associated with the exercise of the transferred Options, (iii) the optionee shall notify the Company in writing that 15 such transfer has occurred, the identity and address of the permitted transferee and the relationship of the permitted transferee to the optionee, and (iv) such transfer shall be effected pursuant to transfer documents approved from time to time by the Company. Any permitted transferee may not further assign or transfer the transferred Option otherwise than by will or the laws of descent and distribution. Following any permitted transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable to the Option immediately prior to the transfer, provided that the term "optionee" as used in the Plan shall be deemed to refer also to each permitted transferee where required by the context. A transferred Option may only be exercised by a transferee to the same extent such Option could, at such time, be exercised by the optionee "but for" such transfer. The term "permitted transferees" shall mean one or more of the following: (i) any member of the optionee's immediate family; (ii) a trust established for the exclusive benefit of one or more members of such immediate family; (iii) a partnership in which such immediately family members are the only partners; or (iv) any other person approved from time to time by the Committee. The term "immediate family" is defined for such purpose as spouses, children, stepchildren and grandchildren, including relationships arising from adoption. (iv) Term of Awards. The term of each Award (other than pursuant to Section 6(h)) shall be for such period as may be determined by the Committee; provided, that in no event shall the term of any Award exceed a period of ten (10) years from the date of its grant. (v) Share Certificates. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (vi) Consideration for Grants. Awards may be granted for no cash consideration or for such consideration as the Committee determines including, without limitation, such minimal cash consideration as may be required by applicable law. (vii) Delivery of Shares or other Securities and Payment by Participant of Consideration. No Shares or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement is received by the 16 Company, including without limitation, all applicable withholding taxes. Such payment may be made by such method or methods and in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, withholding of Shares, cashless exercise with simultaneous sale, or any combination thereof; provided that the combined value, as determined by the Committee, of all cash and cash equivalents and the Fair Market Value of any such Shares or other property so tendered to the Company, as of the date of such tender, is at least equal to the full amount required to be paid pursuant to the Plan or the applicable Award Agreement to the Company. (viii) Performance Goals. Where necessary, the Committee shall establish performance goals applicable to those Awards the payment of which is intended by the Committee to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code. Until changed by the Committee, the performance goals shall be based upon the attainment of such target levels of Share price, net income, cash flows, reserve additions or revisions, acquisitions, total capitalization, total or comparative shareholder return, assets, exploration successes, production volumes, findings and development costs, costs reductions and savings, reportable incidents in safety or environmental matters, return on equity, profit margin or sales, and/or earnings per share as may be specified by the Committee. The performance goals may be made subject to adjustment for specified unusual and nonrecurring events and may be absolute, relative to one or more other companies, or relative to one or more indices. Which factor or factors to be used with respect to any grant, and the weight to be accorded thereto if more than one factor is used, shall be determined by the Committee at the time of grant. SECTION 7. Amendment and Termination. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue, or terminate the Plan without the consent of any shareholder, Participant, other holder or beneficiary of an Award, or other Person; provided, however, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of the Company no such amendment, alteration, suspension, discontinuation, or termination shall be made that would (i) increase the total number of Shares available for Awards under the Plan, except as provided in Section 4(c) of the 17 Plan; (ii) increase the class of eligible Participants; or (iii) amend the eligibility requirements for Awards under the Plan. (b) Amendments to Awards. The Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted (other than Initial Grants or Annual Grants under Section 6(h)), provided no change, other than pursuant to Section 7(c), in any Award shall reduce the benefit to Participant without the consent of such Participant. Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. (c) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4(c) of the Plan) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. SECTION 8. Change in Control. Notwithstanding any other provision of this Plan to the contrary, in the event of a Change in Control of the Company, all outstanding Awards granted prior to the date of the Change in Control automatically shall become fully vested on such Change in Control, all restrictions, if any, with respect to such Awards shall lapse, and all performance goals, if any, with respect to such Awards shall be deemed to have been met in full (at the maximum performance level). For purposes of this Plan, a "Change in Control" shall be deemed to occur: (i) if any person (as such term is used in sections 13(d) and 14(d)(2) of the Exchange Act), other than the Company, any parent corporation or subsidiary corporation of the Company or any employee benefit plan of the Company or any such entity, is or becomes the "beneficial owner" (as defined 18 in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities, (ii) upon the first purchase of the Company's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company), (iii) on the date of consummation of a merger, consolidation, recapitalization, reorganization, sale or disposition of all or a substantial portion of the Company's assets, or the issuance of shares of stock of the Company in connection with the acquisition of the stock or assets of another entity, provided, however, that a Change in Control shall not occur under this clause (iii) if consummation of the transaction would result in at least two-thirds of the total voting power represented by the voting securities of the Company (or, if not the Company, the entity that succeeds to all or substantially all of the Company's business) outstanding immediately after such transaction being beneficially owned (within the meaning of Rule 13d-3 promulgated pursuant to the Exchange Act) by at least two-thirds of the holders of outstanding voting securities of the Company immediately prior to the transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction, or (iv) if, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. SECTION 9. Parachute Tax Gross-Up. To the extent that the grant, payment, or acceleration of vesting or payment, whether in cash or stock, of any Award made to a Participant under the Plan is subject to an excise tax under Section 4999(a) of the Code, or any similar or successor provision (a "Parachute Tax"), the Company shall pay such Participant an additional amount of cash (the "Gross-up Amount") such that the "net" after-tax benefit received by the Participant, after paying all applicable Parachute Taxes with respect to such Awards (including those on the Gross-up Amount) and any federal or state taxes on the Gross-up Amount, shall be equal to the net after-tax benefit that such Participant would have received if such Parachute Tax had not been applicable. 19 SECTION 10. General Provisions. (a) No Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (b) Withholding. The Company or any Affiliate is authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, Shares that would otherwise be issued pursuant to such Award, other Awards or other property) of any applicable taxes payable in respect of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. Any Participant who is subject to Rule 16b-3 may direct the Company to withhold Shares or may tender Shares to the Company to satisfy his tax withholding obligations. (c) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. Nothing contained in the Plan shall confer on any Director any right with respect to continuation of membership on the Board. (d) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Texas and applicable Federal law. (e) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without , in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or 20 Award and the remainder of the Plan and any such Award shall remain in full force and effect. (f) Other Laws. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. (g) No Trust or Fund Created. Neither the Plan nor the Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any general unsecured creditor of the Company or any Affiliate. (h) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (j) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company or any Affiliate from taking any action that is deemed by the Company or such Affiliate to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No Employee, Participant, or other Person shall have any claim against the Company or any Affiliate as a result of any such action. (k) Facsimile Signature. Any Award Agreement or related document may be executed by facsimile signature. If any officer who shall have signed or whose 21 facsimile signature shall have been placed upon any such Award Agreement or related document shall have ceased to be such officer before the related Award is granted by the Company, such Award may nevertheless be issued by the Company with the same effect as if such person were such officer at the date of grant. SECTION 11. Effective Date of the Plan. The Plan shall be effective as of the date of its approval by the Board, provided the Plan is subsequently approved by the shareholders of the Company within 12 months thereafter. Notwithstanding any provision in the Plan or in any Award Agreement, no Option or Stock Appreciation Right shall be exercisable and no Award shall vest or become satisfiable prior to such shareholder approval. SECTION 12. Term of the Plan. No Award shall be granted under the Plan after the tenth anniversary of the date the Plan was adopted by the Board or approved by the shareholders, whichever is earlier. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under any such Award shall, extend beyond such date. Dated: April 26, 1999 EX-10.2 4 PURCHASE & SALE AGMT. - SEMCO ENERGY INC. 1 EXHIBIT 10.2 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), effective as of July 15, 1999 is by and between OCEAN ENERGY, INC., a Texas corporation ("Seller"), and SEMCO ENERGY, INC., a Michigan corporation ("Purchaser"). Capitalized terms used herein shall have the meanings ascribed to them in Article XI, unless otherwise provided. W I T N E S S E T H: WHEREAS, Seller owns the APC Shares and the Distribution Assets; WHEREAS, Seller owns the APC Debt; WHEREAS, Purchaser desires to purchase, and Seller desires to sell, the APC Shares, the Distribution Assets and the APC Debt, subject in all respects to the provisions of this Agreement; and WHEREAS, the closing of the transactions contemplated by this Agreement is subject to obtaining certain governmental approvals, including the approval of the RCA, which the parties desire to obtain. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I Sale and Purchase Section 1.1. Sale and Purchase of APC Shares. Subject to all of the terms and conditions of this Agreement, at the Closing, Seller shall sell, transfer and deliver to Purchaser the APC Shares; and Purchaser shall purchase and accept delivery from Seller of the APC Shares at the Closing. Section 1.2. Sale and Purchase of Distribution Assets. Subject to all of the terms and conditions of this Agreement, at the Closing, Seller shall sell, transfer and deliver to Purchaser the Distribution Assets; and Purchaser shall purchase and accept delivery from Seller of the Distribution Assets at the Closing. Section 1.3. Sale and Purchase of APC Debt. Subject to all of the terms and conditions of this Agreement, at the Closing, Seller shall sell, transfer and deliver to Purchaser the APC Debt; and Purchaser shall purchase and accept delivery from Seller of the APC Debt at the Closing. 2 ARTICLE II Purchase Price Section 2.1. Stock Purchase Price. The purchase price for the APC Shares shall be $70,000,000, as adjusted pursuant to Section 2.4 ("Stock Purchase Price"). Section 2.2 Assets Purchase Price. The cash consideration to be paid for the Distribution Assets shall be $161,500,000, as adjusted pursuant to Section 2.4 ("Assets Purchase Price"). Section 2.3. APC Debt Purchase Price. The purchase price for the APC Debt shall be equal to the principal amount thereof on the Closing Date, not to exceed $58,700,000, together with accrued interest thereon (the "APC Debt Purchase Price"). Section 2.4 Purchase Price Adjustment. (a) Adjustment Mechanism. The Purchase Price is based on the understanding that on the Closing Date, the working capital of the Natural Gas Business shall be $2,000,000 (the "Target Working Capital Amount"). For purposes of this Section 2.4, working capital shall be determined in accordance with GAAP, applied on a basis consistent with the manner in which the Base Financial Statements are prepared; provided, however, that the current portion of any long-term debt shall not be included in such calculation. If the working capital of the Natural Gas Business is not at the Target Working Capital Amount, the Purchase Price shall be adjusted as follows: (i) On the date five days before the Closing Date, Seller will provide Purchaser with an estimate of the working capital of the Natural Gas Business as of the Closing Date, and if such estimate is below or above the Target Working Capital Amount, the Purchase Price payable on the Closing Date shall be adjusted downward or upward, as the case may be, as provided in Section 2.4(a)(iii), subject to the provisions thereof. (ii) If either party believes that an adjustment to the Purchase Price is required in addition to the adjustment, if any, provided in Section 2.4(a)(i), Purchaser will cause to be prepared and delivered to Seller no later than 60 days after the Closing Date an audited balance sheet of the Natural Gas Business, as at the Closing Date, which balance sheet shall present fairly, in conformity with GAAP, the assets and liabilities of the Natural Gas Business as at the close of business on the Closing Date and shall be prepared in a manner consistent with the Base Financial Statements and shall set forth the working capital. If such balance sheet shows that the working capital of the Natural Gas Business is below or above the Target Working Capital Amount, the Purchase Price shall be adjusted downward or upward, as the case may be, as provided in Section 2.4(a)(iii). 2 3 (iii) In the event that the working capital of the Natural Gas Business determined pursuant to either the estimate or the audited balance sheet prepared pursuant to Section 2.4(a)(i) or (ii) above is less than or greater than the Target Working Capital Amount, the Purchase Price shall be adjusted downward or upward, as the case may be, by an amount equal to such difference; provided, however, that in no event shall the net effect of such adjustment be to increase the Purchase Price by more than $2,000,000. The party required to make a payment to the other party pursuant to this paragraph shall make any such payment pursuant to clause (ii) within 30 business days after receipt of the applicable audited balance sheet by Seller. Any adjustment shall adjust prorata the Stock Purchase Price and the Asset Purchase Price. (b) Dispute Procedures. During the 30-day period following Seller's receipt of the audited balance sheet for the Natural Gas Business, Seller and its independent auditors will be permitted to review the working papers of the auditors relating to the audited balance sheet. The audited balance sheet shall become final and binding upon the parties on the thirtieth day following receipt thereof by Seller unless Seller gives Purchaser written notice of its disagreement prior to such date. Any notice of disagreement shall specify in reasonable detail the nature of any disagreement so asserted and shall be accompanied by a certificate of Seller's independent auditors that they concur with each of the positions taken by Seller in the notice of disagreement. If a notice of disagreement is received by Purchaser in a timely manner, then the audited balance sheet (as revised in accordance with clauses (i) or (ii) below) shall become final and binding upon the parties on the earlier of (i) the date the parties hereto resolve in writing any differences they have with respect to any matter specified in the notice of disagreement or (ii) the date any disputed matters are finally resolved in writing by the arbitrator referred to below. During the 30-day period following the delivery of a notice of disagreement, Seller and Purchaser shall seek in good faith to resolve in writing any differences that they may have with respect to any matter specified in the notice of disagreement. At the end of such 30-day period, Seller and Purchaser shall submit to an arbitrator for review and resolution any and all matters arising under this Section 2.4(b) which remain in dispute. The arbitrator shall be a nationally recognized independent public accounting firm as shall be agreed upon by the parties hereto in writing. The arbitrator shall render a decision resolving the matters submitted to the arbitrator within 30 days following submission thereto. The cost of any arbitration (including the fees of the arbitrator) pursuant to this Section 2.4 shall be borne 50% by Purchaser and 50% by Seller. The fees and disbursements of Seller's independent auditors incurred in connection with their review of the audited balance sheet shall be borne by Seller, and the fees and disbursements of Purchaser's independent auditors incurred in connection with their preparation and review of the audited balance sheet shall be borne by Purchaser. Section 2.5. Letter of Credit. Concurrently with the execution of this Agreement, Purchaser has delivered to Seller an irrevocable standby letter of credit from Bank of America, in 3 4 an amount equal to $10,000,000, a copy of which is attached to this Agreement as Exhibit B (the "Letter of Credit"). ARTICLE III Representations and Warranties of Seller Seller represents and warrants to Purchaser that, except as set forth or disclosed in Seller's Disclosure Schedule: Section 3.1. Corporate Status and Authority. (a) Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas. Seller has all the requisite corporate power and corporate authority to execute and deliver this Agreement and the other Operative Documents to which it is a party and to perform its obligations hereunder and thereunder, and the execution, delivery and performance of this Agreement and the other Operative Documents to which Seller is a party have been duly authorized by all necessary corporate action on the part of Seller. Seller has all the requisite corporate power and corporate authority to carry on the Distribution Business as it is now being conducted and to own or lease and operate the Distribution Assets as and in the place where the Distribution Business is now conducted or where the Distribution Assets are now owned or leased and operated. Seller has the corporate power to own the APC shares. Section 3.1(a) of Seller's Disclosure Schedule lists all charter documents that, as of the date hereof, constitute the Articles of Incorporation, as amended, of Seller and APC, respectively. Prior to the date of this Agreement, Seller has delivered to Purchaser true, correct and complete copies of the Articles of Incorporation and Bylaws of Seller and APC. (b) APC is a corporation duly organized, validly existing and in good standing under the laws of the State of Alaska. APC has all the requisite corporate power and corporate authority to carry on its business as it is now being conducted and to own or lease and operate its properties as, and in the places where, such business is now conducted and where such properties are now owned or leased and operated. APC has the corporate power to own the APC Assets and to own, lease and operate the Transmission Business as and in the place where such business is now conducted and where such properties are now owned or leased and operated. APC owns no equity security of any other entity and, as a result, has no subsidiaries. Section 3.2. Duly Executed. This Agreement has been duly executed and delivered on behalf of Seller, and, when executed and delivered at the Closing in accordance with this Agreement, each of the other Operative Documents to which Seller is a party shall have been duly executed and delivered on behalf of Seller. This Agreement does, and, when executed and delivered at the Closing in accordance with this Agreement, each of the other Operative Documents to which Seller is a party 4 5 shall, constitute a legal, valid and binding obligation of Seller enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and general principles of equity. Section 3.3. Qualification. Seller and APC are duly qualified and in good standing, as foreign corporations authorized to do business in all jurisdictions (including, without limitation, with respect to Seller, the State of Alaska) where failure to so qualify would materially adversely affect the Natural Gas Business. Section 3.4 Governmental Consent. Except for those consents or approvals set forth in Section 3.4 of Seller's Disclosure Schedule (the "Seller's Required Governmental Consents"), no consent, waiver, approval or authorization of, or designation, declaration or filing with, any governmental authority is or has been required on the part of Seller or APC in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby. Section 3.5. Capitalization of APC; Title to APC Shares and APC Debt. The authorized capital stock of APC consists of (i) 2,850,000 shares of common stock, par value $1.00 per share, of which 1,900,000 shares are duly authorized, validly issued and outstanding, fully paid and nonassessable, and 150,000 shares of Preferred Stock, of which no shares are outstanding. All such outstanding common stock, as well as all of the APC Debt, is owned by Seller. By delivery of payment for the APC Shares and the APC Debt and by delivery of the certificates representing the APC Shares and the instruments representing the APC Debt, in each case, as provided for in this Agreement, Purchaser shall acquire good title to the APC Shares and the APC Debt, free and clear of all liens, mortgages, charges, security interests, encumbrances and other restrictions or limitations of any kind whatsoever. There are no outstanding subscriptions, options, warrants, conversion rights, outstanding convertible securities, preemptive rights, preferential rights, or other rights (contractual or otherwise) or agreements of any kind for the purchase or acquisition from (or the purchase, sale or issuance by) Seller of any APC Debt or any shares of capital stock of APC, or other equity or ownership interest in APC, and no outstanding authorization therefor has been given. Section 3.6. Title to Distribution Assets and APC Assets; Liens. Seller has good and indefeasible title to the Distribution Assets and APC has good and indefeasible title to the APC Assets, except, in each case, those that in the aggregate are not material to the Natural Gas Business and those disposed of since the date of the Base Financial Statements in the ordinary course of business or otherwise disposed of in accordance with this Agreement. None of the Distribution Assets nor any of the APC Assets are subject to any mortgage, pledge, lien, security interest, charge or encumbrance except (i) liens created by or pursuant to the Existing Loan Documents, all of which shall be released at or prior to the Closing to the extent not in favor of the holders of indebtedness to be acquired by Purchaser in accordance with the provisions of this Agreement, (ii) liens securing any indebtedness referred to in clause (d)(iv) of Section 3.9 hereof and covering only the assets and properties securing such indebtedness at the time of its renewal, extension, rearrangement or refunding as contemplated by such clause (d)(iv), all of which shall be released at or prior to the 5 6 Closing to the extent not in favor of the holders of indebtedness to be acquired by Purchaser in accordance with the provisions of this Agreement, (iii) Permitted Encumbrances and (iv) other liens incidental to the conduct of the Natural Gas Business or the ownership of the Distribution Assets or the APC Assets that were not incurred in connection with the borrowing of money or the obtaining of advances for credit and that do not in the aggregate materially impair the value of the assets affected thereby or materially impair the use of such assets in the operation of the Natural Gas Business. Seller enjoys peaceful and undisturbed possession under all material real property leases included in the Distribution Assets, and all such leases are valid and subsisting and in full force and effect. APC enjoys peaceful and undisturbed possession under all material leases of real property on which the facilities operated by it are situated, and all such leases are valid and subsisting and in full force and effect. Section 3.7. No Breach, Etc. The execution, delivery and performance of this Agreement and the Operative Document to which Seller is a party by Seller and the consummation by Seller of the transactions contemplated hereby will not result in (a) any conflict with or breach or violation of or default under the Articles of Incorporation or by-laws of Seller or APC, or (b) subject to obtaining those consents or approvals described in Sections 3.4 and Section 3.7 of Seller's Disclosure Schedule (the "Seller's Required Approvals", which term shall not include any Seller's Required Governmental Consents), any material conflict with or breach or violation of or default under or right to terminate, cancel or accelerate under any Material Contract, or the creation of imposition of any lien, charge, pledge or encumbrance on any of the Distribution Assets or the APC Assets whatsoever, except for such conflicts, breaches, violations, defaults, or rights of termination, cancellation or acceleration, liens , charges, pledges or encumbrances that individually or in the aggregate would not result in a Material Adverse Effect on the Natural Gas Business. Seller has no knowledge of any Material Permits that are currently required in connection with its and APC's ownership and operation of the Natural Gas Business other than those that either have been obtained or will be obtained in due course. The Natural Gas Business is not being operated in violation of any of the provisions of Seller's or APC's Material Permits or any applicable Legal Requirement except for such violations, if any, which will not have, individually or in the aggregate, a Material Adverse Effect on the Natural Gas Business. Section 3.8. Financial Statements; Material Liabilities. (a) Seller has heretofore delivered to Purchaser complete and correct copies of (i) its annual report to shareholders for the fiscal year ended December 31, 1998, (ii) its Annual Report on Form 10-K for such fiscal year, as filed with the Securities and Exchange Commission, (iii) audited combined financial statements of the Distribution Division and APC for each of the three fiscal years ended December 31, 1998, accompanied by the report thereon of KPMG LLP, certified accountants, and (iv) the unaudited combined financial statements of the Distribution Division and APC as of March 31, 1999 ("Base Financial Statements"). The audited and unaudited financial statements referred to in clause (iii) above and the Base Financial Statements are referred to herein as the "Natural Gas Business Financial Statements." All Natural Gas Business Financial Statements were prepared in 6 7 accordance with generally accepted accounting principles applied on a consistent basis, except for changes concurred in by said accountants and disclosed in said financial statements, throughout the periods specified, and present fairly in all material respects the financial condition and the results of operations for the Natural Gas Business as of the dates thereof and for the periods then ended (subject, in the case of unaudited financial statements, to normal year-end audit adjustments). (b) On the date hereof Seller is not aware of any matter that has or is reasonably likely to have a Material Adverse Effect on the Natural Gas Business or (so far as Seller can now reasonably foresee) has a substantial likelihood in the future of having a Material Adverse Effect on the Natural Gas Business (taken as a whole) other than (i) general economic conditions, (ii) the matters referred to or set forth in the annual report to shareholders of Seller referenced in Section 3.8(a), the annual report on Form 10-K of Seller referenced in Section 3.8(a), the Natural Gas Business Financial Statements or in any Material Contracts furnished to Purchaser by Seller and (iii) matters and conditions not relating specifically to the Distribution Division or APC that are generally known to the public or to those in the oil and gas industry, the natural gas or electric utility industry in the State of Alaska or the natural gas transmission and distribution industry. Section 3.9. Changes, etc. Since the date of the Base Financial Statements: (a) no Material Adverse Effect has occurred in respect of the Natural Gas Business; (b) except for those actions taken in compliance with this Agreement, the Natural Gas Business has been conducted in substantially the same manner in which it had been previously conducted; (c) (i) the Distribution Assets, the APC Assets and related real property have been and are being operated in all material respects in compliance with Environmental Law and Seller has disclosed to Purchaser all past or present conditions of the real property, and all matters and issues in any way pertinent or related to the acquisition, operation or management of the Distribution Assets or the APC Assets which could, individually or in the aggregate, lead to imposition of a Material Liability on APC or the Distribution Division. Seller has received no notice or claim or information requests from any federal, state or local governmental or regulatory authority with jurisdiction over Seller (with respect to the Distribution Division), APC or the Distribution Assets or the APC Assets or from any third party alleging non-compliance with Environmental Law. (ii) there are no present or past conditions arising from or relating to the Distribution Assets or the APC Assets involving or resulting from a past or present spill, discharge, leak, emission, injection, escape, dumping, migration, seepage, or release of any kind whatsoever (other than on-site or off-site) of any substance or exposure of any type of 7 8 any workplace or to any medium, including, but not limited to, air, land, surface waters or underground waters, or from any past or present generation, transportation, treatment, storage or disposal of any hazardous or toxic waste materials, raw materials, products or other substances of any kind or from the storage, use or handling of any such materials, products or substances that may lead to imposition of a Material Liability on APC or the Distribution Division. (d) no indebtedness for borrowed money has been incurred or committed to be incurred by the Distribution Division or APC, except such indebtedness that has been incurred (i) in the ordinary course of business, (ii) pursuant to the Credit Agreement between APC and First National Bank (the "First National Credit Agreement"), (iii) pursuant to advances made by Seller to the Distribution Division or APC, including pursuant to the Intercompany Line of Credit Agreement, or (iv) in connection with any renewal, extension, rearrangement or refunding of any indebtedness of the Distribution Division or APC reflected on the Base Financial Statements or incurred after the date thereof pursuant to the Credit Agreement referred to in subclause (ii) above; Section 3.10. Personal Property. To Seller's knowledge, all material items of personal property and fixtures constituting a part of the Distribution Assets and APC Assets that are used or useful in the normal operations of the Distribution Business or the Transmission Business, as the case may be, have been maintained in all material respects in a state of repair (normal wear and tear excepted) that Seller believes to be adequate for the normal use of such item in the ordinary conduct of the Distribution Division or the Transmission Business, as the case may be, it being understood and agreed, however, that Seller is making no representation herein with respect to any item of property that the management of the Natural Gas Business has determined to be not necessary or desirable for the continued efficient and profitable operation of the Distribution Business or the Transmission Business, as the case may be. Section 3.11. Regulatory Commission of Alaska. (a) Section 3.11(a) of Seller's Disclosure Schedule lists all currently effective certificates, permits and authorizations heretofore issued by the RCA to APC or Seller in connection with the Natural Gas Business. (b) Section 3.11(b) of Seller's Disclosure Schedule reflects all of the currently operative tariffs heretofore authorized and approved by the RCA that are currently in effect and specifically applicable to the Natural Gas Business and all of the currently pending rate, certificate or other filings heretofore made by Seller or APC before the RCA and the status of each such filing on the date hereof. (c) All currently effective material filings heretofore made by Seller or APC with the RCA were made in compliance with Legal Requirements then applicable thereto and 8 9 the information contained therein was true and correct in all material respects as of the respective dates of such filings. Section 3.12. Material Contracts. Section 3.12 of Seller's Disclosure Schedule contains a complete and correct list of all Material Contracts as of the date hereof. There are no defaults by Seller, APC or the Distribution Division under any contracts listed in such section that, individually or in the aggregate, will materially and adversely impair the Natural Gas Business. To Seller's knowledge, there are no defaults by any other party to any contracts listed in such section that, individually or in the aggregate, will materially and adversely impair the Natural Gas Business. Except for the First National Credit Agreement, the Existing Loan Documents, the Intercompany Line of Credit Agreement and as otherwise disclosed in Seller's Disclosure Schedule, no Material Contract listed therein contains any restriction on the incurrence by the Seller or APC of additional long-term debt. Section 3.13. Gas Purchase Contracts and Responsibilities. (a) Section 3.13(a) of Seller's Disclosure Schedule accurately lists all currently effective material gas purchase contracts heretofore entered into by Seller or APC with respect to the Natural Gas Business pursuant to which either Seller or APC is obligated as a purchaser of natural gas. (b) As to each such gas purchase contract, neither Seller nor APC (i) has, since January 1, 1998, made any payments (and no such payments have become due to sellers of gas thereunder for gas not taken) pursuant to any "take or pay" or similar arrangements; (ii) is obligated to pay any material amount (net of any applicable offsets and adjustments) for gas taken or not taken prior to the date of the Base Financial Statements other than as reflected in the Base Financial Statements; or (iii) has received gas that is to be paid for in the future other than in the normal cycle of billing in the ordinary course of business or as otherwise reflected in the Base Financial Statements, in each case except to the extent that such matters would not have a Material Adverse Effect. (c) Section 3.13(c) of Seller's Disclosure Schedule accurately lists all hedges, swaps and other financial or physical commodity positions of the Natural Gas Business on the date hereof and the net open commodity position of the Natural Gas Business on such date. Section 3.14. Litigation. Section 3.14 of Seller's Disclosure Schedule lists all actions, suits, proceedings or governmental investigations pending or, to the knowledge of Seller, threatened against Seller or APC which (i) could reasonably be expected to have a Material Adverse Effect on the Natural Gas Business or (ii) challenges or may challenge the validity of this Agreement or any of the Operative Documents or seeks to enjoin or otherwise restrain the transactions contemplated herein. 9 10 Section 3.15. Rights-of-Way. Seller and APC own or possess all rights-of-way necessary for the conduct of the Distribution Business and the Transmission Business, respectively, as now being conducted without any known conflict with the rights of others, in each case except to the extent that the failure to own or possess such rights-of-way would not have a Material Adverse Effect on the Natural Gas Business. Section 3.16. Gas Transportation and Sales Contracts. Section 3.16 of Seller's Disclosure Schedule lists all Material Contracts pursuant to which either the Distribution Division or APC (a) is legally obligated to transport natural gas owned by a third party or (b) is legally obligated to undertake any such transportation. There are no agreements or other legally binding arrangements that constitute Material Contracts pursuant to which either Seller, with respect to the Distribution Business, or APC is a seller of natural gas to any third party other than pursuant to tariffs or similar arrangements approved or authorized by the RCA. Section 3.17. Employment Agreements and Benefits, Etc. (a) Employment Agreements. Section 3.17(a) of Seller's Disclosure Schedule lists all currently effective employment, management, consulting or similar agreements and all currently effective labor contracts and collective bargaining agreements heretofore entered into by APC or Seller with respect to the Natural Gas Business and neither Seller nor APC has any commitment or obligation to establish or enter into any such agreement not disclosed in Section 3.17(a) of Seller's Disclosure Schedule other than those, if any, that do not constitute a Material Employment Contract. (b) Officers and Directors. Section 3.17(b) of Seller's Disclosure Schedule contains a complete and accurate list of each officer of the Distribution Division and each director and officer of APC on the date hereof. (c) Employee Relations. Neither Seller nor APC is a party to any collective bargaining agreements covering any of the Employees. There is not occurring on the date hereof any slowdowns, pickets, work stoppages or other similar disruptive labor activities on the part of Seller's or APC's employees with respect to the Natural Gas Business. To Seller's knowledge, no grievance, unfair labor practice charge or any arbitration proceeding arising out of or under any collective bargaining agreement relating to the Natural Gas Business exists or is pending on the date hereof that would materially hinder the Natural Gas Business from performing its operations in a manner consistent with past practice or result in a material increase in the Natural Gas Business's aggregate compensation expense. (d) ERISA Plans. (i) Except for (a) the ENSTAR Natural Gas Company Retirement Plan for Operating Unit Employees and Clerical Unit Employees (the "Operating Plan") and the ENSTAR Natural Gas Company Retirement Plan For Salaried Employees, 10 11 but only as it covers non-union Natural Gas Business employees (the "Salaried Plan") (collectively, the Operating Plan and the Salaried Plan are herein referred to as the "Pension Plans"), (b) the ENSTAR Natural Gas Company Thrift Investment Plan (the "Thrift Plan"), (c) the ENSTAR Natural Gas Company Profit by Service Plan for Classified Employees and the ENSTAR Natural Gas Company Profit by Service Plan for Salaried Employees (the "Profit Sharing Plans"), (d) the ENSTAR Natural Gas Company Supplemental Executive Retirement Plan (the "SERP"), and (e) the other employee benefit plans listed in Section 3.17(d)(i) of Seller's Disclosure Schedule (the employee benefit plans referred to in (a) through (e) hereof are hereinafter collectively referred to as the "Plans"), neither APC, Seller nor any affiliates thereof, currently sponsors or maintains any employee benefit plan within the meaning of Section 3(3) of ERISA or has at any time within the six years prior to the Closing Date sponsored or maintained any employee pension benefit plan within the meaning of Section 3(2) of ERISA for the benefit of any employees of APC or employees of Seller performing services in connection with the Natural Gas Business ("Employees"). Specifically, neither APC, Seller nor any entity under common control with Seller within the meaning of Code ss. 414 currently contributes to or has at any time within the six years prior to the Closing Date contributed to any multiemployer plan within the meaning of Section 3(37) of ERISA and Purchaser shall have no liability for any such multiemployer plan. (ii) APC and Seller have in all material respects performed all material obligations required to be performed by them or under or in connection with the Plans, and Seller has no knowledge of any material default or violation (including but not limited to fiduciary violations) by any other party to the Plans. (iii) Reports and disclosures relating to the Plans required to be filed with or furnished to governmental agencies, Plan participants or Plan beneficiaries prior to the date hereof have been filed or furnished in accordance with applicable law in a timely manner. (iv) Each of the Thrift Plan, the Pension Plans and the Profit Sharing Plans (a) satisfies in form the requirements of Section 401 of the Code, except to the extent amendments are not required by law to be made until a date after the Closing Date, (b) has received a favorable determination letter from the Internal Revenue Service regarding such qualified status, and (c) has not, since receipt of the most recent favorable determination letter been amended or operated in a way that would, to the knowledge of Seller, materially adversely affect such qualified status. (v) There are no actions, suits or claims pending (other than routine claims for benefits) or, to the knowledge of Seller, threatened against any of the Plans or against the assets of any of the Thrift Plan, Pension Plans or the Profit Sharing Plans. 11 12 (vi) All contributions required to the be made prior to the date hereof to the Thrift Plan, the Profit Sharing Plans and the Pension Plans pursuant to their terms and the provisions of ERISA, the Code or any other applicable Legal Requirement have been timely made. (vii) As to each Pension Plan, (a) there has been no event or condition which presents the material risk of Plan termination, (b) no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, (c) no reportable event within the meaning of Section 4043 of ERISA (for which the disclosure requirements of Regulation section 4043.1 et seq., promulgated by the Pension Benefit Guaranty Corporation ("PBGC"), have not been waived) has occurred, (d) no notice of intent to terminate the Plan has been given under Section 4041 of ERISA, (e) no proceeding has been instituted under Section 4042 of ERISA to terminate the Plan, (f) no material liability to the PBGC has been incurred, and (g) the fair market value of the assets of such Plan equals or exceeds the present value of accumulated benefits under such Plan based upon the actuarial assumptions used for purposes of the most recent actuarial valuation. (viii) The Base Financial Statements reflect contribution liability accruals made in accordance with past practices reflecting the estimated 1999 contribution liability of APC and the Distribution Division to the Pension Plans, the Thrift Plan and the Profit Sharing Plans as of March 31, 1999. (ix) No act, omission or transaction has occurred that would result in imposition on the APC, Seller or any affiliates thereof of (A) breach of fiduciary duty liability damages under Section 409 of ERISA, (B) a civil penalty assessed pursuant to subsections (c), (i) or (l) of Section 502 of ERISA, or (C) a tax imposed pursuant to Chapter 43 of Subtitle D of the Code. (x) There is no action pending with respect to any of the Plans before the Internal Revenue Service, the Department of Labor or the Pension Benefit Guaranty Corporation, or, to the knowledge of Seller, before any state or local governmental agency. (xi) Each Plan subject to the requirements of Section 601 of ERISA has been operated in material compliance therewith. Seller has not contributed to a nonconforming group health plan (as defined in Code Section 5000(c)) and no person under common control with Seller within the meaning of Section 414 of the Code has incurred a tax liability under Code Section 5000(a) that is or could reasonably be expected to be a liability of Seller. 12 13 (xii) Except for amounts with respect to which Seller has sole responsibility to pay, no amounts payable under any Plan or other agreement, contract, or arrangement with respect to any Employees will fail to be deductible for federal income tax purposes by virtue of Section 280G or Section 162(m) of the Code. (xiii) Complete and correct copies of the following documents have been made available to Purchaser as of the date of this Agreement: (i) all Plans and any related trust agreements or insurance contracts, (ii) the most current summary descriptions of each Plan subject to ERISA, (iii) the three most recent Form 5500s and Schedules thereto for each Plan subject to such reporting, (iv) the most recent determination of the IRS with respect to the qualified status of each Plan that is intended to qualify under Section 401(a) of the Code, (v) the most recent accountings with respect to Plan funded through a trust and (vi) the most recent actuarial report of the qualified actuary of each Plan with respect to which actuarial valuations are conducted. (e) Other Employee Benefit Plans. Section 3.17(e) of Seller's Disclosure Schedule lists, in addition to the Plans, all bonus, profit-sharing, incentive compensation, stock option, pension, retirement, deferred compensation and other plans, agreements, trusts, funds and arrangements for the benefit of the Employees other than those, if any, which do not constitute a Material Employment Contract. Section 3.18. Insurance. Seller, in connection with the Distribution Business, and APC have been continuously since January 1, 1995, insured in such amounts and against such risks and losses as are customary for companies conducting businesses similar to the Natural Gas Business during such time period. Neither Seller, in connection with the Distribution Business, nor APC has received any notice of cancellation or termination with respect to any material insurance policy thereof. Section 3.19. Patents, Trademarks, Etc. To Seller's knowledge, the Natural Gas Business is conducted without conflict with or infringement of asserted patent, trade names, trademark, copyright, trade secret, know-how or other industrial property rights of others. Section 3.20. APC Debt. The principal amount outstanding under the APC Debt as of June 1, 1999, is $58,700,000. There is no default by the obligor under the APC Debt with respect to payments of principal and interest required to be made thereunder. Section 3.21. Brokers. Except for Chase Securities, Inc., no broker or finder has acted for or on behalf of Seller or any affiliate of Seller in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or 13 14 on behalf of Seller or any affiliate of Seller for which Purchaser, APC or the Distribution Division has or will have any liabilities or obligations (contingent or otherwise). Section 3.22 Year 2000 Compliance. The Natural Gas Business has adopted a Year 2000 compliance program (the "Y2K Program"), a copy of which is attached as Section 3.22 of Seller's Disclosure Schedule, and has filed the Y2K Program with the RCA. APC and the Distribution Division are in compliance with the Y2K Program in all material respects and have substantially performed the tasks required to be performed thereby on or prior to any date as of which this representation is made or deemed to have been made, in each case except to the extent that such failure would not, or could not reasonably be expected to have, a Material Adverse Effect on the Natural Gas Business. ARTICLE IV Representations and Warranties of Purchaser Purchaser represents and warrants to Seller that, except as set forth or disclosed in Purchaser's Disclosure Schedule: Section 4.1. Corporate Status and Authority. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. Purchaser has all the requisite corporate power and corporate authority to execute and deliver this Agreement and the other Operative Documents to which it is a party and to perform its obligations hereunder and thereunder, and the execution, delivery and performance of this Agreement and the other Operative Documents to which Purchaser is a party have been duly authorized by Purchaser's Board of Directors, which constitutes all necessary corporate action required on the part of the Purchaser for such authorization. Purchaser has heretofore delivered to Seller true and complete copies of its Certificate or Articles of Incorporation and bylaws, in each case as amended. Section 4.2. Power; Duly Executed. Subject to those matters set forth in this Agreement, Purchaser has full right, power and authority to enter into this Agreement and the other Operative Documents to which Purchaser is a party, and Purchaser has full, right, power and authority to purchase and receive the APC Shares and the Distribution Assets pursuant hereto. This Agreement has been duly executed and delivered on behalf of Purchaser, and, when executed and delivered at the Closing in accordance with this Agreement, each of the other Operative Documents to which Purchaser is a party shall have been duly executed and delivered on behalf of Purchaser. This Agreement does, and, when executed and delivered at the Closing in accordance with this Agreement, each of the other Operative Documents to which Purchaser is a party shall, constitute a legal, valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and general principles of equity. 14 15 Section 4.3. Qualification. Purchaser is duly qualified and in good standing, as a foreign corporation authorized to do business in all jurisdictions where the failure to so qualify would materially adversely affect the business or properties of Purchaser. Prior to the Closing, Purchaser shall become duly qualified and in good standing to do business in the State of Alaska. Section 4.4. Governmental Consent. Except for those consents or approvals set forth in Section 4.4 of Purchaser's Disclosure Schedule (the "Purchaser's Required Government Consents"), no consent, waiver, approval or authorization of, or designation, declaration or filing with any governmental authority is or has been required on the part of Purchaser in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. Section 4.5. Brokers. Except for Banc of America Securities LLC and Charlevoix Energy Partners, no broker or finder has acted for or on behalf of Purchaser or any affiliate of Purchaser in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Purchaser or any affiliate of Purchaser for which Seller or any affiliate thereof has or will have any liabilities or obligations (contingent or otherwise). Section 4.6. Litigation. There are no actions, suits, proceedings or governmental investigations pending or, to the knowledge of Purchaser, threatened against Purchaser or any of the its subsidiaries which (a) will have a Material Adverse Effect or can reasonably be expected to have a Material Adverse Effect on the ability of Purchaser to consummate the transactions contemplated in the Agreement, or (b) challenges or may challenge the validity of this Agreement or any of the Operative Documents to be executed at Closing or seeks to enjoin or otherwise restrain the transactions contemplated herein. Section 4.7 No Breach, Etc. The execution, delivery and performance of this Agreement and the Operative Documents to which Purchaser is a party by Purchaser and the consummation by Purchaser of the transactions contemplated hereby will not result in (a) any conflict with or breach or violation of or default under the Certificate or Articles of Incorporation or by-laws of Purchaser, or (b) subject to obtaining those consents or approvals described in Sections 4.4 and 4.7 of the Purchaser's Disclosure Schedule (the "Purchaser's Required Approvals", which term shall not include any Purchaser's Required Governmental Consents), any material conflict with or breach or violation of or default under or right to terminate, cancel or accelerate under any material indenture, contract, agreement, license, lease or other instrument to which Purchaser is a party or the creation of imposition of any lien, charge, pledge or encumbrance on any of the material assets of the Purchaser. With respect to the credit agreement related to the Purchaser's Required Approval described in Section 4.7 of the Purchaser's Disclosure Schedule, such credit agreement is subject to renewal no later than September 30, 1999, and upon such renewal the credit agreement will be amended or otherwise modified so that no consent to the transactions contemplated by this Agreement is required thereunder. Upon such renewal the Purchaser's Disclosure Schedule shall 15 16 be deemed to be modified so that the requirement to obtain such consent is no longer disclosed thereon. Section 4.8. Financial Arrangements of Purchaser. Purchaser presently has and will at all times have adequate sources of funds to provide at the Closing, and at the Closing will have, sufficient funds in order to timely pay the Purchase Price and any adjustments thereto. Section 4.9. Financial Statements. Purchaser has heretofore delivered to Seller complete and correct copies of (a) its annual report to shareholders of its most recently ended fiscal year, (b) its Annual Report on Form 10-K for the same fiscal year, as filed with the Securities and Exchange Commission, (c) its proxy statement relating its most recent Annual Meeting of Shareholders and (d) its quarterly reports on Form 10-Q for any fiscal quarters ended after the fiscal year described in clause (a). The consolidated financial statements of the Purchaser contained therein were prepared in accordance with generally accepted accounting principles applied on a consistent basis, except for changes concurred in by the Purchaser's accountants and disclosed in said financial statements, throughout the periods specified, and present fairly in all material respects the financial condition and results of operations of the businesses of Purchaser as of the dates thereof and for the periods then ended (subject, in the case of unaudited financial statements, to normal year-end audit adjustments) and the absence of footnote disclosure. Section 4.10. Purchase for Investment. Purchaser is acquiring the APC Shares for its own account, for investment only, without a view to distribution, as that phrase has meaning under the Securities Act of 1933, as amended (the "Act") and rules and regulations of the Securities and Exchange Commission. Purchaser understands that the effect of the representation and warranty made herein is that the APC Shares must be held by it indefinitely unless subsequently registered under the Act or unless an exemption from registration is available at the time of any proposed sale or other transfer thereof. Purchaser agrees to indemnify and hold harmless Seller against all liabilities, costs and expenses, including reasonable attorneys' fees, and other Losses incurred by Seller as a result of any sale, transfer or other disposition by Purchaser of all or any part of the APC Shares in violation of the Act or applicable state securities laws. ARTICLE V Covenants and Certain Actions of the Parties Section 5.1. Obligations of Seller. Section 5.1.1. Conduct of Business, Etc. From the date of this Agreement and until the Closing ("Interim Period"), except as is otherwise approved by Purchaser in writing (which approval shall not be unreasonably withheld or delayed), Seller shall: 16 17 (a) except as permitted or contemplated by this Agreement, carry on the Distribution Business in the ordinary course consistent with past practice and, to the extent consistent with such business, use all reasonable efforts to preserve intact the present business organization and to preserve its relationship with customers, suppliers and others having business dealings with the Distribution Division; (b) except as permitted or contemplated by this Agreement, cause APC to carry on the Transmission Business in the ordinary course consistent with past practice and, to the extent consistent with such business, use all reasonable efforts to preserve intact the present business organization and to preserve its relationships with customers, suppliers and others having business dealings with APC; (c) maintain its corporate existence and, to the extent within the control of Seller, maintain all qualifications of Seller that are required for it to carry on the Distribution Business as set forth in clause (a) above; and cause APC to maintain its corporate existence and, to the extent within the control of Seller, cause APC to maintain all qualifications of APC that are required for it to carry on the Transmission Business as set forth in clause (b) above; (d) not permit APC to amend its Articles of Incorporation or bylaws; (e) except as permitted or contemplated by this Agreement and except for proposed transactions that are disclosed in Seller's Disclosure Schedule, not enter into or amend or permit APC to enter into or amend in any bonus, incentive compensation, deferred compensation, profit sharing, retirement, pension, group insurance, death benefit or other fringe benefit plan, trust agreement, or arrangement affecting any Employees, or any compensation, severance or consulting agreement with any such officer or employee other than in the ordinary course of business or otherwise consistent with past practice or as required by law or any presently existing collective bargaining agreement; (f) not permit APC or the Distribution Division, other than in the ordinary course of business, to create, incur, assume, guarantee or otherwise become liable with respect to any indebtedness for money borrowed except (i) pursuant to the First National Credit Agreement, (ii) pursuant to advances made by Seller to the Distribution Division or APC, including under the Intercompany Line of Credit Agreement, (iii) in compliance with the provisions of this Agreement, or (iv) in connection with any renewal, extension, rearrangement or refunding of any indebtedness of the Distribution Division or APC reflected in the Base Financial Statements or incurred after the date thereof pursuant to the First National Credit Agreement; (g) except for proposed transactions described in Section 5.1.1(g) of Seller's Disclosure Schedule, refrain from disposing of any material Distribution Assets or material APC Assets other than in the ordinary course of business; 17 18 (h) except for any proposed transactions described in Section 5.1.1(h) of Seller's Disclosure Schedule, not permit APC to merge or consolidate with any other corporation or acquire any stock, securities, property or assets of any other Person; provided, however, that the foregoing restriction shall not prohibit any acquisition of property or assets to be used by the Natural Gas Business in the ordinary course of business or for capital expenditures permitted by Section 5.1.1(k); (i) not permit APC to issue any shares of any class of its capital stock, or enter into any contract, or grant any option, warrant or right, calling for the issuance of any such shares, or create or issue any securities convertible into any such shares or convertible into securities in turn so convertible, or enter into any contract, or grant any option, warrant or right, calling for the issuance of any such convertible securities; (j) advise and consult, and cause APC to advise and consult, with Purchaser in advance of any material actions (including, without limitation, rate filings) to be taken with respect to regulatory matters or other contested matters; (k) except as contemplated by the Natural Gas Business's capital budget or as set forth in Section 5.1.1(k) of Seller's Disclosure Schedule, not make or commit to make, or permit APC to make or commit to make, any capital expenditures, capital additions or capital improvements with respect to the Natural Gas Business in an amount in excess of $1,000,000 with respect to all such capital projects and except for repairs to the Natural Gas Business's property required for safety and/or the continued operation of the Natural Gas Business in accordance with past practice. (l) use all reasonable efforts to obtain waivers of all preferential rights to purchase all or any part of the Distribution Assets and use all reasonable efforts to obtain, and cause APC to use all reasonable efforts to obtain, any consent of third parties necessary to complete the transactions contemplated by this Agreement; (m) use all reasonable efforts to provide substantially in accordance with past practices under that certain Agreement For Services, dated January 1, 1993, as amended, between Seller, the Distribution Division and APC, all material corporate general and administrative services to APC and the Distribution Division of the type previously provided by Seller and cooperate with Purchaser in the transition of the performance of such services to Purchaser at the Closing. Seller will, and will cause the Distribution Division and APC to, terminate such Agreement For Services at Closing at no cost to the Distribution Division or APC; (n) not take undertake any hedging activity that is inconsistent with net open commodity position, if any, described in Section 3.13(c) of Seller's Disclosure Schedule; and 18 19 (o) enter into or amend any Material Contract or any other contract listed on Section 3.12 of Seller's Disclosure Schedule, in each case except to the extent related to any capital expenditure permitted by Section 5.1.1(k). Section 5.1.2. Access and Information. APC and Seller have given and, during the Interim Period, Seller shall give, or shall cause to be given, to Purchaser and its employees, agents and representatives full access, at all reasonable times and at Purchaser's expense, to the properties, books, files, records and officers of APC and of Seller, as such relate to the Natural Gas Business, and will furnish or shall cause to be furnished, at Purchaser's expense, all information and documents relating to the Natural Gas Business as Purchaser may reasonably request, and permit Purchaser to contact and meet with the employees of APC and Seller, as such are involved in the Natural Gas Business, and others having business relations with such, at such place or places and at such times as reasonably designated by Purchaser, provided that no such investigation shall unreasonably interfere with the Natural Gas Business, or relationships with employees or customers of Seller or APC. During the Interim Period, Seller shall permit Purchaser to make copies of information relating to the Natural Gas Business contained in the books, files and records of Seller and APC. Purchaser will cause all information regarding Seller, the Distribution Division, APC or the Natural Gas Business obtained or acquired by Purchaser or Purchaser's representatives, employees, consultants, independent contractors, attorneys and financing sources and other advisors (the "Purchaser Parties") pursuant to this Agreement to be used and maintained by the Purchaser Parties in accordance with the terms of the confidentiality agreement dated June 3, 1999, by and between Seller and Purchaser (the "Confidentiality Agreement"). Notwithstanding the foregoing provisions of this Section 5.1.2, Seller shall not be required to disclose information to the extent that the disclosure thereof is prohibited under confidentiality agreements currently in effect on the date hereof. (b) Purchaser hereby agrees to defend, indemnify, release, protect, save and hold harmless the Seller Indemnitees from and against any and all Losses (including injury or death of any person or damage to property) arising out of or relating to Purchaser's access to the properties, books, files and records of APC or the Natural Gas Business in connection with this Section 5.1.2, including without limitation any Losses resulting, in whole or in part, from the actions of Purchaser's officers, employees, agents, representatives or affiliates. Section 5.1.3. Hart-Scott-Rodino. (a) Seller will prepare and submit to the Federal Trade Commission and the Department of Justice, in a timely manner, all necessary filings for Seller in connection with the transactions contemplated by this Agreement under the Hart-Scott-Rodino Antitrust Improvements Act or 1976 and the rules and regulations of the Federal Trade Commission thereunder (collectively, the "Hart-Scott-Rodino Act"). (b) In the event that a request for additional information is made of Seller pursuant to the Hart-Scott-Rodino Act, Seller shall use all reasonable efforts to comply with such request as soon as practicable after receipt of such request. 19 20 Section 5.1.4 Limit on Indebtedness For Borrowed Money. At or prior to the Closing, Seller shall take such action as shall be necessary such that, at the Closing, (i) the aggregate indebtedness of the Natural Gas Business for borrowed money or evidenced by leases required to be capitalized for financial reporting purposes in accordance with GAAP does not exceed $58,700,000 (including the APC Debt), and (ii) the outstanding principal balance of the APC Debt does not exceed $58,700,000. Section 5.2. Obligations of Purchaser. Section 5.2.1. Hart-Scott-Rodino. (a) Purchaser will prepare and submit to the Federal Trade Commission and the Department of Justice, in a timely manner, all necessary filings for Purchaser in connection with the transactions contemplated by this Agreement under the Hart-Scott-Rodino Act. (b) In the event that a request for additional information is made of Purchaser pursuant to the Hart-Scott-Rodino Act, Purchaser shall use all reasonable efforts to comply with such request as soon as practicable after receipt of such request. Section 5.2.2. Employee Matters. On or before the Closing Date, Purchaser will offer employment to each Employee as of the Closing Date who meets Purchaser's normal employment criteria for similar classifications of employees. Except as hereinafter provided, and subject to the provisions of any presently existing collective bargaining agreement, Purchaser shall have full discretion in determining the terms, conditions and benefits relating to such employment, provided however, that the salaries and other employment benefits, taken as a whole, and the positions of responsibility offered by Purchaser shall be consistent in all material respects with the salary ranges and other employment benefits, taken as a whole, and the levels of responsibility of such Employees in effect on the Closing Date. Section 5.2.3. Access to Information. After Closing, Purchaser will, and will cause its counsel and independent public accountants to, afford to representatives of Seller, including its counsel and accountants, reasonable access to all books, records, files and documents related to the Distribution Division, APC or the Natural Gas Business in order to permit Seller to prepare and file its tax returns and to prepare for and participate in any investigation with respect thereto, to prepare for and participate in any other investigation and defend any litigation relating to or involving the Seller, Distribution Division, APC or the Natural Gas Business for which Seller may be responsible, to discharge its obligations under this Agreement and the other Operative Documents to which it is a party and for other reasonable purposes and will afford Seller reasonable assistance in connection therewith. Purchaser will cause such records to be maintained for not less than seven years from the date of Closing and will not dispose of such records without first offering in writing to deliver them to Seller; provided, however, that in the event that Purchaser transfers all or a portion of the Natural Gas Business to any third party during such period, Purchaser may transfer to such third party all or a portion of the books, records, files and documents related thereto, provided such third party transferee expressly assumes in writing the obligations of Purchaser under this Section 5.2.3. 20 21 Following the Closing Date, and to the extent reasonably necessary to permit Seller or any of its Affiliates to defend (including, without limitation, any related investigation, appeal or settlement) any lawsuit, mediation, enforcement action, arbitration, administrative hearing or other adjudicative proceeding relating to the Natural Gas Business, Purchaser agrees to afford Seller and its Affiliates and their respective accountants and counsel, during normal business hours, at no cost to Seller other than reasonable out-of-pocket expenses, (i) reasonable access to all employees of Purchaser or any of its Affiliates and all witnesses subject to the control or direction of Purchaser or any of its Affiliates and (ii) reasonable access to all documents and records within the custody or subject to the control of Purchaser or any of its Affiliates; provided, however, that in the event of any litigation nothing herein shall limit either party's rights of discovery under applicable law. Section 5.3. Joint Obligations. (a) Purchaser and Seller will, as soon as reasonably possible following the execution of this Agreement, prepare and file with appropriate governmental authorities such requests for approval as may be necessary to obtain any Seller's Required Governmental Consents and Seller's Required Approvals. Purchaser and Seller will diligently pursue such authorizations and will cooperate with each other in seeking such authorizations. (b) Seller, APC and Purchaser mutually agree and covenant as follows with respect to the disposition of the Plans: (i) Effective as of Closing, Purchaser shall adopt, or cause the appropriate affiliate of Purchaser to adopt, those plans listed on Section 5.3(b)(i) of Seller's Disclosure Schedule. Seller (or its insurer) will be liable for benefits incurred by the Employees under such plans, as a result of events occurring prior to Closing. (ii) Effective as of Closing, Purchaser shall also adopt, or cause the appropriate affiliate of Purchaser to adopt, those plans listed on Section 5.3(b)(ii) of Seller's Disclosure Schedule (together with the plans listed on Section 5.3(b)(i) of Seller's Disclosure Schedule, the "Scheduled Plans") as a successor employer of the Employees who are participants therein, without gap or interruption of coverage. Further, effective as of the Closing Date, Purchaser shall assume Seller's obligations under any presently existing collective bargaining agreement affecting the Natural Gas Business. (iii) Subject to the provisions of any presently existing collective bargaining agreement and subject to the provisions of applicable law, Purchaser shall have the right to amend or terminate any Scheduled Plan following the Closing Date; provided, however, that the overall level of benefits provided to the Employees of the Natural Gas Business shall be comparable to the benefits provided to such Employees on the date hereof for at least two years after the Closing Date. With respect to any employee benefit plan that is not a Scheduled Plan, Purchaser shall not 21 22 assume any obligations thereunder and Seller shall continue to be liable therefor; provided, however, that Seller may amend or terminate any such plan at any time. (iv) Effective as of Closing, Purchaser shall cause APC or the appropriate affiliate of Purchaser to assume the Severance Agreement between Seller and Richard F. Barnes ("Barnes"), a true and correct copy of which has been furnished to Purchaser. Prior to Closing, Purchaser shall enter into severance agreements with each of the other officers of APC, which are identified on Section 5.3(b) of Seller's Disclosure Schedule, providing benefits substantially similar to the benefits provided to such persons under the MSP. In the event Barnes' or any other such officer's employment is subject to an Involuntary Termination (as such term is defined in the applicable severance agreement) within six months following Closing, Seller shall reimburse Purchaser for the cost of any severance benefits provided to such officer in accordance with the applicable severance agreement. Purchaser shall provide severance benefits to each of the other Employees as of Closing (but not including Employees subject to any collective bargaining agreement) in accordance with the terms of the Resource Group Plan set forth in Section 5.3(b)(iv) of Purchaser's Disclosure Schedule. Purchaser will continue to provide severance benefits to such Employees substantially similar to those set forth in such Resource Group Plan for a period of at least three years after the Closing Date. (v) APC, Seller and Purchaser shall cooperate in exchanging information (including pertinent employment records, benefit information, financial statements and other data) or in taking actions respecting the interests of the Employees in each of the plans described in this Section so as to secure an orderly and effective transition of benefit arrangements for the Employees. APC, the Seller and Purchaser agree to use all reasonable efforts to accomplish the purposes of this Section 5.3(b), subject to such changes as may be required by any governmental agency of proper jurisdiction or other regulatory authority. (c) During the Interim Period, neither Purchaser nor Seller shall make, nor permit any of its affiliates or representatives to make, any news release or other public disclosure pertaining to this Agreement or the transactions contemplated hereby without the prior written approval of the other as to both form and content, which approval shall not be unreasonably withheld. Notwithstanding the foregoing, either party may make such news release or other public disclosure which, in the opinion of such party's outside counsel, is required to be made by such party pursuant to applicable securities laws or securities exchange rules. 22 23 ARTICLE VI Approvals, Reasonable Efforts The parties recognize the importance of obtaining the Seller's Required Governmental Consents, the Seller's Required Approvals, the Purchaser Required Governmental Consents and the Purchaser's Required Approvals and, in this regard, agree to give priority to seeking such approvals. The parties shall apply for and diligently prosecute all applications for, and shall use all reasonable efforts promptly to obtain, such approvals or forebearances from all applicable federal, state and local authorities, and such other governmental authorities as shall be necessary to permit the consummation of the transactions contemplated this Agreement, and shall use all reasonable efforts to bring about the satisfaction as soon as practicable of the transactions contemplated by this Agreement. To this end, the parties agree to make available the personnel and other resources of their respective organizations in order to accomplish actions reasonably required by them to obtain all such approvals. ARTICLE VII Conditions Precedent Section 7.1. Preamble. The respective obligations set forth herein of Seller and Purchaser to consummate the transactions contemplated hereby shall be subject to the fulfillment, on or before the Closing Date, in the case of Seller, of the conditions set forth in Sections 7.2 and 7.3, and in the case of Purchaser, of the conditions set forth in Sections 7.2 and 7.4. Any of the following conditions may be waived in whole or in part by the party whose obligation to perform at Closing is subject to such condition. Section 7.2 Hart-Scott-Rodino Compliance. The applicable waiting period under the Hart-Scott Rodino Act shall have expired or terminated. Section 7.3. Conditions to Obligations of Seller. Section 7.3.1. Representations and Warranties of Purchaser. The representations and warranties of Purchaser contained in Article IV of this Agreement shall be accurate in all respects (provided that, for purposes of this Section 7.3.1 any representation or warranty contained in Article IV that is qualified by a materiality standard or a Material Adverse Effect qualification shall be read without regard to any such qualifications as if such qualifications were not contained therein) as of the Closing Date, except for such failures which, individually or in the aggregate, have not had and could not reasonably be expected to have, a Material Adverse Effect on Seller. Purchaser shall have duly performed and complied in all material respects with all agreements contained herein required to be performed or complied with by it at or before the Closing. 23 24 Section 7.3.2. Officer's Certificate. Purchaser shall have delivered to Seller a certificate, dated the Closing Date and signed by its Chairman, President or a Vice President, as to the fulfillment of the conditions set forth in Section 7.3.1 hereof. Section 7.3.3 Seller's Required Governmental Consents. All of Seller's Required Governmental Consents shall have been obtained by Final Order. Section 7.3.4 Seller's Required Approvals. All of Seller's Required Approvals, the absence of which would have a Material Adverse Effect on Seller or its businesses other than the Natural Gas Business after the Closing, and all of Purchaser's Required Approvals, the absence of which would have a Material Adverse Effect on Purchaser, in each case other than those consents and approvals that are customarily obtained after the closing of a transaction of the nature of the transaction contemplated by this Agreement, have been obtained and are in full force and effect. Section 7.3.5. Actions at Closing. Purchaser shall have taken the respective actions to be taken by it at the Closing pursuant to Section 8.1 hereof. Section 7.3.6. Absence of Proceedings. No action, suit or proceeding instituted by any governmental authority shall be pending and no statute, rule or regulation and no injunction, order, decree or judgment of any court or governmental authority of competent jurisdiction shall be in effect that could reasonably be expected to prohibit, restrain, enjoin or restrict the consummation of the transactions contemplated by this Agreement. Section 7.4. Conditions to Obligations of Purchaser. Section 7.4.1. Representations and Warranties of Seller. The representations and warranties of Seller contained in Article III and Section 10.1 of this Agreement shall be accurate in all respects (provided that, for purposes of this Section 7.4.1 any representation or warranty contained in Article III or Section 10.1 that is qualified by a materiality standard or a Material Adverse Effect qualification shall be read without regard to any such qualifications as if such qualifications were not contained therein) as of the Closing Date, except for such failures which, individually or in the aggregate, have not had and could not reasonably be expected to have, a Material Adverse Effect on the Natural Gas Business. Seller shall have duly performed and complied in all material respects with all agreements contained herein required to be performed or complied with by it at or before the Closing. Section 7.4.2. Officer's Certificate. Seller shall have delivered to Purchaser a certificate, dated the Closing Date and signed by its Chairman, President or Vice President, as to the fulfillment of the conditions set forth in Section 7.4.1 hereof. Section 7.4.3 Governmental Consents. All of Seller's Required Governmental Consents and Purchaser's Required Governmental Consents shall have been obtained by Final Order. 24 25 Section 7.4.4 Other Approvals. All of Seller's Required Approvals, the absence of which would have a Material Adverse Effect on Purchaser and on the Natural Gas Business after the Closing, and all of Purchaser's Required Approvals, the absence of which would have a Material Adverse Effect on Purchaser, in each case other than consents and approvals that are customarily obtained after the closing of a transaction of this nature, have been obtained and are in full force and effect. Section 7.4.5. Actions at Closing. Seller shall have taken the actions to be taken by Seller at the Closing pursuant to Section 8.1. hereof. Section 7.4.6. Absence of Proceedings. No action, suit or proceeding instituted by any governmental authority shall be pending and no statute, rule or regulation and no injunction, order, decree or judgment of any court or governmental authority of competent jurisdiction shall be in effect that could reasonably be expected to prohibit, restrain, enjoin or restrict the consummation of the transactions contemplated by this Agreement. Section 7.4.7. Maintenance of Material Qualifications. Prior to Closing, Seller shall have maintained all material qualifications of Seller that are required for it to carry on the Distribution Business and shall have maintained all material qualifications of APC that are required for it to carry on the Transmission Business. ARTICLE VIII Closing Section 8.1. Closing. The closing of the purchase and sale of the APC and the Distribution Assets (the "Closing") will take place at the offices of Vinson & Elkins L.L.P., 2300 First City Tower, 1001 Fannin, Houston, Texas on the first business day following five calendar days after all of the conditions specified in Section 7.3 and 7.4 have been satisfied, unless another time, date and place is agreed to in writing by the parties. The date of the Closing is referred to in this Agreement as the "Closing Date." At the Closing the following events shall occur, each event being deemed to have occurred simultaneously with the other events: (a) Seller will deliver to Purchaser the APC Shares and the APC Debt, by delivering the certificates representing the APC Shares and the instruments representing the APC Debt, in each case endorsed or accompanied by stock or bond powers, as applicable (in form reasonably satisfactory to counsel for Purchaser), in favor of Purchaser; and (b) Purchaser will pay the Purchase Price, as adjusted, by wire transferring such amount, in lawful money of the United States of America in immediately available funds, to such account as Seller shall have designated by notice to Purchaser; and (c) Seller and Purchaser shall execute and deliver a General Assignment and Bill of Sale ("General Assignment") substantially in the form of Exhibit A attached hereto, 25 26 it being understood and agreed that the schedules attached to the General Assignment as so executed and delivered shall be appropriately modified and amended to reflect dispositions and acquisitions of Distribution Assets after the date hereof; (d) To the extent consistent with the other provisions of this Agreement, Seller shall execute and deliver at Closing such other conveyances, certificates of title and bills of sale reasonably requested by Purchaser that are necessary in order to satisfy any applicable Legal Requirement relating to the transfer of the Distribution Assets to Purchaser or which are customarily given in Alaska to accomplish transfers of assets of the type involved; provided, however, that nothing in this clause (e) shall obligate Seller to execute or deliver any document that affects, in a manner adverse to Seller, Seller's liability to Purchaser as expressed herein and in the General Assignment. (e) Seller shall have delivered to Purchaser the original Letter of Credit. ARTICLE IX Termination Section 9.1. Termination. Subject to Section 9.2 hereof, this Agreement and the transactions contemplated hereby may be terminated and abandoned: (a) at any time prior to the Closing Date by mutual consent of Purchaser and Seller; or (b) by Purchaser or Seller at any time after December 31, 1999 (the "Termination Date") if the Closing shall not have occurred on or prior to such date; provided, however, that either party may extend the Termination Date for an additional three months from such originally scheduled Termination Date if all the conditions to consummation of the transactions contemplated hereby set forth in Article VII hereof have either been satisfied or are then capable of being satisfied by such date, other than the conditions set forth in Sections 7.3.3 and 7.4.3; and provided further, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before the Termination Date; (c) by Purchaser or Seller at any time within 30 days following the issuance of a ruling by the RCA to the effect that the transactions contemplated by this Agreement to occur at Closing will not be authorized to occur; or (d) at any time on or before the Closing Date, by Purchaser if Seller shall have failed to perform, satisfy and comply with, in any material respect, on the date specified, any material term, condition or provision herein required of Seller on or before the Closing Date; 26 27 (e) at any time on or before the Closing Date, by Seller if Purchaser shall have failed to perform, satisfy and comply with, in any material respect, on the date specified any material term, condition or provision herein required of Purchaser on or before the Closing Date; or (f) by Purchaser at any time on or before the Closing Date, upon the immediate payment by Purchaser to Seller of a termination fee of $10 million, upon receipt of which by Seller (i) such termination shall become effective and (ii) Seller shall promptly return the original Letter of Credit to Purchaser. The power of termination and abandonment of the transactions contemplated by this Agreement pursuant to this Section 9.1 will be effective only after written notice thereof, signed on behalf of the party for which it is given by a duly authorized officer, shall have been given to the other party hereto. Section 9.2 Limitation on Right to Terminate; Effect of Termination. (a) A party shall not be allowed to exercise any right of termination pursuant to Section 9.1 if the event giving rise to the termination right shall be due to the willful failure of such party seeking to terminate this Agreement to perform or observe in any material respect any of the covenants, or agreements hereof to be performed or observed by such party. (b) If this Agreement is terminated as permitted under Section 9.1 hereof, such termination shall be without liability of or to any party to this Agreement, or any shareholder, director, officer, employee, agent, servant, consultant or representative of such party; provided, however, that if such termination shall result from the willful failure of any party to fulfill a condition to the performance of any other party or to perform a covenant of this Agreement or from a material and willful breach by any party to this Agreement, then such party shall (subject to the limitation set forth in the last sentence of this Section 9.2(b)) be fully liable for any and all damages sustained or incurred by the other party. If either party to this Agreement resorts to legal proceedings to enforce this Agreement, the prevailing party in such proceedings shall be entitled to recover all costs incurred by such party including reasonable attorney's fees, in addition to any other relief to which such party may be entitled; provided, however, and notwithstanding anything to the contrary in this Agreement, in no event shall either party be entitled to receive any punitive, indirect or consequential damages. (c) Notwithstanding anything in Section 9.2(b) to the contrary, if Seller terminates this Agreement pursuant to Section 9.1(e) or as the result of any default or breach by Purchaser of Purchaser's obligations hereunder, then Seller shall be entitled to receive an amount equal to $10,000,000 as liquidated damages, and as Seller's sole remedy in connection therewith, free of any claims by Purchaser or any other Person with respect thereto (the parties hereby acknowledging that the extent of damages to Seller occasioned by such breach or default by Purchaser would be impossible or extremely difficult 27 28 to ascertain and that the amount of such liquidated damages is a fair and reasonable estimate of such damages under the circumstances). (d) Upon the election by Seller to terminate this Agreement pursuant to Section 9.1(e) hereof because of Purchaser being in default or breach of its obligations under this Agreement (collectively, the "Breach Event"), Seller shall give notice of the Breach Event and its decision to terminate this Agreement to Purchaser. If Purchaser fails to cure such Breach Event within one Business Day after such notice is received by Purchaser, then Seller shall have the right to give notice to Purchaser of the failure to cure the Breach Event and demand payment from Purchaser of the $10 million liquidated damages. If Purchaser fails to pay to Seller the $10 million liquidated damages, in cash or by wire transfer to an account designated by Seller within one Business Day after the notice demanding payment of the liquidated damages is received by Purchaser, then Seller shall have the right to draw on the Letter of Credit in the full amount of $10 million for the full payment of the $10 million liquidated damages. If it is finally determined (which determination is no longer subject to further review or appeal) in accordance with the dispute resolution mechanisms permitted by this Agreement that Seller was not entitled to receive liquidated damages, then Seller shall, within 10 business days after such final determination, remit such liquidated damages, together with interest at the annual rate equal to the prime rate of Bank of America plus 2% from the date of payment to Seller until the date of payment to Purchaser. ARTICLE X Taxes Section 10.1 Seller Tax Representations and Warranties. (a) Seller represents and warrants with respect to APC and the Distribution Division that, except as set forth or disclosed in Section 10.1(a) of Seller's Disclosure Schedule (i) all Tax Returns required to be filed have been filed or requests for extensions have been timely filed, (ii) all such Tax Returns are true and correct in all material respects, and (iii) all Taxes shown to be due on such Tax Returns have been paid in full. Except as set forth in Section 10.1(a) of Seller's Disclosure Schedule, no notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of APC or the Distribution Division which have not been fully paid or finally settled, and any such deficiency shown in Section 10.1(a) of Seller's Disclosure Schedule is being contested in good faith through appropriate proceedings. Except as set in Section 10.1(a) of Seller's Disclosure Schedule, there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes of APC or the Distribution Division for any period of time. Except as set forth in Section 10.1(a) of Seller's Disclosure Schedule, no audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Returns of APC or the Distribution Division, and neither the 28 29 Seller nor APC has any knowledge of any threatened action, audit, or administrative or court proceeding with respect to any Taxes or Tax Returns of APC or the Distribution Division. (b) Seller and APC are and will be members of an "affiliated group" within the meaning of Section 1504 of the Code as of the Closing Date. (c) Except as set forth in Section 10.1(c) of Seller's Disclosure Schedule, neither Seller nor APC is a party to any allocation or sharing agreement regarding Taxes with any person. (d) Seller is not a resident alien individual or foreign corporation within the meaning of Section 897 of the Code and Purchaser is not required to withhold Tax on the Purchase Price by reason of Section 1445 of the Code or any other provision. (e) Except as set forth in Section 10.1(e) of Seller's Disclosure Schedule, there are no powers of attorney in effect relating to Taxes of Seller or APC. (f) Except as set forth in Section 10.1(f) of Seller's Disclosure Schedule, there is no dispute or claim as to the Tax liability of any other person as to which Seller or APC has an indemnification obligation. 10.2 Tax Covenants and Indemnification (a) Code Section 338(h)(10) Election; Purchase Price Allocation. Upon consummation of the transactions contemplated by this Agreement, Seller and Purchaser shall join in making a timely election under Section 338(h)(10) of the Code (a "Section 338(h)(10) Election") with respect to the purchase of the APC Shares and shall make similar elections under state and local law to the fullest extent possible. Purchaser will be responsible for preparing and filing all documents and materials necessary in connection with making the Section 338(h)(10) Election and any similar elections under state and local law. Not later than 120 days after the Closing Date, Purchaser shall prepare and deliver to Seller a proposed allocation of the Purchase Price for purposes of the Section 338(h)(10) Election. Purchaser and Seller shall timely complete and file Form 8023 and any similar form under applicable state law. If Purchaser and Seller cannot agree on such allocation, Purchaser and Seller will select a nationally recognized accounting firm or other recognized expert to appraise the assets of APC. The cost of such appraisal will be divided between Purchaser and Seller equally. Purchaser and Seller agree not to take any position inconsistent with any such allocation for Tax reporting purposes. Purchaser and Seller will file all Tax Returns in a manner consistent with the Section 338(h)(10) Election and the valuation of APC's assets determined as provided above. (b) Transfer Taxes. Seller shall be liable for all sales, use, documentary, recording, stamp, transfer or similar Taxes, assessments or fees arising from the transaction contemplated by this Agreement; provided, however, that if and to the extent that the 29 30 aggregate amount thereof exceed $150,000, then Purchaser shall pay 50% of the amount of such excess, up to a maximum payment with respect thereto by Purchaser of $50,000. (c) Information. Seller and Purchaser will make available to each other, and to any taxing authority, all information, records, or documents relating to the liability or potential liability for Pre-Closing Taxes that may be reasonably requested by a party and will preserve such information, records or documents until the expiration of any applicable statute of limitations or extensions thereof, provided Seller and Purchaser shall reserve the confidentiality of any such information, records or documents. (d) Seller Indemnification. Seller shall be responsible for and shall indemnify and hold harmless Purchaser, its subsidiaries and APC from and against any and all Tax claims resulting from, arising out of or relating to: (i) any and all Taxes imposed on or incurred by Purchaser or APC as a result of a breach of the representations and warranties made in Section 10.1 of this Article; (ii) any and all Pre-Closing Taxes imposed on, incurred by or attributed to APC or the Distribution Division, including any federal, state or local Taxes incurred as a result of making the Section 338(h)(10) Election, except to the extent any such Taxes are taken into account in determining the adjustment to the Purchase Price pursuant to Section 2.4, and (iii) any liability resulting from, arising out of or relating to, in the nature of, or caused by any liability of APC for Taxes of any person other than APC under Treas. Reg. ss. 1.1502-6 (or any similar provision of state, local or foreign law). (e) Purchaser Indemnification. Purchaser shall be responsible for and shall indemnify and hold harmless Seller from and against any and all Tax claims resulting from, arising out of or relating to any and all Post-Closing Taxes imposed on or incurred by APC or the Distribution Division. (f) Procedures for Indemnification. The procedures for indemnification pursuant to this Article 10 shall be conducted in a manner consistent with Section 12.2 hereof. (g) Proration of Tax Items. The Parties agree that for purposes of allocating tax items of APC and the Distribution Division between Seller and Purchaser for the Tax year that includes the Closing Date, such tax items for such Tax year shall be apportioned between Seller and Purchaser based upon the actual operations of APC and the Distribution Division during the portion of such period ending on the Closing Date and the portion of such period beginning on the day following the Closing Date, and each portion of such period shall be deemed to be a taxable period (whether or not it is in fact a taxable period); provided, that ad valorem Taxes shall be prorated on a daily basis. (h) Filing Responsibility. Purchaser and APC shall be responsible for filing all Tax Returns and paying all Taxes due with respect to periods ending after the Closing Date. To the extent the law permits or requires a short period return for the period or portion thereof ending on or before the Closing Date, Seller shall be responsible for filing such 30 31 returns and paying all Taxes due with respect to such period. Purchaser will take such steps as are reasonably requested by Seller so that Seller will have the authority necessary for Seller to be able to execute and timely file the Tax Returns required to be filed by Seller. (i) Tax Refunds and Tax Benefits. Any Tax refunds that are received by Purchaser or APC, and any amounts credited against Tax to which Purchaser or APC become entitled, that relate to Tax periods or portions thereof ending on or before the Closing Date shall be for the account of Seller, and Purchaser shall pay over to Seller any such refund or the amount of any such credit within fifteen (15) days after receipt or entitlement thereto. In addition, to the extent that a claim for refund or a proceeding results in a payment or credit against any Tax by a taxing authority to the Purchaser or APC of any amount accrued as of the Closing Date, Purchaser shall pay such amount to Seller within fifteen (15) days after receipt or entitlement thereto. (j) Control of Tax Audits. Seller shall have the right, at its own expense, to control any audit or examination by any taxing authority ("Tax Audit"), initiate any claim for refund, contest, resolve and defend against any assessment, notice of deficiency, or other adjustment or proposed adjustment relating to any and all Taxes for any taxable period ending on or before the Closing Date and relating to APC or the Distribution Division. With respect to the items described in the preceding sentence, Seller shall consult with Purchaser with respect to the resolution of any such issue that would adversely affect Purchaser, and with respect to Taxes other than income Taxes will not settle any such issue, or file any amended return relating to such issue, without the consent of Purchaser, which consent shall not be unreasonably withheld. Seller will not enter into any binding agreement with any Tax Authority with respect to Taxes (other than income Taxes) for Tax periods ending or beginning after the Closing Date. Purchaser shall have the right, at its own expense, to control any other Tax Audit, initiate any other claim for refund, and contest, resolve and defend against any other assessment, notice of deficiency, or other adjustment or proposed adjustment relating to any Taxes for any taxable period beginning before the Closing Date and ending after the Closing Date, provided, that Purchaser shall consult with Seller with respect to the resolution of any issue that would adversely affect Seller, and, with respect to Taxes, other than income Taxes, will not settle any such issue, or file any amended return relating to any such issue, without the consent of Seller, which consent shall not unreasonably be withheld. Where consent to a settlement is withheld by the other party pursuant to this Section, such other party may continue or initiate any further proceedings at its own expense, provided that the liability of the first party, after giving effect to this Agreement, shall not exceed the liability that would have resulted from the settlement or amended return. (k) Cooperation on Tax Matters. (i) Purchaser, APC and Seller shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Agreement and any audit, litigation or other proceeding with respect 31 32 to Taxes. Such cooperation shall include the retention and (upon the other party's request) the preservation of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Seller agrees (A) to retain all books and records in its possession with respect to Tax matters pertinent to APC and the Distribution Assets relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Purchaser or Seller, any extensions thereof) of the respective taxable periods, and to abide by all record retention requirements or agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, Seller shall allow Purchaser to take possession of such books and records. (ii) Purchaser and Seller further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Regulations promulgated thereunder with respect to the transactions contemplated by this Agreement. (l) Survival of Obligations. The obligations of the parties set forth in this Article X shall be unconditional and absolute and shall remain in effect until the expiration of the applicable statute(s) of limitations. ARTICLE XI Definitions As used herein, the following terms have the following meanings: AAA: As defined in Section 13.11(b)(ii). Act: As defined in Section 4.10. Agreement: This Purchase and Sale Agreement, dated as of July 15, 1999, between Seller and Purchaser, as the same may be amended or modified in writing by the parties from time to time. APC: Alaska Pipeline Company, an Alaska corporation. APC Assets: All assets, properties and rights of APC. APC Debt: The (i) debt of APC owned by Seller and described in the Seller's Disclosure Schedule and (ii) indebtedness under the Intercompany Line of Credit. APC Debt Purchase Price: As defined in Section 2.3. 32 33 APC Shares: All the outstanding shares of capital stock of APC. Assets Purchase Price: As defined in Section 2.2. Barnes: As defined in 5.3(b)(iv). Base Financial Statements: As defined in Section 3.8. Business Day: Any day except Saturday, Sunday and any other day on which banking institutions located in the City of New York, New York are required or authorized to close. Board of Directors: Either of the respective boards of directors of Seller and Purchaser or any duly authorized committee of that board. Claim Notice: A written notice of claim given by a party seeking indemnification pursuant to the terms of this Agreement that specifies in reasonable detail the specific nature of the Losses and the estimated amount of such Losses. Closing: As defined in Section 8.1. Closing Date: As defined in Section 8.1. Code: The Internal Revenue Code of 1986, as amended. Contracts: In the case of Seller, all agreements, contracts, notes and other legally binding commitments to which Seller is a party and which relate to the Distribution Division and, in the case of APC, all agreements, contracts, notes and other legally binding commitments to which APC is a party. Distribution Assets: The "Assets," as defined in the General Assignment. Distribution Business: The business carried on and conducted by the Distribution Division. Distribution Division: Seller's Alaskan natural gas distribution division generally known as "ENSTAR Natural Gas Company." Environmental Laws: Any and all federal, state and local laws, statutes, regulations, rules, orders, ordinances or permits of any governmental authority pertaining to health, the environment, wildlife or natural resources in effect in any and all jurisdictions in which the APC Assets and Distribution Assets are located, including, without limitation, the Clean Air Act, as amended, and the Federal Water Pollution Control Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Safe Drinking Water Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Resource Conservation and Recovery Act, as amended, The Hazardous and 33 34 Solid Waste Amendments Act of 1984, as amended, the Toxic Substances Control Act, as amended, the Occupational Safety and Health Act, as amended, the Hazardous Materials Transportation Act, as amended, the Natural Gas Pipeline Safety Act of 1968, as amended and the Hazardous Liquid Pipeline Safety Act of 1979, as amended. Employees: As defined in Section 3.17(d)(i). ERISA: The Employee Retirement Income Security Act of 1974, as amended from time to time. Existing Loan Documents: The mortgages, indentures, security agreements and other instruments listed in Seller's Disclosure Schedule, together with any mortgages, indentures, security agreements or other instruments executed and delivered by Seller or APC after the date hereof in connection with the renewal, extension, rearrangement or refunding of the indebtedness evidenced or secured by any of such listed mortgages, indentures, security agreements or other instruments to the extent accomplished in compliance with this Agreement. Final Order: An action by the relevant regulatory authority that has not been reversed, stayed, enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by law before the transactions contemplated hereby may be consummated has expired, and as to which all conditions to the consummation of such transactions prescribed by law, regulation or order have been satisfied. First National Credit Agreement: As defined in Section 3.9(d). General Assignment: As defined in Section 8.1(c). Hart-Scott-Rodino Act: As defined in Section 5.1.3. Indemnified Party: As defined in Section 12.2(e). Indemnifying Party: As defined in Section 12.2(e). Intercompany Line of Credit Agreement: The Revolving Credit Agreement dated as of July 1, 1998, between the Distribution Division and Seller. Interim Period: As defined in Section 5.1.1. knowledge: When used in the phrases "to Seller's knowledge," "to the knowledge of Seller" or similar phases with respect to Seller, means, and shall be limited to, the actual knowledge of the executive officers of Seller or APC or the senior employee of Seller or APC who are responsible for the area of operation of the Natural Gas Business to which such person's knowledge relates. 34 35 Legal Requirements: Any and all applicable (i) federal, state, local and foreign laws (statutory and administrative), ordinances and regulations, (ii) judgments, orders, writs, injunctions, decrees and (iii) contracts with any federal, state or foreign court, arbitrator or administrative or governmental authority, bureau or agency relating to compliance with matters described in (i) or (ii) above. Losses: As defined in Section 12.2(a). Material Adverse Effect: With respect to any Person, an occurrence or condition that has a material adverse effect on the condition (financial or otherwise) of operations, business, property or prospects of such Person, taken as a whole, or materially hinders or impedes the consummation of the transactions contemplated by this Agreement; provided, however, that an occurrence or condition shall not constitute a Material Adverse Effect to the extent that the Distribution Division or APC realizes the benefit of insurance maintained by or for the benefit of the Natural Gas Business or is recoverable by the Natural Gas Business through operation of current tariffed rates; provided further that any action or threatened action from the RCA, either in connection with its consideration of the approval of the transactions contemplated by this Agreement or otherwise, shall not form the basis, directly or indirectly, for a Material Adverse Effect with respect to the Distribution Division, APC or the Natural Gas Business. Material Contract: Any Contract which (a) calls for payments to or from Seller or APC, on the one hand, and any third party, on the other hand, of an amount in excess of $1,250,000 for any 12-month period commencing on or after the date hereof and (b) is not terminable solely at the option of Seller or APC, as the case may be, without penalty on no more than 90 days notice. Material Employment Contract: Any employment, management, consulting or similar agreements or any labor contracts or collective bargaining agreement that (a) calls for payments from Seller or APC of an amount in excess of $50,000 for any 12-month period commencing on or after the date hereof and (b) is not terminable solely at the option of Seller or APC, as the case may be, without penalty on no more than 90 days notice. Material Liability: In the case of any Person, any material liability of such Person; provided however, such term shall not include any material liability the cost or expense associated with which insurance proceeds have been recovered by such Person or is recoverable by such Person through operation of current tariffed rates. Material Permits: All Permits relating to the Natural Gas Business other than those the absence of which would not have a Material Adverse Effect. MSP: As defined in Section 5.3(b)(i). Natural Gas Business: The Distribution Business and the Transmission Business, taken together. 35 36 Natural Gas Business Financial Statements: As defined in Section 3.8. Notice Period: As defined in Section 12.2(e) Operating Plan: As defined in Section 3.17(d)(i). Operative Documents: This Agreement, the General Assignment, the Tax Agreement and all other documents executed and delivered by Seller or Purchaser at Closing. Pension Plans: As defined in Section 3.17(d). Permits: Any and all permits, authorizations, certificates, approvals, registrations, legal status, variances, franchises, orders or other approvals and licenses (i) under any Legal Requirement or (ii) granted by any federal, state, local or foreign administrative authority, bureau or agency. Permitted Encumbrances: As applied to Seller or APC: (a) liens for taxes, assessments and governmental charges not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business and for which adequate reserves have been established; (b) carriers', warehousemen's, materialmen's, mechanics', repairmen's, employees' or other similar liens or charges for liquidated amounts arising in the ordinary course of business (i) if securing amounts that have not yet become due and payable or payment is being withheld as provided by law or (ii) if their validity is being contested in good faith in the ordinary course of business by appropriate action and for which adequate reserves have been established; (d) liens incurred or deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance and other social security, or to secure the performance of leases, tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money or the obtaining of advances or credit); (e) any judgment lien relating to a judgment for not more than $50,000, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 30 days after the expiration of any such stay; (f) leases granted in the ordinary course of business or leases to which any property acquired in connection with the Natural Gas Business in the ordinary course of business is subject; 36 37 (g) any encumbrances (other than to secure the payment of money), easements, rights-of-way, permits, reservations, leases, rights in respect of gravels, minerals, oil, gases or water or in respect of grazing, logging, mining, canals, ditches, reservoirs or the like, conditions, covenants, and restrictions, provided that such encumbrances, easements, rights-of-way, permits, reservations, leases, rights, conditions, covenants, and restrictions are such that they will not either individually or in the aggregate, if exercised or availed of, interfere materially with the use or operation of the property of Seller or APC affected thereby for the purpose for which such property is currently used; (h) all Legal Requirements and rights reserved to or vested in any municipality or public authority to control, regulate or use any property of Seller or APC; (i) other than any consents of any governmental authority, any required third party consents to assignment and similar agreements and obligations with respect to which prior to Closing (A) waivers or consents have been obtained from the appropriate Person, (B) the applicable period of time for asserting such rights has expired without any exercise of such rights or (C) arrangements reasonably satisfactory to Purchaser have been made by the parties to allow Purchaser to receive substantially the same economic benefits as if all such waivers and consents had been obtained; (j) all rights to consent by, required notices to, filings with, or other actions by any governmental authority in connection with the transactions contemplated hereby; (k) reservations and other matters relating to titles to leases and leasehold interests in oil and gas properties and the lands covered thereby, if such reservations and other matters do not, in the aggregate, do not materially impair the use of such leases or leasehold interests for the purposes for which they are held or the value of the interest therein; (l) any liens, mortgages or encumbrances given by the Distribution Division and/or APC for the benefit of the other securing indebtedness owing from one of the foregoing to the other; and (m) any other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects or irregularities of any kind whatsoever (but not including liens to securing indebtedness for borrowed money) affecting the APC Assets or the Distribution Assets that individually or in the aggregate do not, in the aggregate, materially impair the use of such assets for the purposes for which they are held or the value of the interest therein. Person: An individual, corporation, limited liability company, partnership, joint venture, bank, trust, unincorporated organization and/or a government or any department or agency thereof. Such term shall also include the Distribution Division. PBGC: As defined in Section 3.17(d)(vii). 37 38 Plans: As defined in Section 3.17(d)(i). Post-Closing Taxes: Any taxable period beginning after the Closing Date, and, for any taxable period beginning before the Closing Date and ending after the Closing Date, Taxes relating to the portion of such taxable period after but not including the Closing Date. Pre-Closing Taxes: Any taxable period ending on or prior to the Closing Date, and, for any taxable period beginning before the Closing Date and ending after the Closing Date, Taxes relating to the portion of such taxable period up to and including the Closing Date. Profit Sharing Plans: As defined in Section 3.17(d)(i). Purchase Price: The Stock Purchase Price, the Assets Purchase Price and the APC Debt Purchase Price, taken together. Purchaser: SEMCO ENERGY, Inc., a Michigan corporation. Purchaser Indemnitees: Purchaser and its officers, directors, employees, agents, representatives, affiliates, subsidiaries (including, from and after the Closing, APC), successors and assigns. Purchaser's Disclosure Schedule: The disclosure schedule of Purchaser attached hereto; and the phrase disclosed in Purchaser's Disclosure Schedule shall mean as set forth or referred to in Purchaser's Disclosure Schedule. Purchaser's Required Approvals: As defined in Section 4.7. Purchaser's Required Governmental Consents: As defined in Section 4.4. RCA: The Regulatory Commission of Alaska, together with any predecessor commission or agency (including, without limitation, the Alaska Public Utilities Commission) or any successor commission or agency. Salaried Plan: As defined in Section 3.17(d)(i). Section 338(h)(10) Election: As defined in Section 10.2(a). Seller: Ocean Energy, Inc., a Texas corporation. Seller's Disclosure Schedule: The disclosure schedule of Seller attached hereto; and the phrase "disclosed in Seller's Disclosure Schedule" shall mean as set forth or referred to in Seller's Disclosure Schedule. Seller's Required Approvals: As defined in Section 3.7. 38 39 Seller's Required Governmental Consents: As defined in Section 3.4. Seller Indemnitees: Seller and its officers, directors, employees, agents, representatives, affiliates, subsidiaries, successors and assigns. SERP: As defined in Section 3.17(d)(i). Stock Purchase Price: As defined in Section 2.1. Tax Agreement: As defined in Section 8.1(e). Taxes means all taxes, charges, fees, levies, penalties or other assessments imposed by any federal, state or local foreign taxing authority, including but not limited to, income, excise, real or personal property, sales, transfer, franchise, payroll, withholding, social security, gross receipts, license, stamp, occupation, employment or other taxes, including any interest, penalties or additions attributable thereto. Tax Return: Any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any taxing authority with respect to Taxes including amendments thereto. Termination Date: As defined in Section 9.1(b). Thrift Plan: As defined in Section 3.16(d)(i). Transmission Business: The business carried on and conducted by APC. ARTICLE XII Assumption and Indemnification 12.1 Assumption. Subject to Section 5.1.4 and Seller's indemnification obligation set forth in Section 12.2(b), at the Closing, Purchaser shall assume all liabilities, duties and obligations of every kind whatsoever of Seller relative to the ownership or operation of the Natural Gas Business, including, without limitation, the obligation to pay all trade and other accounts payable relative to the Natural Gas Business. 39 40 12.2 Indemnification . (a) Subject to Section 12.2(c), and except for those matters set forth in Article X which shall be governed by the terms of Article X, Purchaser shall indemnify, defend and hold harmless the Seller Indemnitees from and against any and all claims, liabilities, losses, causes of actions, costs and expenses (including, without limitation, involving theories of negligence or strict liability and including court costs and attorneys' fees) ("Losses") asserted against, resulting from, imposed upon or incurred by any of the Seller Indemnitees as a result of, or arising out of, the breach of any of the representations, warranties, covenants or agreements of Purchaser contained in this Agreement, or as a result of, or arising out of, the ownership or operation of the Natural Gas Business, the Distribution Assets or the APC Assets, regardless in each case whether known or unknown, or whether attributable to periods of time before or after the Closing Date; provided, however, that Purchaser shall have no obligation to indemnify any of the Seller Indemnitees with respect to any matter to the extent Seller is indemnifying Purchaser for such matter pursuant to Section 12.2(b). (b) Subject to Section 12.2(d), and except for those matters set forth in Article X which shall be governed by the terms of Article X, Seller shall indemnify, defend and hold harmless the Purchaser Indemnitees from and against all Losses asserted against, resulting from, imposed upon or incurred by any of the Purchaser Indemnitees as a result of, or arising out of (i) the breach of any of the representations, warranties, covenants or agreements of Seller contained in this Agreement, (ii) the litigation described under Item Nos. 1 and 2 on Section 3.14 of Seller's Disclosure Schedule or (iii) any oral or written representations or other actions by Seller, APC or the Distribution Division prior to the Closing Date to any Employee not subject to collective bargaining agreements, if and to the extent such representations or actions are a significant cause of such Employee's employment status being other than at-will; provided, however, that with respect to the matters set forth in clause (iii) above, the amount of Losses attributable to an Employee's not having at-will status shall only be the amount by which Purchaser suffers Losses in excess of the amount, if any, that Purchaser would otherwise be obligated to pay such Employee upon termination under the terms of a severance agreement referred to in Section 5.3(b)(iv) hereof or the Resource Group Plan described in Section 5.3(b)(iv) hereof. Notwithstanding any provision in this Agreement to the contrary, the indemnification for Losses described in clauses (ii) and (iii) shall not be subject to the threshold set forth in Section 12.2(d)(iv) hereof. Notwithstanding any provision in this Agreement to the contrary, Seller's obligation to indemnify Purchaser with respect to any litigation proceeding described in clause (ii) above shall terminate upon a final, nonappealable judgment is obtained with respect to such proceeding or such proceeding is dismissed with prejudice, whichever is earlier. Notwithstanding any provision in this Agreement to the contrary, Seller's obligation to indemnify Purchaser with respect to the matters set forth in clause (iii) above shall terminate on the third anniversary of the Closing Date. 40 41 (c) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO EVENT SHALL PURCHASER BE LIABLE TO SELLER INDEMNITEES FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES; provided, however, that if a Seller Indemnitee is held liable to a third party for any of such damages and Purchaser is obligated to indemnify such Seller Indemnitee for the matter that gave rise to such damages, then Purchaser shall be liable for, and obligated to reimburse such Seller Indemnitee for, such damages. (d) Notwithstanding anything to the contrary in this Agreement, but subject to the last two sentences of Section 12.2(b), the liability of Seller under this Agreement and any documents delivered in connection herewith or contemplated hereby shall be limited as follows: (i) IN NO EVENT SHALL SELLER BE LIABLE TO PURCHASER INDEMNITEES FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES; provided, however, that if a Purchaser Indemnitee is held liable to a third party for any of such damages and Seller is obligated to indemnify such Purchaser Indemnitee for the matter that gave rise to such damages, then Seller shall be liable for, and obligated to reimburse such Purchaser Indemnitee for, such damages. (ii) In no event shall any amounts be recovered from Seller under Section 12.2(b) or otherwise for any matter for which a Claim Notice is not delivered to Seller; (A) in the case of indemnity for breach of a representation or warranty, prior to the close of business on the date of termination of such representation or warranty pursuant to Section 12.2(d)(iii), (B) in the case of any covenant or agreement of Seller, other than those covenants or agreements set forth in Section 5.2.2 or 5.3(b)(i), prior to the close of business on the 18-month anniversary of the Closing Date, and (C) in the case of the covenants or agreements of Seller set forth in Sections 5.2.2 or Section 5.3(b)(i), prior to the end of any applicable statute of limitations; provided, however, that such indemnities shall survive with respect only to the specific matter that is the subject of any Claim Notice delivered in good faith in compliance with the requirements of this Section 12.2(d)(ii) until the earlier to occur of (A) the date on which a final nonappealable resolution of the matter described in such Claim Notice has been reached or (B) the date on which the matter described in such Claim Notice has otherwise reached final resolution. (iii) The representations and warranties of Seller (i) set forth in Section 3.10 shall survive the Closing for a period of 180 days, and such representations and warranties of Seller shall terminate at 5:00 p.m., local time in Alaska, on the 180th day after the Closing Date, and (ii) the representations and warranties of Seller set forth in Section 3.17 shall survive the Closing for the full period of any applicable statute of limitation. Except as set forth in the preceding 41 42 sentence, the representations, warranties, covenants and agreements of Seller set forth in this Agreement shall survive the Closing for a period of 18 months, and all representations, warranties, covenants and agreements of Seller under this Agreement shall terminate at 5:00 p.m., local time in Alaska, on the 18 month anniversary of the Closing Date; provided, however, that any such representation, warranty, covenant or agreement that is the subject of a proper Claim Notice delivered in good faith shall survive with respect only to the specific matter described in such Claim Notice until the earlier to occur of (A) the date on which a final nonappealable resolution of the matter described in such Claim Notice has been reached or (B) the date on which the matter described in such Claim Notice has otherwise reached final resolution. (iv) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller indemnify the Purchaser Indemnitees, or be otherwise liable in any way whatsoever to the Purchaser Indemnitees, for any Losses until the Purchaser Indemnitees have suffered Losses in the aggregate in excess of a deductible in an amount equal to $3,000,000, after which point Seller will be obligated only to indemnify the Purchaser Indemnitees from and against further Losses in excess of such deductible. (v) Notwithstanding anything to the contrary herein, in no event shall Seller indemnify the Purchaser Indemnitees, or be otherwise liable in any way whatsoever to the Purchaser Indemnitees, for any Losses in excess of an amount equal to the Purchase Price (before giving effect to any adjustments provided for pursuant to this Agreement). (vi) Seller may (but will not be required to), from time to time prior to or at the Closing, by notice in accordance with this Agreement, supplement or amend the Seller's Disclosure Schedule, including without limitation one or more supplements or amendments to correct any matter which would constitute a breach of any representation, warranty or covenant herein contained; provided, however, that subject to the following sentence, no such supplement or amendment will affect the rights or obligations of the parties to this Agreement (including without limitation the right to assert a breach of a representation or warranty as a failed closing condition) until after the Closing Date. Notwithstanding any other provision hereof, if the Closing occurs, any such supplement or amendment of any Schedule will be effective to cure and correct for indemnification purposes any breach of any representation, warranty or covenant which would have existed by reason of Seller not having made such supplement or amendment. (vii) Seller shall have no liability for any claim (A) to the extent that such claim is covered by insurance maintained by or for the benefit of Seller (including any such insurance coverage applicable to the Natural Gas Business the benefit of which the Distribution Division or APC will realize) and Purchaser or APC actually receive the proceeds of such insurance or (B) that, in the case of a claim against or 42 43 affecting the Distribution Division or APC, is recoverable by the Distribution Division or APC (consistent with the prior practices of the RCA) through the operation of current tariffed rates. (e) All claims for indemnification under Sections 12.2(a) or 12.2(b) shall be asserted and resolved pursuant to this Section 12.2(e). Any Person claiming indemnification hereunder is hereinafter referred to as the "Indemnified Party" and any Person against whom such claims are asserted hereunder is hereinafter referred to as the "Indemnifying Party." In the event that any Losses are asserted against or sought to be collected from an Indemnified Party by a third party, said Indemnified Party shall with reasonable promptness provide to the Indemnifying Party a Claim Notice. The Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to any such Losses if the Indemnified Party fails to notify the Indemnifying Party thereof in accordance with the provisions of this Agreement in reasonably sufficient time so that the Indemnifying Party's ability to defend against the Losses is not prejudiced. The Indemnifying Party shall have 30 days from the personal delivery or receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not it disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such Losses and/or (ii) whether or not it desires, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against such Losses; provided, however, that any Indemnified Party is hereby authorized prior to and during the Notice Period to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party (and of which it shall have given notice and opportunity to comment to the Indemnifying Party) and not prejudicial to the Indemnifying Party. In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such Losses, the Indemnifying Party shall have the right to defend all appropriate proceedings, and with counsel of its own choosing, which proceedings shall be promptly settled or prosecuted by them to a final conclusion. If the Indemnified Party desires to participate in, but not control, any such defense or settlement it may do so at its sole cost and expense. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any Losses that the Indemnifying Party elects to contest or, if appropriate and related to the claim in question, in making any counterclaim against the Person asserting the third party Losses, or any cross-complaint against any Person. No claim may be settled or otherwise compromised without the prior written consent of the Indemnifying Party. (f) The rights, remedies and obligations of the Purchaser Indemnitees and the Seller Indemnitees set forth in this Section 12.2 and Article X will be the exclusive rights, remedies and obligations of such Persons after the Closing with respect to this Agreement, the events giving rise to this Agreement and the transactions provided for herein or contemplated hereby or thereby. (g) WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN 43 44 INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 12.3 Independent Investigation. Purchaser represents and acknowledges that it is knowledgeable of with respect to the transmission and distribution of natural gas and of the usual and customary practices of natural gas local distribution companies such as the Natural Gas Business and that it has had access to the Natural Gas Business, the officers and employees of Seller, the Distribution Division and APC, and the books, records and files of Seller, the Distribution Division and APC, relating to the Natural Gas Business and in making the decision to enter into this Agreement and consummate the transactions contemplated hereby, Purchaser has relied solely on the basis of its own independent due diligence investigation of the Natural Gas Business and upon the representations and warranties made in Article III. Accordingly, Purchaser acknowledges that Seller has not made, and Seller hereby expressly disclaims and negates any representation or warranty (other than those express representations and warranties made in Article III), express, implied, at common law, by statute or otherwise, relating to the Natural Gas Business. 12.4 Disclaimer Regarding Natural Gas Business. Except as otherwise expressly provided in Article III above, Purchaser ACKNOWLEDGES THAT SELLER HAS NOT MADE, AND SELLER HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE CONDITION OF ANY REAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL PROPERTY CONSTITUTING PART OF THE NATURAL GAS BUSINESS (INCLUDING, WITHOUT LIMITATION, (A) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (d) ANY RIGHTS OF PURCHASER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE, (e) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, (f) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, (g) ANY AND ALL IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAW NOW OR HEREAFTER IN EFFECT, AND (h) ANY IMPLIED OR EXPRESS WARRANTY REGARDING ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT OR PROTECTION OF THE ENVIRONMENT OR HEALTH) IT BEING THE EXPRESS INTENTION OF PURCHASER AND SELLER THAT (EXCEPT TO THE EXTENT EXPRESSLY PROVIDED IN ARTICLE 3) THE DISTRIBUTION ASSETS AND THE APC ASSETS SHALL BE CONVEYED (DIRECTLY OR INDIRECTLY, AS APPLICABLE) TO PURCHASER "AS IS," "WHERE IS" AND IN THEIR PRESENT CONDITION AND STATE OF 44 45 REPAIR AND PURCHASER REPRESENTS TO SELLER THAT PURCHASER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS WITH RESPECT TO THE DISTRIBUTION ASSETS AND THE APC ASSETS AS PURCHASER DEEMS APPROPRIATE AND PURCHASER WILL ACCEPT THE DISTRIBUTION ASSETS AND THE APC ASSETS "AS IS," "WHERE IS" AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR. ARTICLE XIII Miscellaneous Section 13.1. Modification; Waiver. This Agreement may be modified, amended or supplemented in any manner and at any time only by a written instrument executed by purchaser and Seller. Section 13.2. Entire Agreement. This Agreement supersedes any and all other agreements, oral or written, among the parties hereto in respect of the subject matter of this Agreement. Section 13.3. Expenses. Whether or not the transactions contemplated herein shall be consummated, each party shall (except as otherwise specifically provided herein) pay its own expenses incident to the preparation and performance of this Agreement, including broker's fees and commissions; and each party shall indemnify and hold harmless the other party with respect to brokerage fees and commissions incurred by the indemnifying party in connection with the transactions contemplated by this Agreement. Section 13.4 Further Actions. Each party shall execute and deliver such other certificates, agreements, conveyances, certificates of title, and other documents and take such other actions as may reasonably be requested by the other parties in order to consummate or implement the transactions contemplated by this Agreement. Section 13.5. Notices. Any and all notices or other communications required or permitted under this Agreement shall be given in writing and delivered in person or sent by United States certified or registered mail, postage prepaid, return receipt requested, or by overnight express mail, or by telex, facsimile or telecopy to the address of such party set forth below. Any such notice shall be effective upon receipt or three days after placed in the mail, whichever is earlier. If to Purchaser: SEMCO ENERGY, Inc. 405 Water Street, P.O. Box 5026 Port Huron, Michigan 48061-5026 Attention: Sebastian Coppola Telecopy Number: (810) 989-4099 with copies to: 45 46 Arnold R. Madigan 303 E. 17th Avenue, Suite 780 Denver, Colorado 80203-1260 Telecopy Number: (303) 894-0756 and LeBouef, Lamb, Greene & MacRae, LLP 633 17th Street, Suite 2000 Denver, Colorado 80202 Attention: Thomas J. Moore Telecopy Number: (303) 297-0422 If to Seller: Ocean Energy, Inc. 1001 Fannin, Suite 1600 Houston, Texas 77002 Attention: Robert K. Reeves Telecopy Number: (713) 265-8840 with a copy to: Vinson & Elkins L.L.P. 2300 First City Tower 1001 Fannin Houston, Texas 77002 Attention: J. Mark Metts Telecopy Number: (713) 615-5605 Any party may, by notice so delivered, change its address for notice purposes hereunder. Section 13.6. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, by operation of law or otherwise, by any party hereto without the prior written consent of the other party; provided, however, in the event of any such assignment by a party by operation of law without the consent of the other party as required above, such other party may consent to such assignment after it has occurred and, in such event, this Agreement and all the provisions hereof shall be binding upon the Person receiving such assignment by operation of law. Section 13.7. No Third Party Beneficiaries. Nothing in this Agreement shall provide any benefit to any third party or entitle any third party to any claim, cause of action, remedy or right of any kind, it being the intent of the parties that this Agreement shall not be construed as a third party 46 47 beneficiary contract; provided, however, that the indemnification provisions in Section 12.2 shall inure to the benefit of the Purchaser Indemnitees and the Seller Indemnitees as provided therein. Section 13.8. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to either Party. Upon such determination that any term or other provisions is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 13.9. Counterparts. This Agreement may be executed in multiple counterparts, all of which shall constitute one and the same instrument. Section 13.10. Construction. Any section headings in this Agreement are for convenience of reference only, and shall be given no effect in the construction or interpretation of this Agreement or any provisions thereof. No provision of this Agreement will be interpreted in favor of, or against, any party by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof. Section 13.11. Applicable Law; Alternative Dispute Resolution. (a) This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Texas without giving effect to any choice or conflict of law provision or rule (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas. (b) Any dispute arising under this Agreement or otherwise in connection with or relating to the transactions contemplated hereby shall be resolved pursuant to this Section 13.11(b): (i) Any party has the right to request the other to meet to discuss a dispute. The party requesting the meeting will give at least 10 business days notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the party with complete power to resolve the dispute to attend the meeting. Within three business days after receipt to such request, the party receiving the request will provide a responsive written statement and will designate an officer of the party who will attend the meeting with complete power to resolve the dispute. (ii) If the meeting fails to resolve the dispute by a signed agreement among the officers, the dispute shall be submitted for binding arbitration 47 48 administered by the AAA under its Commercial Arbitration Rules before a single arbitrator, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (iii) The parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitrator will rule on all requests for discovery and disclosure and discovery shall be completed within 90 days of the date of the first notice pursuant to Section 13.11(b)(i). The arbitrator may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Texas relevant to the subject. The arbitrator shall not have the authority or power to alter, amend or modify any of the terms and conditions of the agreement of the parties. The arbitrator shall issue a final ruling within 180 days of the date of the first notice pursuant to Section 13.11(b)(i). (iv) The ruling of the arbitrator shall be in writing and signed and shall be final and binding upon the parties. The fees and expenses of counsel, witnesses and employees of the parties and all other costs and expenses incurred exclusively for the benefit of the party incurring the same shall be borne by the party incurring such fees and expenses. All other fees and expenses including, without limitation, compensation for the judge, shall be divided equally between the parties. All meetings and arbitrations held pursuant to this Section 13.11 shall take place in the Borough of Manhattan, New York, New York. Section 13.12. Disclosure Schedules. With respect to the disclosure schedules delivered pursuant to this Agreement, the disclosures made on any section of a disclosure schedule with respect to any representation or warranty shall be deemed to be made with respect to any other representation or warranty requiring the same or similar disclosure only if the relevance of such disclosure to other representations and warranties is evident from the face of the applicable section of the such disclosure schedule. The inclusion of any matter on any disclosure schedule will not be deemed an admission by any party that such listed matter is material or that such listed matter has or would have Material Adverse Effect or constitutes a Material Liability or Material Contract, as the case may be. Section 13.13. General Assignment. The parties acknowledge that Schedule A to the General Assignment describing the real property included in the Distribution Assets has not yet been prepared. Such schedule shall include all of the real property located in the State of Alaska that is owned or used by the Distribution Division in connection with the Distribution Business and such schedule shall be prepared by Seller and shall be delivered to Purchaser prior to the Closing. Upon such delivery, such schedule shall be deemed to be incorporated into the General Assignment and this Agreement by this reference. Until such schedule is prepared, the General Assignment shall be deemed to cover all of the real property located in the State of Alaska that is owned or used by the Distribution Division in connection with the Distribution Business. 48 49 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. OCEAN ENERGY, INC. By -------------------------------------- James T. Hackett President and Chief Executive Officer SEMCO ENERGY, INC. By -------------------------------------- William L. Johnson Chairman of the Board, President and Chief Executive Officer EX-10.3 5 PURCHASE & SALE AGMT.- CROSS TIMBERS OIL COMPANY 1 EXHIBIT 10.3 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (this "Agreement") dated July 30, 1999 is by and between Seagull Energy E&P Inc., a Delaware corporation ("Seller") and Cross Timbers Oil Company, a Delaware corporation ("Buyer"). WITNESSETH: WHEREAS, Seller owns all of the issued and outstanding shares of Arkoma Holding Corporation, a Delaware corporation (the "Company"); and WHEREAS, Seller currently owns certain oil and gas properties and related assets in Arkansas and Oklahoma (the "Seagull Assets") that are included in the Assets (as hereinafter defined) and Seller's affiliate, Ocean Energy Resources, Inc. ("OERI"), currently owns certain oil and gas properties and related assets in Arkansas (the "OERI Assets") that are included in the Assets; and WHEREAS, Seller intends to convey the Seagull Assets to Company and OERI intends to convey the OERI Assets to Company, in each case, prior to the Closing (as hereinafter defined); and WHEREAS, Fidelity Oil Holdings, Inc. and JMI Energy, Inc. (collectively, the "Joint Owners") each own certain undivided interests in the Assets, which undivided interests Company intends to acquire prior to the Closing (such acquisition by Company, together with its acquisition of the Seagull Assets and the OERI Assets, are hereinafter referred to as the "Pre-Closing Transactions"): WHEREAS, Seller is willing to sell to Buyer and Buyer is willing to buy from Seller all of the issued and outstanding shares of Company ("Shares") on the terms and conditions herein set forth. NOW THEREFORE, for and in consideration of the mutual benefits derived and to be derived from this Agreement by each party hereto, as well as other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 2 ARTICLE 1 PURCHASE AND SALE OF SHARES 1.1 Agreement to Purchase and Sell Shares and Assets. On and subject to the terms and conditions of this Agreement, Buyer agrees to buy from Seller, and Seller agrees to sell, transfer, assign and convey to Buyer, all of the Shares. 1.2 Assets. Subject to Section 1.3, the term "Assets" shall mean (i) prior to the consummation of the Pre-Closing Transactions, all of each of Seller's and OERI's (collectively, the "Current Owners") right, title and interest in and to, and (ii) following the consummation of the Pre-Closing Transactions, all of Company's right, title and interest in and to: (a) the wells described on Exhibit "A" attached hereto and all other water, disposal, injector and other wells (the "Wells") located on the Properties (as hereinafter defined) and the oil, gas and mineral leases, and the leasehold estates created thereby, the mineral servitudes, mineral interests, royalty and overriding royalty interests and any other real property interests covering, related to or associated with such Wells, including the leases, mineral interests and other real property interests described on Exhibit "A-1" hereto (collectively, the "Properties", or singularly, a "Property"); (b) all rights incident to the Wells or the Properties including, without limitation, (i) all rights with respect to use and occupation of the surface thereof and subsurface depths thereunder, (ii) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Property being a part thereof, including all production from such pool or unit allocated to such Property, and (iii) all tenements, hereditaments and appurtenances pertaining to such Wells and Properties; (c) all easements, rights-of way, servitudes, permits, licenses and other estates or similar rights or privileges related to or used in connection with the Wells or the Properties (the "Easements"); (d) all personal property, pipelines, equipment, machinery, fixtures and improvements located on or used in connection with the Wells, the Properties and the Easements and all rolling stock used primarily in connection with the ownership or operation of the Wells, Properties or Easements; (e) the surface property described in Exhibit A-2 and all improvements located thereon, together with all office equipment, computers and other personal property located upon such surface property and primarily used in connection with the ownership or operation of the Wells or Properties; (f) all contracts, agreements, leases and other arrangements related to or used in connection with (but only to the extent that such contracts, agreements, leases and other arrangements relate to) the Wells, the Properties and the Easements including (without making any representation or warranty as to whether there are any or whether if there are, they are effective or terminated) all the Current Owners' and Company's rights 2 3 under and by virtue of all covenants and warranties pertaining to the Assets, express or implied, (such as, without limitation, title warranties and manufacturers', suppliers' and contractors' warranties), that have been heretofore been made by the Current Owners' or Company's predecessors in title or by any third party manufacturers, suppliers and contractors, such that the transaction contemplated hereunder shall be made with full substitution and subrogation of Buyer, its successors and assigns, in and to and under and by virtue of the covenants and warranties described in this subsection (e) and with full subrogation to all rights accruing under the statutes of limitation and repose in relation to the Assets and all causes of action, rights of action or warranties of the Current Owners or Company against all former owners of the Assets, except predecessors in title who are subsidiaries or affiliates of Seller (but such former owners shall include OERI and Seller); (g) all oil, gas distillate, condensate, casinghead gas and other liquid or gaseous hydrocarbons and other minerals (collectively, "Hydrocarbons") produced from or attributable to the Wells or the Properties, and proceeds attributable thereto, to the extent attributable to the period of time on and after the Effective Time; (h) all suspense accounts held by the Current Owners or Company relating to the Properties; (i) all books, records, files, muniments of title, reports and similar documents and materials that relate to the foregoing interests that are not to be held confidential with other non-affiliated third parties; and (j) all geological, engineering, exploration, production, geophysical and seismic data and information related to the Wells or the Properties that the Current Owners or Company own or are able to transfer or assign under any currently effective agreement relating to any such data and information. Buyer is responsible for all fees (including any such fees arising in connection with the Pre-Closing Transactions or the sale of the Shares) related to transferring or assigning such data unless Buyer notifies Seller prior to the Closing that it declines to accept a transfer or assignment thereof. 1.3 Excluded Assets. Notwithstanding the foregoing, the Assets shall not include, and there is excepted, reserved and excluded from the purchase and sale contemplated hereby (collectively, the "Excluded Assets"); (a) all geological, engineering, exploration, production, geophysical and seismic data and information that by currently effective agreement any Current Owner is prohibited or unable to sell, transfer or assign to Company or Buyer (including prohibitions due to a sale of the Shares) (provided that Seller will use all reasonable efforts to obtain necessary consents to transfer or assign such data and information to Buyer); 3 4 (b) any refund of taxes or other costs or expenses borne by the Current Owners or Company or their predecessors in title attributable to the period of time prior to the Effective Time; and (c) any and all proceeds from the settlements or final adjudication of contract or audit disputes that any Current Owner or Company or their predecessors in title receive from co-owners or operators of the Wells or the Properties or with purchasers, gatherers, processors or transporters of Hydrocarbons from or attributable to the Wells or the Properties including, without limitation, settlement of royalty, take-or-pay, pricing or volume adjustment disputes, insofar as said proceeds are attributable to periods of time prior to the Effective Time. 1.4 Effective Time. The term "Effective Time" as used herein shall mean 7:00 a.m. local time in Houston, Texas on July 1, 1999. ARTICLE 2 PURCHASE PRICE 2.1 Purchase Price. Buyer agrees to pay to Seller at the Closing the amount of $235,300,000 (the "Purchase Price"), as adjusted in accordance with the provisions of Section 9.2, by means of a completed wire transfer of immediately available funds to an account designated by Seller. 2.2 Allocated Values. The parties agree to allocate the Purchase Price among the Wells and Properties for all purposes (including financial accounting and tax purposes) in accordance with the allocation schedule attached hereto as Schedule 2.2 (the "Allocated Values"). Seller and Buyer each agree that they will not (and they shall cause their affiliates not to) take any position inconsistent with such allocation in preparing all tax returns and tax reports to governmental authorities ("Tax Returns") or otherwise. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Subject to Sections 11.4, 14.7 and 14.8, Seller represents and warrants to Buyer that: 3.1 Ownership of Shares; Organization and Good Standing. Company and the Current Owners are corporations duly organized, validly existing and in good standing under the laws of the state of their incorporation with full corporate power, right and authority to own and lease the properties and assets they currently own and lease and to carry on their business as such businesses are currently being conducted. The Current Owners are, and as of the Closing, Company will be, duly licensed or qualified under the laws of, and each is in good standing in, each jurisdiction where, because of the nature of its activities or properties, such licensing or qualification is required, except where the failure to be so licensed or qualified would not, 4 5 individually or in the aggregate, have a Material Adverse Effect. Seller is the owner of the Shares, free and clear of any lien, charge or encumbrance and has full right and authority to transfer the Shares to Buyer. The authorized capital stock of Company consists of 1,000 shares of common stock, par value $0.01 per share, all of which are issued and outstanding and constitute the Shares. There are no existing subscriptions, agreements, options, warrants, rights, calls or commitments of any character providing for the issuance of any additional shares of Company (or any other interest in the ownership or earnings of Company), the sale of treasury shares, or for the purchase or redemption of shares of Company's capital stock and there are no outstanding securities or other instruments convertible into or exchangeable for shares of such capital stock and no commitment to issue such security or instruments. For purposes of this Agreement, an occurrence or condition shall have a "Material Adverse Effect" if it has a material adverse effect on the use, ownership or operation of the Assets, taken as a whole, or materially hinders or impedes the consummation of the transactions contemplated by this Agreement. 3.2 Authorization of Agreement; No Violation; No Consents. This Agreement has been duly executed and delivered by Seller. Seller has the full corporate power and authority to enter into this Agreement, to make the representations, warranties, covenants and agreements made herein and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of Seller. Neither the execution and delivery of this Agreement by Seller nor the consummation of the transactions contemplated hereby (a) will conflict with or result in a breach, default or violation of (i) the terms, provisions or conditions of the Certificate or Articles of Incorporation or Bylaws of the Current Owners or Company or (ii) any judgment, decree or order or any governmental permit, certificate, license, Law (as hereinafter defined) or any judgment, decree or order to which the Current Owners or Company is a party or is subject, or to which any of the Assets are subject, except for (A) consents and approvals from Governmental Entities (as hereinafter defined) that are customarily obtained after closing in connection with a sale of assets such as the Shares or the transfer of properties such as the Assets (as is contemplated in connection with the Pre-Closing Transactions) (the "Customary Post-Closing Consents") or (b) will result in the creation of any lien, charge or other encumbrance on any of the Assets or Shares. 3.3 Governmental Consents. No consent, action, approval or authorization of, or registration, declaration or filing with, any domestic or foreign court, government, governmental agency, authority, entity or instrumentality ("Governmental Entity") is required to authorize, or is otherwise required in connection with, the execution and delivery of this Agreement by Seller, Seller's performance of the terms of this Agreement, the consummation of the Pre-Closing Transactions, or the validity or enforceability hereof against Seller, except for Customary Post-Closing Consents. 3.4 Enforceability. This Agreement constitutes the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar Laws affecting creditors' rights generally and general principles of equity. 5 6 3.5 Brokers. Other than Banc of America Securities LLC, no broker or finder has acted for or on behalf of Seller or any affiliate of Seller in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller or any affiliate of Seller for which Buyer has or will have any liabilities or obligations (contingent or otherwise). 3.6 Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to the knowledge of Seller, threatened against the Current Owners, Company or any affiliate of Seller. 3.7 Suits. Other than the matters set forth on Schedule 3.7, there is no suit, action, claim, investigation or inquiry by any person or entity or by any Governmental Entity and no legal, administrative or arbitration proceeding pending or, to the knowledge of Seller, threatened relating to the Shares or Assets and to which the Current Owners or Company or any affiliate thereof is a party. 3.8 Public Utility Holding Company Act. Neither the Current Owners or Company nor any subsidiary of Seller is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, and the rules and regulations thereunder (the "1935 Act"). 3.9 Investment Company Act. None of the Current Owners or Company is an "investment company" or a company "controlled" by an "investment company", in each case within the meaning of the Investment Company Act of 1940, as amended. 3.10 No Adverse Changes. Except as permitted or disclosed in this Agreement or any Exhibits or Schedules hereto, since the Effective Time, there have been no events that would have, individually or in the aggregate, a Material Adverse Effect on the Assets, other than events affecting the U.S. economy or the oil and gas industry in general and, except as is contemplated by the Pre-Closing Transactions, since the Effective Time, neither the Current Owners or Company have made any sale, transfer or other disposition of the Assets (other than sales of Hydrocarbons in the ordinary course of business) and Seller has made no sale, transfer or other disposition of the Shares. 3.11 Compliance With Laws. To the knowledge of Seller, none of the Current Owners is and, as of the Closing, Company is not, in default or violation of any domestic or foreign statute, law, ordinance, rule, regulation or common or civil law obligation ("Law") of any Governmental Entity applicable to it and related to the Assets or Shares, or by which the Assets or Shares are bound. 3.12 Governmental Licenses, Permits and Certificates. To the knowledge of Seller, prior to the consummation of the Pre-Closing Transactions, the Current Owners possess, and following consummation of the Pre-Closing Transactions, Company possesses all governmental licenses, permits, exemptions, approvals and certificates necessary for the ownership and operation of the Assets, except for those licenses, permits, exemptions, approvals or certificates 6 7 that are customarily obtained after the transfer of properties similar to the Assets (as is contemplated in connection with the Pre-Closing Transactions). 3.13 Wells. To the knowledge of Seller, (a) all of the wells in which, prior to the consummation of the Pre-Closing Transactions, any of the Current Owners and, following the consummation of the Pre-Closing Transactions, Company has an interest by virtue of its ownership of the Properties have been drilled and completed within the boundaries of such Property or within the limits otherwise permitted by contract, pooling or unitization agreement, or by Law, (b) all drilling and completion of such wells and all operations with respect thereto have been conducted in compliance with all applicable Laws and (c) all such wells have been produced in compliance with allowables allocated thereto by the applicable Governmental Entity. 3.14 Gas Prepayment Arrangements; Take-or-Pay. Except for gas imbalances between the Current Owners or Company and any third party working interest owners or gatherers or transporters relative to the Properties which are set forth on Schedule 3.14 (such imbalances, excluding the imbalance relating to the Johnson "O" Well in the Ross Field, Pope County, Arkansas, are referred to herein as the "Gas Imbalances"), to the knowledge of Seller, none of Company or the Current Owners is not obligated by any gas prepayment arrangement or by any "take-or-pay" requirement or by any other financial penalty or payback obligation to deliver any gas at a future time without then or thereafter receiving payment therefor. 3.15 Condition of Equipment. To the knowledge of Seller, all personal property, equipment, machinery, fixtures and improvements currently in use and material to the ownership and operation of the Assets is in use and is in reasonable repair, ordinary wear and tear excepted. 3.16 Foreign Person. Seller is not a foreign person as contemplated by Section 1445 of the Internal Revenue Code. 3.17 Title to Property. As of the date hereof, the Current Owners have, and as of the Closing, Company will have, Defensible Title (as hereinafter defined) to the Properties, free and clear of all liens, charges and encumbrances, except liens for taxes not yet due and payable and such minor imperfections of title, if any, as do not materially detract from the value of or interfere with the present ownership, operation, or use of the Property affected thereby or which, individually or in the aggregate, would not have a Material Adverse Effect on any of the Properties. 3.18 Environmental Matters. As used herein, "Environmental Laws" means applicable federal, state, and local laws, including statutes, regulations and orders, ordinances, and common law, relating to protection of the public health, welfare, and the environment, including without limitation, those laws relating to storage, handling and use of chemicals and other hazardous materials, those relating to the generation, processing, treatment, storage, transport, disposal, or other management of waste materials of any kind, and those relating to the protection of environmentally sensitive areas; "Violation of Environmental Laws" means the violation of or the failure to meet the specific objective requirements or standards that are clearly applicable to an Asset under applicable Environmental Laws; "Release" means depositing, spilling, leaking, 7 8 pumping, pouring, emitting, emptying, discharging, injecting, escaping, leasing, dumping, or disposing; "Hazardous Material" means "hazardous substance", "pollutant or contaminant", and "petroleum and natural gas liquids", as those terms are defined or used in Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"); and "Conditions" means Release or the presence of Hazardous Materials. To the knowledge of Seller and unless otherwise disclosed on Schedule 3.18: (a) With respect to its use, ownership and operation of the Properties, prior to the consummation of the Pre-Closing Transactions, the Current Owners are and, following the consummation of the Pre-Closing Transactions, Company is, in compliance with all applicable Environmental Laws. (b) There has been no Release and there is no current threat of Release of any Hazardous Materials on, onto, or from the Properties that has resulted in or could result in (i) a material violation of any Environmental Laws or the creation of any material liability or obligations, including without limitation, notification, deed recordation, or remediation, under any Environmental Laws, or (ii) a material diminution in value of any Property. The Properties have not contained and currently contain no underground or aboveground storage tanks, no "PCBs" or "PCB items" (as those terms are defined in the U.S. Code of Federal Regulations), and no asbestos. (c) With regard to activities and conditions on the Properties, none of the Current Owners or Company has given, or was required to give, and none of the Current Owners or Company has received, any notice that: (i) such entity has violated, or is about to violate, any Environmental Laws with respect to the Properties; (ii) there has been a Release, or there is a threat of Release, of Hazardous Materials from the Properties; (iii) such entity may be or is liable, in whole or in part, for the costs of cleaning up, remediating, removing or responding to a Release of Hazardous Materials with respect to the Properties ; (iv) the Properties are subject to a lien in favor of any Governmental Entity for any liability, cost or damages, under any Environmental Laws arising from or costs incurred by such governmental entity in response to a Release of Hazardous Materials. No conditions currently exist, or are reasonably foreseeable, that would give rise to such a notice. (d) Prior to the consummation of the Pre-Closing Transactions, the Current Owners have, and following the consummation of the Pre-Closing Transactions, Company has all permits, licenses, certificates, approvals, registrations, and applications (hereinafter "Environmental Permits"), necessary to comply with all Environmental Laws applicable to the Properties, except, with respect to Company, for those Environment Permits customarily obtained after the transfer of properties similar to the Assets (as is contemplated in the Pre-Closing Transactions). In connection with the Pre-Closing Transactions, the Current Owners and Company shall cooperate in obtaining the transfers of all Environmental Permits and agree to satisfy all notice and approval requirements for such transfers. 8 9 3.19 Status of Leases. With respect to the oil, gas and/or mineral leases relating to the Properties, to the knowledge of Seller: (i) such leases have been maintained according to their terms, in compliance with the agreements to which such leases are subject; (ii) such leases are presently in full force and effect; (iii) all royalties (other than royalties held in suspense), delay rentals and other payments due under such leases have been properly and timely paid and all conditions necessary to keep such leases in force have been fully performed; and (iv) none of the Current Owners or Company nor, to the knowledge of Seller, any other party to any such lease has received notice of any claim or action seeking to terminate, cancel, rescind or procure a judicial reformation of any such lease or any provisions thereof or seeking the release of any such lease (or portion thereof) comprising any part of the Properties or the drilling of any additional wells on such lease (or portion thereof). 3.20 Operations and Expenditures. With respect to any joint, unit or other operating agreements affecting the Properties, there are no outstanding calls or payments under authorities for expenditures concerning any single expenditure to be made by any of the Current Owners or Company in excess of Fifty Thousand Dollars ($50,000) which are due or which such entity has committed to make and which have not been made. 3.21 Plugged/Nonproducing Wells. To the knowledge of Seller, (i) plugged wells located on the Properties have been properly plugged and there are no abandoned unplugged well bores located on the Properties which good oil field practice would require plugging and (ii) none of the wells on the Properties are currently required to be plugged and abandoned under the Law of any Governmental Entity. 3.22 Removal of Equipment. From the date hereof to the Closing, none of the Current Owners or Company will remove, exchange, suffer loss or destruction (casualty or otherwise) of any personal property, equipment, machinery, fixtures or improvements, material to the use, ownership, or operation of the Properties without replacement thereof with personal property, pipelines, equipment, machinery, fixtures or improvements of equal or better value and specifications. 3.23 Preferential Rights. To the knowledge of Seller, Schedule 10.2(b) identifies all Wells that may be subject to any preferential rights of purchase or comparable rights. 3.24 Disclosure. To the knowledge of Seller, no statement contained in any document, certificate, or other writing furnished or to be furnished by Seller or its affiliates to Buyer in this Agreement or any Exhibit or Schedule hereto contains or shall contain any untrue statement of a material fact or omits or shall omit to state any material fact necessary, in the light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. 9 10 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller that: 4.1 Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation with full corporate power, right and authority to own and lease the properties and assets it currently owns and leases and to carry on its business as such business is currently being conducted. Buyer is duly licensed or qualified under the laws of, and is in good standing in, each jurisdiction where, because of the nature of its activities or properties, such licensing or qualification is required, except where the failure to be so licensed or qualified would not, individually or in the aggregate, have a Material Adverse Effect. 4.2 Authorization of Agreement; No Violation; No Consents. This Agreement has been duly executed and delivered by Buyer. Buyer has the full corporate power and authority to enter into this Agreement, to make the representations, warranties, covenants and agreements made herein and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of Buyer. Neither the execution and delivery of this Agreement by Buyer nor the consummation by Buyer of the transactions contemplated hereby (a) will conflict with or result in a breach, default or violation of (i) the terms, provisions or conditions of the Certificate or Articles of Incorporation or Bylaws of Buyer or (ii) any judgment, decree or order or any governmental permit, certificate, license, law, statute, rule or regulation or any judgment, decree or order to which Buyer is a party or is subject, or to which the business, assets or operations of Buyer are subject, except for (A) Customary Post-Closing Consents and (B) any conflict, breach, default or violation that would not have, individually or in the aggregate, a Material Adverse Effect or (b) will result in the creation of any lien, charge or other encumbrance on any property or assets of Buyer. Buyer is now, and after Closing shall continue to be, qualified with all applicable governmental entities to own and operate the Assets. 4.3 Governmental Consents. No consent, action, approval or authorization of, or registration, declaration or filing with, any Governmental Entity is required to authorize, or is otherwise required in connection with, the execution and delivery of this Agreement by Buyer or Buyer's performance of the terms of this Agreement or the validity or enforceability hereof against Buyer, except for Customary Post-Closing Consents. 4.4 Enforceability. This Agreement constitutes the legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally and general principles of equity. 4.5 Brokers. No broker or finder has acted for or on behalf of Buyer or any affiliate of Buyer in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in 10 11 any way on agreements, arrangements or understandings made by or on behalf of Buyer or any affiliate of Buyer for which Seller or any of its affiliates has or will have any liabilities or obligations (contingent or otherwise). 4.6 Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to the knowledge of Buyer, threatened against Buyer or any affiliate of Buyer. 4.7 Suits. There is no suit, action, claim, investigation or inquiry by any person or entity or by any Governmental Entity and no legal, administrative or arbitration proceeding pending or, to the knowledge of Buyer, threatened (a) to which Buyer or any affiliate thereof is a party and (b) that would have a Material Adverse Effect. 4.8 Public Utility Holding Company Act. Neither Buyer nor any subsidiary of Buyer is subject to regulation under the 1935 Act. 4.9 Investment Company Act. Buyer is not an "investment company" or a company "controlled" by an "investment company", in each case within the meaning of the Investment Company Act of 1940, as amended. 4.10 Investment. Buyer is an experienced and knowledgeable investor in the oil and gas business. Prior to entering into this Agreement, Buyer was advised by and has relied solely on its own legal, tax and other professional counsel concerning this Agreement, the Assets, the Shares and the value thereof. Buyer is acquiring the Shares and the Assets for its own account and not for distribution or resale in any manner that would violate any state or federal securities law, rule, regulation or order. 4.11 Financing. Buyer has currently available (including funds that can be drawn under existing lines of credit) all funds necessary to pay the Adjusted Purchase Price (as hereinafter defined) and any other amounts contemplated by this Agreement. Buyer's ability to consummate the transactions contemplated hereby is not contingent on its ability to obtain financing from any lender or to complete any public or private placement of securities prior to or upon the Closing. 4.12 Foreign Person. Buyer is not a foreign person as contemplated by Section 1445 of the Internal Revenue Code. 11 12 ARTICLE 5 COVENANTS OF SELLER Seller covenants and agrees, except as otherwise contemplated by this Agreement, that: 5.1 General. Seller will, and Seller shall cause its affiliates to, use their reasonable efforts in good faith to take all actions and to do all things necessary or advisable in order to consummate and make effective the transactions contemplated by this Agreement, including the Pre-Closing Transactions. 5.2 Operation of the Assets. (a) Subject to the provisions of applicable operating and other agreements and the Pre-Closing Transactions, from the Effective Time to the Closing, Seller shall (and Seller shall cause its affiliates, including Company to), operate and administer the Assets in a good and workmanlike manner consistent with Seller and its affiliates' past practices, and (subject to the consummation of the Pre-Closing Transactions) shall carry on the business with respect to the Assets in substantially the same manner as before execution of this Agreement. Seller shall use its (and shall cause its affiliates to use their) reasonable efforts to preserve in full force and effect the Properties, Easements and the contracts included in the Assets. (b) From and after the date hereof until the Closing, Seller shall (and shall cause its affiliates to), except for emergency action taken in the face of risk to life, property or the environment, (i) submit to Buyer for prior written approval, all requests for operating or capital expenditures that involve individual commitments of more than Fifty Thousand Dollars and No/100 ($50,000) net to Company and the Current Owners, and all material proposed contracts and agreements relating to the Assets, (ii) consult with, inform and advise Buyer regarding all material matters concerning the operation, management and administration of the Assets and (iii) obtain Buyer's written approval prior to voting for any material matter under any operating, joint venture, partnership or similar agreement covering the Properties including, without limitation, any vote relating to reworking, recompleting or plugging an existing well. (c) Buyer acknowledges that, prior to the consummation of the Pre-Closing Transactions, the Current Owners own, and upon consummation of the Pre-Closing Transactions Company will own, an undivided interest in certain of the Properties, and Buyer agrees that the acts or omissions of the other working interests owners, joint venturers or partners who are not affiliated with any of Company or the Current Owners shall not constitute a violation of the provisions of this Article 5, nor shall any action required by a vote of working interest owners, joint venturers or partners constitute such a violation so long as such party has voted its interest in a manner that complies with the provisions of this Article 5. To the extent that none of Company or Current Owners is the operator or managing venturer or partner of any of the Properties, the obligations of such parties in this Article 5 shall be construed to require that such party use reasonable efforts (without being obligated to incur any expense or institute any cause of action) to 12 13 cause the operator or managing venturer or partner of such Properties to take such actions or render such performance within the constraints of the applicable operating agreements and other applicable agreements. 5.3 Access. Buyer and its representatives, employees, consultants, independent contractors, attorneys and other advisors (the "Buyer Parties") have been and shall be given, until such books and records of Seller and its affiliates are physically transferred to Buyer, full access to the Properties (after executing a mutually agreeable confidentiality agreement) and to the books and records of Seller and its affiliates that are included in the Assets for the purpose of conducting an investigation of the Assets; provided, however, that such investigation shall be conducted during Seller's and its affiliates' normal business hours and in a manner that does not interfere with normal operations of such entities. Such books and records will be physically transferred to Buyer at Buyer's cost on or before the Closing. Seller and its affiliates will cause their employees, counsel, accountants and other representatives to be available to the Buyer Parties at all reasonable times for purposes of such investigations. 5.4 Pre-Closing Transactions. Prior to the Closing, Seller shall transfer the Seagull Assets to Company pursuant to a form of assignment substantially in the form attached hereto as Exhibit "B" (the "Assignment"). Prior to the Closing, Seller shall cause its affiliate, OERI, to transfer the OERI Assets to Company pursuant to a form of the assignment substantially in the form of the Assignment. Immediately, prior to the Closing, the Company shall acquire from the Joint Owners their respective interests in the Assets pursuant to a form of assignment mutually acceptable to Seller and Buyer. 5.5 Section 338(h)(10) Election. With respect to Seller's sale and Buyer's purchase of the Shares of Company, Seller and Buyer jointly shall make a timely election under Section 338(h)(10) of the Internal Revenue Code, and under any provision of any state law for which the same or a comparable election is permissible with respect to the foregoing transaction, so as to have the gain from the deemed sale of the assets of Company and each other member of the Company group recognized in Seller's consolidated federal income tax return and any state income tax return for which the same or a comparable election is permissible (collectively, the "Election"). Seller and its affiliates agree to report the sale and purchase of the Shares in a manner that is consistent with the Election and shall take no position contrary thereto unless required to do so by law or pursuant to a determination by the Internal Revenue Service or any applicable state or local taxing authority. ARTICLE 6 COVENANTS OF BUYER Buyer covenants and agrees, except as otherwise contemplated by this Agreement, that: 6.1 Further Assurances. Buyer hereby gives Seller further assurance that it will use its reasonable efforts in good faith to take all actions and to do all things necessary or advisable in order to consummate and make effective the transactions contemplated by this Agreement. 13 14 6.2 Employee Matters. Buyer may offer employment, to be effective upon the Closing, to those employees of Seller and/or its affiliates that are primarily involved in the operations of the Assets and that are listed on Schedule 6.2 hereto (the "Employees"). Prior to Closing, Buyer shall provide to Seller, in writing, a list of those Employees to whom Buyer has made offers of employment. Except as hereinafter provided, Buyer shall have full discretion in determining the terms, conditions and benefits relating to such employment. Buyer shall provide severance benefits to each Employee employed by Buyer or its affiliates (i) who is a Covered Employee (as such term is defined in the Management Stability Plan previously provided to Buyer by Seller, such plan being hereinafter referred to as the "MSP") as of Closing and (ii) whose employment is subject to an Involuntary Termination (as such term is defined in the MSP) prior to April 1, 2001 equal to the severance benefits such Employee would have received under the MSP (as in effect as of Closing); provided, however, that in the event an Employee's employment is subject to an Involuntary Termination within six months following Closing, Seller shall reimburse Buyer for the cost of any severance benefits provided to such Employee. 6.3 Election Filings. Buyer shall prepare the filings required in connection with the Election and provide drafts of the same to Seller on or before February 1, 2000, for Seller's review and approval ARTICLE 7 CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement are subject, at the option of Seller, to the following conditions: 7.1 Delivery. Buyer has delivered to Seller at Closing: (a) the Estimated Adjusted Purchase Price (as hereinafter defined); (b) an opinion of Buyer's general counsel in the form of Exhibit "C" attached hereto; and (c) any other agreements, documents, certificates, approvals, consents or other instruments reasonably necessary to consummate the transactions contemplated by this Agreement. 7.2 Representations. The representations and warranties of Buyer contained herein shall be true and correct in all material respects on the date of Closing as though made on and as of that date. 7.3 Performance. Buyer shall have performed in all material respects the obligations, covenants and agreements hereunder to be performed by it at or prior to the Closing. 7.4 Pending Matters. No suit, action or other proceeding by a third party or a governmental authority shall be pending or threatened which seeks substantial damages from 14 15 Seller or the Company in connection with, or seeks to restrain, enjoin or otherwise prohibit the consummation of all the transactions contemplated by this Agreement. The Closing shall not violate any order or decree of any court or governmental body having competent jurisdiction. ARTICLE 8 CONDITIONS TO OBLIGATIONS OF BUYER The obligations of Buyer to consummate the transactions contemplated by this Agreement are subject, at the option of Buyer, to the following conditions: 8.1 Delivery. Seller has delivered to Buyer at Closing: (a) a copy of the certificate of incorporation of Company certified as of a recent date by the Secretary of State of the State of Delaware; (b) a certificate of good standing of Company issued as of a recent date by the Secretary of State of the State of Delaware; (c) a certificate of the secretary or an assistant secretary of Company, dated the Closing, in form and substance reasonably satisfactory to Buyer, as to no amendments to the certificate of incorporation or Bylaws of Company; (d) a signed resignation by each of the directors and officers of Company and terminations of all powers of attorney granted by Company; (e) the organizational documents of Company and the books of minutes of meetings of the boards of directors, committees thereof, shareholders, managers, management committees and other similar records of Company certified as true and correct by the secretary or assistant secretary of Company; (f) certificates representing the Shares duly endorsed for transfer to Buyer or with duly executed stock powers attached; (g) copies of duly executed, acknowledged and recorded Assignments from each of the Current Owners to Company covering such entity's rights, titles and interests in the Assets and copies of duly executed, acknowledged and recorded assignments from each of the Joint Owners to Company covering such entity's rights, titles and interests in the Assets; (h) duly executed letters-in-lieu of transfer orders directing all purchasers of production from or attributable to the Properties after the Effective Time to make payment to Company at Buyer's address of proceeds attributable to such production on and after the Effective Time; 15 16 (i) an opinion of Seller's general counsel in the form of Exhibit "D" attached hereto; and (j) any other agreements, documents, certificates, approvals, consents or other instruments reasonably necessary to consummate the transactions contemplated by this Agreement. 8.2 Representations. The representations and warranties of Seller contained herein shall be true and correct in all material respects on the date of Closing as though made on and as of that date. 8.3 Performance. Seller shall have performed in all material respects the obligations, covenants and agreements hereunder to be performed by it at or prior to the Closing. 8.4 Pending Matters. No suit, action or other proceeding by a third party or a governmental authority shall be pending or threatened which seeks substantial damages from Buyer in connection with, or seeks to restrain, enjoin or otherwise prohibit the consummation of all the transactions contemplated by this Agreement. The Closing shall not violate any order or decree of any court or governmental body having competent jurisdiction. ARTICLE 9 CLOSING; ADJUSTMENTS TO PURCHASE PRICE 9.1 Time and Place of Closing. The transactions contemplated by this Agreement are to be closed on September 15, 1999 (or such later date as Seller may designate as is hereafter provided) at 10:00 a.m. local time in Houston, Texas ("Closing") at the offices of Seller, 1600 First City Tower, 1001 Fannin, Houston, Texas 77002; provided that Seller may, by written notice to Buyer, extend the date of the Closing to a date no later than September 30 for purposes of curing Title Defects or Violations of Environmental Laws or Conditions. 9.2 Adjustments to the Purchase Price. Seller shall prepare and deliver to Buyer at least three business days prior to the date of the Closing, Seller's estimate of the Adjusted Purchase Price (as hereinafter defined), together with the statement setting forth Seller's estimate of the amount of each adjustment and such backup or supporting information relating thereto as may be necessary to permit Buyer to understand how Seller determined such estimates. The parties shall negotiate in good faith and attempt to agree on such estimated adjustments amounts prior to Closing. If any estimated adjustment amounts are not agreed upon prior to the Closing, the estimate of the Adjusted Purchase Price for purposes of Closing shall be calculated upon Seller's and Buyer's agreed upon estimated adjustments amounts and Seller's good faith estimation of any disputed amounts. At Closing, Buyer shall pay to Seller the estimated Adjusted Purchase Price determined as set forth in this Section 9.2 (such estimated Adjusted Purchase Price being hereinafter referred to as the "Estimated Adjusted Purchase Price"). (a) The Purchase Price shall be increased by the following amounts: 16 17 (i) the amount as of the Effective Time of all prepaid ad valorem, property or similar taxes and assessments based upon or measured by ownership of the Assets, insofar as such prepaid taxes relate to periods of time after the Effective Time; (ii) all costs and expenses (including but not limited to rentals, royalties, production and severance taxes, capital expenditures, lease operating expenses and overhead) paid that are attributable to the Assets and attributable to the period of time from and after the Effective Time; (iii) the amount of all accounts receivable attributable to Hydrocarbons that at the Effective Time are owned by Company or any of the Current Owners or Joint Owners and are above the pipeline connection, in tanks, in storage or in processing plants; such accounts shall be valued and calculated at the price actually received, if received, by Buyer for such Hydrocarbons, less applicable royalties, burdens and taxes; (iv) an amount equal to the interest on the Purchase Price (as such Purchase Price may be adjusted for Title Defects, Title Benefits, Violations of Environmental Laws or Conditions or pursuant to Section 10.5, in each case, in accordance with the terms of this Agreement) from September 1, 1999 to the date of the Closing at the rate of 6% per annum; provided that if Closing does not occur on or before September 15, 1999 because (A) Seller extends the date of the Closing as provided in Section 9.1 or (B) Seller is unable to close by such date on account of unresolved Title Defects or Violations of Environmental Laws or Conditions (provided that such matters are not unresolved on account of the breach of this Agreement by Buyer), then no such interest will be computed with respect to the days by which the Closing is extended on account of such reasons; (v) any other amount provided for in this Agreement or agreed upon by Buyer and Seller (including amounts for Title Benefits as provided herein). (b) The Purchase Price shall be decreased by the following amounts: (i) an amount equal to all unpaid ad valorem, property, production, severance and similar taxes and assessments based upon or measured by the ownership of the Assets that are attributable to periods of time prior to the Effective Time, which amounts shall, to the extent not actually assessed, be computed based on such taxes and assessments for the preceding tax year (such amount to be prorated for the period of Company's, any of the Current Owners' or Joint Owners' ownership before and Buyer's ownership after the Effective Time); (ii) an amount equal to all revenues (gross) collected or reasonably estimated by Seller to be collected by Company or any of the Current Owners or Joint Owners with respect to the Assets and attributable to the period of time after the Effective Time; 17 18 (iii) the amount of all accounts payable including suspense accounts attributable to the period of time prior to the Effective Time, to the extent not theretofore paid by Company or any of the Current Owners or Joint Owners; (iv) the Allocated Value of any Property sold to the holder of a Preferential Right (as hereinafter defined) pursuant to Section 10.5; (v) any other amount provided for in this Agreement or agreed upon by Buyer and Seller (including amounts for Title Defects and Violations of Environmental Laws or Conditions as provided herein). (c) For the net Gas Imbalance, or over or under production relative to the Properties as of the Effective Time, the Purchase Price shall be increased or decreased, as appropriate, by the product of (i) the amount (measured in Thousand Cubic Feet ["Mcf"]) of net Gas Imbalances or over or under production, and (ii) One Dollar and No/100 ($1.00) per Mcf. (d) The Purchase Price, as adjusted by adjustments described in Section 9.2(a), (b) and (c) is hereinafter referred to as the "Adjusted Purchase Price". 9.3 Post-Closing Statement and Procedures. Not later than ninety (90) days after the date of the Closing, Seller shall prepare and deliver to Buyer a final statement of the Adjusted Purchase Price and the adjustment amounts relating thereto (the "Statement"). (a) To the extent reasonably required by Seller, Buyer shall assist in the preparation of the Statement. Seller shall provide Buyer such data and information as Buyer may reasonably request supporting the amounts reflected on the Statement in order to permit Buyer to perform or cause to be performed an audit. The Statement shall become final and binding upon the parties on the 60th day following receipt thereof by Buyer (the "Final Settlement Date") unless Buyer gives written notice of its disagreement (a "Notice of Disagreement") to Seller prior to such date. Time is of the essence with respect to the Notice of Disagreement. Any Notice of Disagreement shall specify in detail the dollar amount, nature and basis of any disagreement so asserted. If a Notice of Disagreement is received by Seller in a timely manner, then the Statement (as revised in accordance with clause (i) or (ii) below) shall become final and binding on the parties and the Final Settlement Date shall be the earlier of (i) the date Seller and Buyer agree in writing with respect to all matters specified in the Notice of Disagreement or (ii) the date on which the Final Statement (as hereinafter defined) is issued by the Arbitrator (as hereinafter defined). (b) During the thirty (30) days following the date of receipt by Seller of the Notice of Disagreement, Seller and Buyer shall attempt to resolve in writing any differences that they may have with respect to all matters specified in the Notice of Disagreement. If, at the end of such 30 day period, Buyer and Seller have not reached agreement on such matters, the matters that remain in dispute shall be submitted to an 18 19 arbitrator (the "Arbitrator") for review and resolution. The Arbitrator shall be Price Waterhouse, or if such firm is unable or unwilling to act, such other nationally recognized independent public accounting firm as shall be agreed upon by Buyer and Seller in writing. The Arbitrator shall render a decision resolving the matters in dispute within sixty (60) days following their submission to the Arbitrator. The cost of any arbitration (including the fees and expenses of the Arbitrator) pursuant to this Section 9.3 shall be borne equally by Buyer and Seller. The fees and disbursements of Seller's independent auditors incurred in connection with the procedures performed with respect to the Statement, as requested by Seller, and the fees and disbursements of Buyer's independent auditors incurred in connection with their preparation of the Notice of Disagreement shall be borne by the party that incurs them. As used in this Agreement the term "Final Statement" shall mean the revised Statement described in Section 9.3(a), as prepared by Seller and as may be subsequently adjusted to reflect any subsequent written agreement between the parties with respect thereto, or if submitted to the Arbitrator, the revised Statement issued by the Arbitrator. (c) Within five business days after final determination of the Adjusted Purchase Price in accordance with this Section 9.3, Buyer shall pay to Seller or Seller shall pay to Buyer, as the case may be, the amount by which such final Adjusted Purchase Price is greater than or less than, respectively, the Estimated Adjusted Purchase Price. Any post-Closing payment made pursuant to this Section 9.3(c) shall be made by means of a wire transfer of immediately available funds and shall bear interest at a rate equal to six percent (6%) from the date of the Closing to and including the date of payment. ARTICLE 10 TITLE AND OTHER MATTERS 10.1 Examination Period. From and after the date of execution hereof until 12:00 p.m. local time in Houston, Texas, on September 3, 1999 (the "Examination Period"), (a) Buyer may notify Seller in writing of any alleged Title Defects affecting any of the Wells or Properties and discovered by Buyer or agent of Buyer, setting forth in such notice a reasonably detailed description of each Title Defect and the value attributed by Buyer to each Title Defect, (b) Buyer shall notify Seller in writing of any Title Benefits discovered by Buyer or agent of Buyer, setting forth in such notice a reasonably detailed description of each Title Benefit and (c) Buyer may notify Seller of any Violation of Environmental Laws or Conditions affecting a Property. Any matters that may otherwise constitute Title Defects or Violation of Environmental Laws or Conditions but that are not specifically raised in writing by Buyer prior to the expiration of the Examination Period shall be deemed to have been waived; provided that Buyer shall not be deemed to have waived (i) any Title Defects arising on account of the breach of the covenants set forth in Section 5.4 hereof or (ii) the Company's rights under any special warranty of title set forth in the Assignments or assignments delivered, in connection with the Pre-Closing Transactions, to Company by Seller, OERI and/or the Joint Owners, with respect to the Title Defects not known to or discovered by Buyer during the Examination Period (the "Special Warranty Rights"). Upon receipt of such notice from Buyer, Seller shall have the right, but not 19 20 the obligation, to attempt to cure such Title Defects or Violation of Environmental Laws or Conditions prior to 12:00 p.m. local time in Houston, Texas on September 15, 1999 ("Title Cure Date"). From time to time during the Examination Period and prior to the written notice that Buyer is required to deliver as set forth above in this Section 10.1, if Buyer discovers any Title Defects or Violations of Environmental Laws or Conditions and Buyer desires to assert such Title Defects or Violations of Environmental Laws or Conditions, Buyer shall use its reasonable efforts to notify Seller of such Title Defects or Violations of Environmental Laws or Conditions promptly after its discovery thereof in order to provide Seller with as much time as is possible to cure such Title Defects or Violations of Environmental Laws or Conditions if Seller desires to do so. 10.2 Definitions of Title Defects, Defensible Title, Permitted Encumbrances and Title Benefits. (a) Any (i) default by Company, a Current Owner or a Joint Owner under some material provision of an oil, gas or mineral lease, or (ii) unobtained consent to assignment, lien, charge, obligation, encumbrance, defect or irregularity of title or any other circumstance or condition that causes or could reasonably be expected to cause, prior to the consummation of the Pre-Closing Transactions, the title of a Current Owner or a Joint Owner and after the consummation of the Pre-Closing Transactions, the title of Company, in any of the Properties to be less than Defensible Title (as hereinafter defined) and for which in the case of either (i) or (ii) notice is given by Buyer to Seller pursuant to Section 10.1, shall be a title defect (a "Title Defect"). (b) For purposes of this Agreement, the term "Defensible Title" to the Properties shall mean, subject to and except for the Permitted Encumbrances (as hereinafter defined), (i) prior to the consummation of the Pre-Closing Transactions, the title of the Current Owners and Joint Owners and after the consummation of the Pre-Closing Transactions, the title of Company, in the Properties is free and clear of all liens, encumbrances and defects of any kind whatsoever, and (ii) as to those Wells included in the Properties for which a "Working Interest or WI" and a "Net Revenue Interest or NRI" are set forth on Schedule 10.2(b), prior to the consummation of the Pre-Closing Transactions, the Current Owners and Joint Owners (in the aggregate) and after the consummation of the Pre-Closing Transactions, Company, is entitled to receive the percentage of all Hydrocarbons produced, saved and marketed from such Wells in an amount not less than the Net Revenue Interest or NRI set forth on Schedule 10.2(b), without reduction, suspension or termination throughout the duration of the productive life of such Wells (except as such interests may be affected in connection with Gas Imbalances, operations for which any such entity is a non-consenting co-owner, as permitted by the contracts included in the Assets and as set forth on Schedule 10.2(b)), and prior to the consummation of the Pre-Closing Transactions, the Current Owners and Joint Owners (in the aggregate) and after the consummation of the Pre-Closing Transactions, Company, is obligated to bear the percentage of costs and expenses related to the maintenance, development and operation of such Wells in an amount not greater than the Working Interest or WI set forth on Schedule 10.2(b), without increase throughout the productive life of such Wells, except increases that also result in a 20 21 proportionate increase in the Net Revenue Interest or NRI set forth on Schedule 10.2(b) and increases that result from contribution requirements with respect to defaulting co-owners, as permitted by the contracts included in the Assets and as set forth on Schedule 10.2(b). (c) For purposes of this Agreement, the term "Permitted Encumbrances" shall mean any of the following: (i) any liens for taxes and assessments not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business (liability for which will be retained by the Current Owners or Joint Owners, as applicable); (ii) any obligations or duties (other than the payment of fees) to any municipality or public authority with respect to any franchise, grant, certificate, license or permit, and all applicable Law; (iii) any easements, rights-of-way, servitudes, permits and other rights in respect of surface operations, pipelines or the like, and easements for pipelines, power lines and other similar rights-of-way, and encroachments, on, over or in respect of any property or lands of the Current Owners, Joint Owners or Company, or over which the Current Owners, Joint Owners or Company owns rights-of-way, easements, permits or licenses, that do not unreasonably or materially interfere with the operation of any property or lands of the Current Owners, Joint Owners or Company for exploration and production of Hydrocarbons or related operations; (iv) all royalties, overriding royalties, net profits interests, production payments, carried interests, reversionary interests, calls on production and other burdens on or deductions from the proceeds of production that do not operate to (A) reduce the Net Revenue Interest or NRI below that set forth on Schedule 10.2(b) or (B) increase the Working Interest or WI above that set forth on Schedule 10.2(b) without a proportionate increase in the Net Revenue Interest or NRI set forth on such schedule; (v) the terms and conditions of all contracts included in the Assets and Easements including but not limited to all leases, servitudes, production sales contracts, division orders, contracts for sale, purchase, exchange, refining or processing of Hydrocarbons, unitization and pooling designations, declarations, orders and agreements, operating agreements, agreements of development, area of mutual interest agreements, farmout agreements, gas balancing or deferred production agreements, processing agreements, plant agreements, pipeline, gathering and transportation agreements, injection, repressuring and recycling agreements, carbon dioxide purchase or sale agreements, salt water or other disposal agreements, seismic or geophysical permits or agreements, and other agreements to the extent that such contracts and agreements do not (A) reduce the 21 22 Net Revenue Interest or NRI below that set forth on Schedule 10.2(b) or (B) increase the Working Interest or WI above that set forth on Schedule 10.2(b) without a proportionate increase in the Net Revenue Interest or NRI set forth on such schedule; (vi) Customary Post-Closing Consents; (vii) preferential purchase rights, rights of first refusal and similar rights to acquire any of the Properties (collectively, "Preferential Rights", or singularly, a "Preferential Right") (which shall be subject to the provisions of Section 10.5); (viii) conventional rights of reassignment prior to abandonment; (ix) any other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects or irregularities of any kind whatsoever affecting the Assets that individually or in the aggregate are not such as to interfere materially with the ownership, operation, value or use of any of the Assets, do not materially prevent the Current Owners and Joint Owners (prior to the consummation of the Pre-Closing Transactions) or Company (following the consummation of the Pre-Closing Transactions) from receiving the proceeds of production and that do not operate to (A) reduce the Net Revenue Interest or NRI below that set forth on Schedule 10.2(b) or (B) increase the Working Interest or WI above that set forth on Schedule 10.2(b) without a proportionate increase in the Net Revenue Interest or NRI set forth on such schedule. (d) For purposes of this Agreement, the term "Title Benefit" shall mean (i) any matter that causes an increase in the Current Owners', Joint Owners' or, Company's Net Revenue Interest or NRI (in the aggregate) above that set forth on Schedule 10.2(b) or (ii) any matter that decreases the Current Owners', Joint Owners' or Company's Working Interest or WI (in the aggregate) below that set forth on Schedule 10.2(b), without a proportionate decrease in the Net Revenue Interest or NRI set forth on such schedule. 10.3 Remedies for Title Defects and Violations of Environmental Laws or Conditions Found During the Examination Period. (a) In the event that (i) any Title Defect on a Property is not waived by Buyer or cured on or before the Title Cure Date or (ii) there is a Violation of Environmental Laws or Condition affecting a Property which has not been waived by Buyer or cured on or before the Title Cure Date, then Seller and Buyer shall mutually agree upon one or more of the following remedies, or any combination thereof; (i) reduce the Purchase Price by an amount agreed upon in writing by Buyer and Seller as being the value of such Title Defect or the cost to cure such Violation of Environmental Law or Condition, taking into consideration the Allocated Value of the Property subject to such Title 22 23 Defect or Violation of Environmental Law or Condition, the portion of the Property subject to such Title Defect or Violation of Environmental Law or Condition, and the legal effect of such Title Defect or Violation of Environmental Law or Condition on the Property affected thereby; provided, however, that if any such Title Defect is the result of a discovery by Buyer that a Net Revenue Interest in a Property that is less than the Net Revenue Interest set forth on Schedule 10.2(b), then Buyer and Seller agree that the proportion of reduction to the Purchase Price shall be equal to the product of the Allocated Value of such Property and the percentage reduction in such Net Revenue Interest as a result of such Title Defect; or (ii) elect to have such Property retained by the Current Owners or Joint Owners, as applicable, and not conveyed to Company pursuant to the Pre-Closing Transactions and the Purchase Price be reduced by the Allocated Value of such Property so retained; or (iii) indemnify Buyer against all liability, loss, cost and expense resulting from such Title Defect or Violation of Environmental Law or Condition pursuant to an indemnity agreement mutually acceptable to the parties. (b) Notwithstanding Section 10.3(a) or anything else to the contrary, (i) in no event shall there be any reduction in the Purchase Price or other remedies provided by Seller for Title Defects unless and until the amount of all Title Defects properly asserted by Buyer for all of the Properties (not including any Title Defects cured by Seller) exceed an amount equal to $1,000,000.00; and (ii) in no event shall there be any adjustments to the Purchase Price or other remedies provided by Seller for Violations of Environmental Laws or Conditions unless the aggregate amount of all Violations of Environmental Laws or Conditions properly asserted by Buyer for all of the Properties (not including any violations of Environmental Laws or Conditions cured by Seller) exceed an amount equal to $1,000,000.00, in each case, above which point Buyer shall be entitled to reductions of the Purchase Price with respect to Title Defects or Violations of Environmental Laws or Conditions in excess of such amounts with respect to the Properties affected thereby; provided that any lien filed of record will be adjusted to its full extent, irrespective of the amount of such lien or the amount of all Title Defects or Violations of Environmental Laws or Conditions. (c) Notwithstanding anything herein to the contrary, no Property or Well shall be included in the Assets, and the Current Owners or Joint Owners shall retain any such Property or Well, where the agreed upon reductions to the Purchase Price on account of Title Defects and/or Violations of Environmental Laws or Conditions affecting such Property or Well exceed the Allocated Value of such Property or Well. 10.4 Remedies for Title Benefits. (a) Seller shall be entitled to an addition to the Purchase Price with respect to all Title Benefits, in an amount to be mutually agreed upon by the parties; provided, however, that if a Title Benefit is the result of a discovery that the Current Owners, Joint Owners or Company owned, as of the Effective Time, a Net Revenue Interest in a 23 24 Property that is greater than the Net Revenue Interest set forth on Schedule 10.2(b), then Buyer and Seller agree that the proportion of increase to the Purchase Price shall be equal to the product of the Allocated Value of such Property and the percentage increase in such Net Revenue Interest as a result of such Title Benefit. (b) Notwithstanding Section 10.4(a) or anything else to the contrary, in no event shall there be any additions to the Purchase Price for Title Benefits unless and until the aggregate amount of such Title Benefits for all of the Properties exceeds an amount equal to $1,000,000.00, after which point Seller shall be entitled to additions to the Purchase Price only with respect to Title Benefits in excess of such amount. 10.5 Preferential Rights to Purchase. Seller shall use its (and shall cause its affiliates and the Joint Owners to use their respective) reasonable efforts to comply with all Preferential Right provisions relative to any Property prior to the Title Cure Date. Seller shall promptly notify Buyer if any Preferential Rights are exercised or waived or if the requisite period has elapsed without said rights having been exercised or waived. If the holder of any Preferential Right validly elects to purchase a Property that is subject to a Preferential Right, the Property will be conveyed to such holder prior to the Closing and a reduction of the Purchase Price shall be made equal to the Allocated Value of such Property. 10.6 Arbitration Concerning Title Defects and/or Violations of Environmental Laws or Conditions. Any controversy, claim or dispute arising out of or relating to whether or not there is a Title Defect and/or a Violation of Environmental Laws or Conditions or whether or not the operations performed or caused to be performed by Seller to cure a Title Defect and/or a Violation of Environmental Laws or Conditions shall be submitted for binding determination through arbitration by a panel of three (3) arbitrators acting pursuant to American Arbitration Association rules, policies and procedures. The fees and expenses of counsel, witnesses and employees of the parties hereto and all other costs and expenses incurred exclusively for the benefit of the party incurring the same shall be borne by the party incurring such fees and expenses. All other fees and expenses, including but without limitation, compensation for the arbitrators, shall be divided equally between the parties hereto. The parties, upon any dispute over the decision rendered according to this Section 10.6, hereby submit to the jurisdiction of the state and federal courts in the State of Texas and for venue in Houston, Harris County, Texas and waive any right to which they may be entitled to submit a dispute under the laws or courts of another jurisdiction. 10.7 Exceptions to Seller's Representations in Sections 3.17 and 3.18. Any Title Defect and/or Violations of Environmental Laws or Conditions discovered by Buyer during the Examination Period shall be deemed to be exceptions to the representations of Seller set forth in Sections 3.17 and 3.18 and exceptions to the special warranties of title made by Seller, OERI and/or Joint Owners in the Assignments or assignments (as applicable) delivered to the Company in connection with the Pre-Closing Transactions. 24 25 ARTICLE 11 ENVIRONMENTAL MATTERS 11.1 Audit. Buyer may, at its option, cause an environmental audit (the "Audit") of all or any portion of the Properties to be conducted by a reputable industry recognized environmental consulting or engineering firm ("auditors"). The Audit shall be conducted at the sole risk, cost and expense of Buyer, and Buyer and such firm shall indemnify and defend the Seller Indemnitees (as hereinafter defined) from and against any and all Losses arising (as hereinafter defined) from the actions of the auditors, and not information discovered by them, in conducting the Audit. 11.2 Notice of Violations of Environmental Laws or Conditions. Buyer may notify Seller in writing on or before September 3, 1999, of any environmental matters disclosed by the Audit that Buyer reasonably believes in good faith may constitute a Violation of Environmental Laws or Conditions on a Property, including with such notice a reasonably detailed description of the specific matter(s) that is an alleged Violation of Environmental Laws or Conditions and its estimated cost and expense to cure such alleged Violation of Environmental Laws or Conditions. 11.3 Remedies for Violations of Environmental Laws or Conditions. If Seller confirms to its reasonable satisfaction that any matter described in a notice delivered pursuant to Section 11.2 constitutes a Violation of Environmental Laws or Conditions, then the remedies for such matter shall be as set forth in Section 10.3 hereof. 11.4 Limitations. Notwithstanding anything to the contrary, this Article 11, Section 10.3 and the Special Warranty Rights are intended to be the sole and exclusive remedy that Buyer (or any other Buyer Indemnitees (as hereinafter defined)) shall have against Seller (or any other Seller Indemnitees (as hereinafter defined)) with respect to any matter or circumstance relating to Title Defects and/or Violations of Environmental Laws or Conditions. EXCEPT TO THE LIMITED EXTENT NECESSARY TO ENFORCE THE TERMS OF THIS ARTICLE 11 AND EXCEPT AS PROVIDED IN SECTION 10.3 OR WITH RESPECT TO THE SPECIAL WARRANTY RIGHTS, BUYER (ON BEHALF OF ITSELF AND EACH OF THE OTHER BUYER INDEMNITEES) HEREBY RELEASES AND DISCHARGES ANY AND ALL CLAIMS AT LAW OR IN EQUITY, KNOWN OR UNKNOWN, WHETHER NOW EXISTING OR ARISING IN THE FUTURE, CONTINGENT OR OTHERWISE, AGAINST ANY OF THE SELLER INDEMNITEES WITH RESPECT TO ANY MATTER OR CIRCUMSTANCE RELATING TO TITLE OR ENVIRONMENTAL LAWS OR CONDITIONS AND BUYER AT CLOSING WILL AGREE TO INDEMNIFY AND HOLD HARMLESS SELLER, THE SELLER INDEMNITEES FROM ALL LOSSES THEREFROM. 25 26 ARTICLE 12 TAXES 12.1 Allocation of Taxes. (a) Buyer shall be liable for all sales, use, documentary, recording, stamp, transfer or similar taxes, assessments or fees arising from the transactions contemplated by this Agreement, including such taxes, assessments or fees incurred in connection with the Pre-Closing Transactions. (b) All ad valorem, property and similar taxes on the Assets shall be prorated pursuant to Sections 9.2(a)(i) and 9.2(b)(i), and Buyer assumes the obligation to pay all such taxes to the appropriate Governmental Entity on or before the applicable due date. (c) Except as set forth in Sections 12.1(a) and (b), Seller shall be responsible for all taxes imposed on or with respect to the Assets that are attributable to any taxable period before the Effective Time. Buyer shall be responsible for all taxes imposed on or with respect to the Assets on or after the Effective Time. (d) Subject to Buyer's obligations set forth in Section 6.3, Seller shall be responsible for any tax liability resulting from its failure to timely make the Section 338(h)(10) election in accordance with Section 5.5. (e) Seller shall be responsible for the preparation and filing of any Tax Returns related to the Assets or Company that are required to be filed for taxable periods ending before the Effective Time. Buyer shall be responsible for the preparation and filing of all other Tax Returns related to the Assets or Company. 12.2 Indemnity for Taxes. (a) BUYER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS SELLER, OERI, THE JOINT OWNERS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, AFFILIATES, SUBSIDIARIES, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE "SELLER INDEMNITEES") FROM AND AGAINST ANY AND ALL LIABILITY FOR TAXES IMPOSED OR ASSESSED BY ANY TAXING AUTHORITY THAT ARE THE RESPONSIBILITY OF BUYER PURSUANT TO THIS ARTICLE 12. (b) SELLER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS BUYER, ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, AFFILIATES, SUBSIDIARIES, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE "BUYER INDEMNITEES") FROM AND AGAINST ANY AND ALL LIABILITY FOR TAXES IMPOSED OR ASSESSED BY ANY TAXING AUTHORITY THAT ARE THE RESPONSIBILITY OF SELLER PURSUANT TO THIS ARTICLE 12. 26 27 ARTICLE 13 TERMINATION 13.1 Termination At or Prior to Closing. This Agreement may be terminated on or prior to the Closing as follows: (a) by mutual written consent of the parties; (b) by Seller on the Closing if the conditions set forth in Article 7 have not been satisfied in all material respects; (c) by Buyer on the Closing if the conditions set forth in Article 8 have not been satisfied in all material respects; (d) by Seller if the Closing shall not have occurred on or before September 30, 1999; provided, however, that such party cannot so terminate this Agreement if such party is at such time in material breach of any provision of this Agreement; (e) by Seller or Buyer if the Closing shall not have occurred on or before November 30, 1999; provided, however, that no such party can so terminate this Agreement if such party is at such time in material breach of any provision of this Agreement; (f) by Seller or Buyer if any Governmental Entity shall have issued an order, judgment or decree or taken any other action challenging, delaying, restraining, enjoining, prohibiting or invalidating the consummation of any of the transactions contemplated herein; or (g) by Seller or Buyer if (i) the aggregate amount of all Title Defects (net of any Title Benefits) asserted by Buyer pursuant to Section 10.1 or the aggregate amount of all Purchase Price reductions related to Title Defects pursuant to Section 10.3(a) plus (ii) the estimated aggregate amount of the cost of curing all Violations of Environmental Laws asserted by Buyer pursuant to Sections 10.1 and/or 11.2 or the aggregate amount of all Purchase Price reductions related to Violations of Environmental Laws pursuant to Section 10.3(a), exceeds an amount equal to ten percent (10%) of the Purchase Price. 13.2 Effect of Termination. In the event that Closing does not occur as a result of any party exercising its right to terminate pursuant to Section 13.1, then this Agreement shall be null and void and no party shall have any rights or obligations under this Agreement, except that nothing herein shall relieve any party from any liability for any breach hereof. 13.3 Remedies for Termination. If Seller terminates this Agreement pursuant to Section 13.1(b) then Seller at its election shall be entitled to (a) specific performance of this Agreement and may petition a court for an injunction ordering same or (b) damages equal to the difference between the Purchase Price provided for herein and the purchase price ultimately 27 28 received by Seller and the other Current Owners and the Joint Owners for the sale of the Assets or the Shares. If Buyer terminates this Agreement pursuant to Section 13.1(c) then Buyer at its election shall be entitled to (a) specific performance of this Agreement and may petition a court for an injunction ordering same or (b) damages equal to Buyer's cost incurred in due diligence and in preparation for the transactions contemplated hereby. ARTICLE 14 OTHER AGREEMENTS OF THE PARTIES 14.1 Assumption. At the Closing, subject to Seller's obligations set forth in Sections 10.3(a), 12.2(b) and 14.2(b), Buyer shall assume all liabilities, duties and obligations of every kind whatsoever of the Current Owners, the Joint Owners and Company relative to the ownership or operation of the Assets, including, without limitation, (a) all Gas Imbalances, (b) all obligation to pay all trade and other accounts payable relative to the Assets incurred subsequent to the Effective Time, and (c) all suspense accounts of the Current Owners, the Joint Owners and Company relating to the Properties; provided, however, that Buyer shall not assume and shall have no liability whatsoever (contingent or otherwise) with respect to the Excluded Assets. 14.2 Indemnification. (a) SUBJECT TO SECTIONS 10.3(a), 12.2(b) AND 14.2(c), BUYER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS THE SELLER INDEMNITEES FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITIES, LOSSES, CAUSES OF ACTIONS, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, INVOLVING THEORIES OF NEGLIGENCE OR STRICT LIABILITY OR INVOLVING DAMAGE TO PROPERTY OR INJURY OR DEATH TO PERSONS AND INCLUDING COURT COSTS, THIRD-PARTY COSTS AND EXPENSES IN PREPARATION FOR COURT OR ARBITRATION AND ATTORNEYS' FEES) ("LOSSES") ASSERTED AGAINST, RESULTING FROM, IMPOSED UPON OR INCURRED BY ANY OF THE SELLER INDEMNITEES AS A RESULT OF, OR ARISING OUT OF, THE BREACH OF ANY OF THE REPRESENTATIONS, WARRANTIES, COVENANTS OR AGREEMENTS OF BUYER CONTAINED IN THIS AGREEMENT, OR AS A RESULT OF, OR ARISING OUT OF, THE OWNERSHIP OR OPERATION OF THE ASSETS OR THE SHARES INCLUDING, BUT NOT LIMITED TO, THE OBLIGATION TO PROPERLY PLUG AND ABANDON ALL WELLS NOW OR HEREAFTER LOCATED ON ANY OF THE ASSETS, OR AS A RESULT OF, OR ARISING OUT OF, ANY MATTER OR CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS OR CONDITIONS (EXCEPT TO THE EXTENT OF SELLER'S RESPONSIBILITY FOR CERTAIN VIOLATIONS OF ENVIRONMENTAL LAWS OR CONDITIONS PURSUANT TO SECTION 10.3(a)), REGARDLESS IN EACH CASE WHETHER KNOWN OR UNKNOWN, WHETHER ATTRIBUTABLE TO PERIODS OF TIME BEFORE OR AFTER THE EFFECTIVE TIME OR CLOSING, AND WHETHER ANY OF THE SELLER INDEMNITEES WERE WHOLLY OR PARTIALLY NEGLIGENT OR 29 29 OTHERWISE AT FAULT; PROVIDED, HOWEVER, THAT BUYER SHALL HAVE NO OBLIGATION TO INDEMNIFY ANY OF THE SELLER INDEMNITEES WITH RESPECT TO ANY MATTER TO THE EXTENT SELLER IS INDEMNIFYING BUYER FOR SUCH MATTER PURSUANT TO SECTIONS 10.3(a), 12.2(b) AND 14.2(b). (b) SUBJECT TO SECTIONS 14.2(d) AND 14.2(e), SELLER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS THE BUYER INDEMNITEES FROM AND AGAINST ANY AND ALL LOSSES CAUSED BY, ARISING FROM OR ATTRIBUTABLE TO (I) ANY MATERIAL MISREPRESENTATION OF SELLER HEREUNDER, (II) ANY BREACH OF WARRANTY OF THE SELLER IN OR UNDER THIS AGREEMENT, OR (III) ANY BREACH OF ANY COVENANT MADE BY SELLER HEREUNDER. THE OBLIGATION OF SELLER TO PROVIDE INDEMNIFICATION TO BUYER FOR ANY MISREPRESENTATION OR BREACH OF WARRANTY OR COVENANT OF SELLER (EXCLUDING ANY BREACH OF ANY OF SELLER'S COVENANTS UNDER SECTIONS 12.1(d) AND 14.2(g) HEREOF) SHALL BE LIMITED TO (A) CLAIMS SUBMITTED IN WRITING BY BUYER TO SELLER ON OR BEFORE DECEMBER 31, 2000 AND (B) CLAIM(S) EXCEEDING AN AMOUNT OF ONE MILLION DOLLARS ($1,000,000) IN THE AGGREGATE BUT (X) WITH RESPECT TO SELLER'S OBLIGATION TO PROVIDE INDEMNIFICATION TO BUYER FOR ANY MISREPRESENTATION OR BREACH OF WARRANTY, SELLER SHALL NOT BE OBLIGATED TO INDEMNIFY ANY BUYER INDEMNITEE FOR ANY AMOUNTS IN EXCESS OF FOUR MILLION DOLLARS ($4,000,000.00) IN THE AGGREGATE, AND (Y) WITH RESPECT TO SELLER'S OBLIGATION TO PROVIDE INDEMNIFICATION TO BUYER FOR ANY BREACH OF ANY COVENANT (EXCLUDING ANY BREACH OF ANY OF SELLER'S COVENANTS UNDER SECTIONS 12.1(d) AND 14.2(g) HEREOF), SELLER SHALL NOT BE OBLIGATED TO INDEMNIFY ANY BUYER INDEMNITEE FOR ANY AMOUNTS IN EXCESS OF FOUR MILLION DOLLARS ($4,000,000.00) IN THE AGGREGATE. (c) Notwithstanding anything to the contrary in this Agreement, in no event shall Buyer be liable to the Seller Indemnitees for any exemplary, punitive, special, indirect, consequential, remote or speculative damages; provided, however, that if the Seller Indemnitees are held liable to a third party for any of such damages and Buyer is obligated to indemnify the Seller Indemnitees hereunder for the matter that gave rise to such damages, then Buyer shall be liable for, and obligated to reimburse the Seller Indemnitees for, such damages. (d) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller be liable to the Buyer Indemnitees for any exemplary, punitive, special, indirect, consequential, remote or speculative damages; provided, however, that if the Buyer Indemnitees are held liable to a third party for any of such damages and Seller is obligated to indemnify the Buyer Indemnitees hereunder for the matter that gave rise to such damages, then Seller shall be liable for, and obligated to reimburse the Buyer Indemnitees for, such damages. 29 30 (e) All claims for indemnification under Sections 12.2, 14.2(a), 14.2(b) or 14.2(g) shall be asserted and resolved pursuant to this Section 14.2(e). Any person claiming indemnification hereunder is hereinafter referred to as the "Indemnified Party" and any person against whom such claims are asserted hereunder is hereinafter referred to as the "Indemnifying Party". In the event that any Losses are asserted against or sought to be collected from an Indemnified Party by a third party, said Indemnified Party shall with reasonable promptness provide to the Indemnifying Party a Claim Notice. The Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to any such Losses if the Indemnified Party fails to notify the Indemnifying Party thereof in accordance with the provisions of this Agreement in reasonably sufficient time so that the Indemnifying Party's ability to defend against the Losses is not prejudiced. The Indemnifying Party shall have thirty (30) days from the personal delivery or receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not it disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such Losses and/or (ii) whether or not it desires, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against such Losses; provided, however, that any Indemnified Party is hereby authorized prior to and during the Notice Period to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party (and of which it shall have given prior notice and opportunity to comment to the Indemnifying Party) and not prejudicial to the Indemnifying Party. In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such Losses, the Indemnifying Party shall have the right to defend all appropriate proceedings with counsel of its own choosing, which proceedings shall be promptly settled or prosecuted by them to a final conclusion. If the Indemnified Party desires to participate in, but not control, any such defense or settlement it may do so at its sole cost and expense. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any Losses that the Indemnifying Party elects to contest or, if appropriate and related to the claim in question, in making any counterclaim against the person asserting the third party Losses, or any cross-complaint against any person. No claim may be settled or otherwise compromised without the prior written consent of the Indemnifying Party. (f) The representations, warranties and covenants made by Seller pursuant to this Agreement (other than the representations and warranties set forth in Sections 3.17 and 3.18 which shall expire upon the occurrence of Closing) shall survive the Closing for the following periods after the Closing Date: (i) the covenants set forth in Section 12.1(d) shall survive until one day after the expiration of the applicable statute of limitations (including all extensions); (ii) the covenants set forth in Section 14.2(g) shall survive without limitation; and (iii) all other representations and warranties and covenants of Seller shall survive until December 31, 2000. Representations, warranties and covenants of Seller under this Agreement shall be of no further force or effect after the applicable expiration date specified above; provided, however, that there shall be no such termination of any representation, warranty or covenant with respect to a bona fide claim asserted with respect thereto prior to such date in accordance with the terms of Section 30 31 14.2(e). All representations, warranties and covenants of Buyer shall survive the Closing without any limitation as to time. (g) SUBJECT TO SECTIONS 14.2(d) AND 14.2(e), SELLER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS THE BUYER'S INDEMNITEES FROM AND AGAINST ANY AND ALL LOSSES CAUSED BY, ARISING FROM OR ATTRIBUTABLE TO THE SUITS SET FORTH ON SCHEDULE 3.7 HEREOF. (h) WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY OR VIOLATION OF ANY LAW OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 14.3 Records: Access and Retention. (a) On or before the Closing, Seller will deliver to Buyer at Buyer's cost and expense all the books, records and files applicable to the Assets in Seller's or its affiliates' possession. (b) After the Closing, Buyer shall give Seller and its authorized representatives such access, during normal business hours, to the books, records and files being conveyed, assigned and transferred to Buyer hereunder, as may be reasonably required by Seller, provided that such access does not unreasonably interfere with the ongoing operations of Buyer. Seller shall be entitled to keep or obtain extracts and copies of such books, records and files. (c) For a period of seven (7) years after the Closing, Buyer shall use its reasonable efforts to preserve and retain all books, records and files being conveyed, assigned and transferred to Buyer hereunder; provided, however, that in the event that Buyer transfers all or a portion of the Assets or the Shares to any third party during such period, Buyer may transfer to such third party all or a portion of the books, records and files related thereto, provided such third party transferee expressly assumes in writing the obligations of Buyer under this Section 14.3 and Buyer first offers to Seller the opportunity, at Seller's expense, to copy the books, records and files to be transferred. 14.4 Names. As soon as reasonably possible after Closing, but in no event later than forty-five (45) days after Closing, Buyer shall remove the names of OERI, Seller and/or Seagull Energy E&P Inc., and all variations thereof, from all of the Assets and make the requisite filings with, and provide the requisite notices to, the appropriate federal, state or local agencies and all other parties to the oil and gas leases, Easements and contracts included in the Assets to place the 31 32 title or other indicia of ownership, including operation of the Assets, in a name other than OERI, Seller or Seagull Energy E&P Inc., or any variations thereof. 14.5 Expenses. Each party shall be solely responsible for all expenses, including due diligence expenses, incurred by it in connection with this transaction, and neither party shall be entitled to any reimbursement for such expenses from the other party hereto, except as provided in Articles 13 and 14. 14.6 Independent Investigation. Buyer represents and acknowledges that it is knowledgeable of the oil and gas business and of the usual and customary practices of producers such as Seller and its affiliates and that it has had access to the Assets, the officers and employees of Seller and its affiliates, and the books, records and files of Seller relating to the Assets and that, in making the decision to enter into this Agreement and consummate the transactions contemplated hereby, Buyer has relied solely on the basis of its own independent due diligence investigation of the Assets and Shares and upon the representations and warranties made in Article 3. Accordingly, Buyer acknowledges that none of Seller, its affiliates or any Joint Owner has made, and Seller (on behalf of itself, its affiliates and all Joint Owners) hereby expressly disclaim and negate any representation or warranty (other than those express representations and warranties made in Article 3), express, implied, at common law, by statute or otherwise, relating to the Assets. 14.7 Disclaimer Regarding Assets. Except as otherwise expressly provided in Article 3 above and except with respect to the Special Warranty Rights, BUYER ACKNOWLEDGES THAT NONE OF SELLER, ITS AFFILIATES OR ANY JOINT OWNER HAS MADE, AND SELLER (ON BEHALF OF ITSELF, ITS AFFILIATES AND THE JOINT OWNERS) HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE CONDITION OF ANY REAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL PROPERTY CONSTITUTING PART OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (d) ANY RIGHTS OF BUYER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE, (e) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM REDHIBITORY VICES OR DEFECTS OR OTHER VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, (f) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, (g) ANY AND ALL IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAW NOW OR HEREAFTER IN EFFECT, AND (h) ANY IMPLIED OR EXPRESS WARRANTY REGARDING ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE ENVIRONMENT OR THE PRESENCE OF MATERIALS IN, ON OR UNDER THE ASSETS OR PROTECTION OF THE ENVIRONMENT OR HEALTH), IT BEING THE EXPRESS INTENTION OF BUYER AND SELLER THAT (EXCEPT TO THE EXTENT EXPRESSLY PROVIDED IN ARTICLE 3 AND WITH RESPECT TO THE SPECIAL WARRANTY RIGHTS) THE REAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES 32 33 AND PERSONAL PROPERTY ARE AS IS AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR AND BUYER REPRESENTS TO SELLER AND ALL SELLER INDEMNITEES THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS WITH RESPECT TO THE REAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL PROPERTY AS BUYER DEEMS APPROPRIATE AND BUYER WILL ACCEPT THE REAL PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL PROPERTY AS IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR. 14.8 Disclaimer Regarding Information and Year 2000 Compliance. Seller (on behalf of itself, its affiliates and the Joint Owners) hereby expressly negates and disclaims, and Buyer hereby waives and acknowledges that none of such parties or their representatives made, any representation or warranty, express or implied, relating to (a) the accuracy, completeness or materiality of any information, data or other materials (written or oral) now, heretofore, or hereafter furnished to Buyer by or on behalf of such parties or (b) production rates, recompletion opportunities, decline rates, geological or geophysical data or interpretations, the quality, quantity, recoverability or cost of recovery of any Hydrocarbon reserves, any product pricing assumptions, or the ability to sell or market any Hydrocarbons after Closing, or (c) that any of the Assets are Year 2000 or "Y2K" compliant. 14.9 Waiver of Trade Practices Acts. (a) It is the intention of the parties that Buyer's rights and remedies with respect to this transaction and with respect to all acts or practices of the Seller Indemnitees, past, present or future, in connection with this transaction shall be governed by legal principles other than the Texas Deceptive Trade Practices-Consumer Protection Act, Tex. Bus. & Com. Code Ann. ss. 17.41 et seq. (the "DTPA"). As such, Buyer hereby waives the applicability of the DTPA to this transaction and any and all duties, rights or remedies that might be imposed by the DTPA, whether such duties, rights and remedies are applied directly by the DTPA itself or indirectly in connection with other statutes; provided, however, Buyer does not waive ss. 17.555 of the DTPA. Buyer acknowledges, represents and warrants that it is purchasing the goods and/or services covered by this Agreement for commercial or business use; that it has assets of $5 million or more according to its most recent financial statement prepared in accordance with generally accepted accounting principles; that it has knowledge and experience in financial and business matters that enable it to evaluate the merits and risks of a transaction such as this; and that it is not in a significantly disparate bargaining position with Seller. (b) To the maximum extent permitted by law, Buyer hereby waives all provisions of consumer protection acts, deceptive trade practice acts and other acts similar to the DTPA in all jurisdictions in which any of the Assets are located (such acts, together with the DTPA, are hereinafter collectively referred to as the "Trade Practices Acts"). (c) Buyer expressly recognizes that the price for which Seller has agreed to perform its obligations under this Agreement has been predicated upon the inapplicability 33 34 of the Trade Practices Acts and this waiver of the Trade Practices Acts. Buyer further recognizes that Seller, in determining to proceed with the entering into of this Agreement, has expressly relied on this waiver and the inapplicability of the Trade Practices Acts. ARTICLE 15 MISCELLANEOUS 15.1 Applicable Law; Alternative Dispute Resolution. (a) This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Texas without giving effect to any choice or conflict of law provision or rule (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas. (b) Except as expressly provided in Sections 9.3 and 10.6, any dispute arising under this Agreement shall be resolved pursuant to this Section 15.1(b): (i) Any party has the right to request the other to meet to discuss a dispute. The party requesting the meeting will give at least five (5) business days prior notice in writing of the subject it wishes to discuss, provide a written statement of the dispute, and designate an officer of the company with complete power to resolve the dispute to attend the meeting. Within three (3) business days after receipt to such request, the party receiving the request will provide a responsive written statement and will designate an officer of the company who will attend the meeting with complete power to resolve the dispute. (ii) If the meeting fails to resolve the dispute by a signed agreement among the officers, the dispute shall be submitted for nonappealable, binding arbitration as described in this Section 15.1. (iii) The parties agree to make discovery and disclosure of all matters relevant to the dispute to the extent and in the manner provided by the Federal Rules of Civil Procedure. The arbitration panel will rule on all requests for discovery and disclosure and discovery shall be completed within ninety (90) days of the date of the first notice pursuant to Section 15.1(b)(i). The arbitrators may consider any matter relevant to the subject to the dispute and shall follow the statutes and decisions of the substantive law of Texas relevant to the subject. The arbitrators shall not have the authority or power to alter, amend or modify any of the terms and conditions of the agreement of the parties. The arbitrators shall issue a final ruling within 180 days of the date of the first notice pursuant to Section 15.1(b)(i). (iv) The ruling of the arbitrators shall be in writing and signed and shall be final and binding upon the parties. The fees and expenses of counsel, witnesses and employees of the parties and all other costs and expenses incurred 34 35 exclusively for the benefit of the party incurring the same shall be borne by the party incurring such fees and expenses. All other fees and expenses including, without limitation, compensation for the arbitrators, shall be divided equally between the parties. All meetings held pursuant to this Section 15.1 shall take place in Houston, Texas. 15.2 No Third Party Beneficiaries. Nothing in this Agreement shall provide any benefit to any third party or entitle any third party to any claim, cause of action, remedy or right of any kind, it being the intent of the parties that this Agreement shall not be construed as a third party beneficiary contract; provided, however, that the indemnification provisions in Article 12 and in Section 14.2 shall inure to the benefit of the Buyer Indemnitees and the Seller Indemnitees as provided therein. 15.3 Waiver. Except as expressly provided in this Agreement, neither the failure nor any delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, or of any other right, power or remedy; nor shall any single or partial exercise of any right, power or remedy preclude any further or other exercise thereof, or the exercise of any other right, power or remedy. Except as expressly provided herein, no waiver of any of the provisions of this Agreement shall be valid unless it is in writing and signed by the party against whom it is sought to be enforced. 15.4 Entire Agreement; Amendment. This Agreement, the Schedules and Exhibits hereto, each of which is deemed to be a part hereof, and any agreements, instruments or documents executed and delivered by the parties pursuant to this Agreement, constitute the entire agreement and understanding between the parties hereto, and it is understood and agreed that all previous undertakings, negotiations and agreements between the parties regarding the subject matter hereof are merged herein; provided, however, that this Agreement does not supersede the confidentiality agreement previously executed by and between Seller and Buyer, which shall not terminate (except in accordance with its terms) unless and until the Closing occurs, and following the Closing, only to the extent it relates to the Assets or Shares. This Agreement may not be modified orally, but only by an agreement in writing signed by Buyer and Seller. 15.5 Notices. Any and all notices or other communications required or permitted under this Agreement shall be given in writing and delivered in person or sent by United States certified or registered mail, postage prepaid, return receipt requested, or by overnight express mail, or by telex, facsimile or telecopy to the address of such party set forth below. Any such notice shall be effective upon receipt or three (3) days after placed in the mail, whichever is earlier. 35 36 If to Seller or any other Seller's Indemnitee: Ocean Energy, Inc. 1001 Fannin Street, Suite 1600 Houston, Texas 77002-6794 Attention: Stephen A. Thorington Telecopy Number: 713-265-8024 With a copy to: Ocean Energy, Inc. 1001 Fannin Street, Suite 1600 Houston, Texas 77002-6794 Attention: Robert R. Reeves Telecopy Number: 713-882-7224 If to Buyer or any other Buyer's Indemnitee: Cross Timbers Oil Company 810 Houston Street, Suite 2000 Fort Worth, Texas 76102-6298 Attention: Vaughn O. Vennerberg, II Telecopy Number: 817-882-2800 With a copy to: Cross Timbers Oil Company 810 Houston Street, Suite 2000 Fort Worth, Texas 76102-6298 Attention: E.E. Storm III Telecopy Number: 817-870-7278 Any party may, by notice so delivered, change its address for notice purposes hereunder. 15.6 Assignment. No party shall assign (by operation of law or otherwise) all or any part of this Agreement, nor shall any party assign or delegate any of its rights or duties hereunder, without the prior written consent of the other party and any assignment or delegation made without such consent shall be void; provided, however, that prior to Closing Buyer may assign this Agreement to an affiliate of Buyer. Following any such an assignment, (i) Buyer shall remain jointly liable with such affiliate for duties, liabilities and obligations of the buyer hereunder, (ii) Buyer shall be deemed, as of the Closing, to have made the representations set forth in Sections 4.1 though 4.9 hereof with respect to such affiliate and shall indemnify the Seller Indemnitees for a breach of any such representations, and (iii) Buyer shall be deemed, as 36 37 of the Closing, to have remade the representations set forth in Article 4 at to it. The term "affiliate" as used in this Section means any other person directly or indirectly controlling, controlled by, or under direct or indirect common control with, Buyer. The term "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any person, means the possession, directly or indirectly, of 50% or more of the voting power (or in the case of a person which is not a corporation, 50% or more of the ownership interest, beneficial or otherwise) of such person or the power otherwise to direct or cause the direction of the management and policies of that person, whether through voting, by contract or otherwise. Subject to the foregoing, this Agreement shall be binding on and inure to the benefit of the parties hereto and their permitted successors and assigns. 15.7 Severability. If any provision of this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in full force and effect and this Agreement shall be construed in all respects as if such invalid, illegal or unenforceable provision were omitted. If any provision is inapplicable to any person or circumstance, it shall, nevertheless, remain applicable to all other persons and circumstances. 15.8 Publicity. Seller and Buyer shall consult with each other with regard to all publicity and other releases concerning this Agreement and the transactions contemplated hereby and, except as required by applicable law or the applicable rules or regulations of any Governmental Entity or stock exchange, no party shall issue any such publicity or other release without the prior written consent of the other party. 15.9 Construction. Any section headings in this Agreement are for convenience of reference only, and shall be given no effect in the construction or interpretation of this Agreement or any provisions thereof. No provision of this Agreement will be interpreted in favor of, or against, any party by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof. 15.10 No Merger. The delivery and/or recordation of the assignments to be delivered pursuant to this Agreement shall not cause, under the doctrine of merger or otherwise, the extinguishment of any representations, warranties or agreements contained in this Agreement. In the event of any conflict between the terms of this Agreement and the terms of such assignments, the terms of this Agreement shall govern and control. 15.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and which together shall constitute but one and the same instrument. 37 38 IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement on the date first written above. SELLER SEAGULL ENERGY E&P INC. By: ----------------------------------- Name: Stephen A. Thorington Title: Senior Vice President-Finance, Treasury and Corporate Development BUYER CROSS TIMBERS OIL COMPANY By: ----------------------------------- Name: Vaughn O. Vennerberg, II Title: Senior Vice President-Land 38 39 SCHEDULE 3.18 ENVIRONMENTAL MATTERS None EX-10.4 6 FORM OF EMPLOYEE AGREEMENT - REEVES & ZEPERNICK 1 EXHIBIT 10.4 [w/auto allowance] EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of __________________ (the "Effective Date"), by and between Ocean Energy, Inc., a Texas corporation (the "Company"), and ___________________ ("Employee"). WHEREAS, the Company has heretofore assumed the Employment Agreement entered into effective as of ___________________, by and between Ocean Energy, Inc. a Delaware corporation, and Employee which has been previously amended in certain minor respects and is currently in effect (the "Employment Agreement"); and WHEREAS, the Company employs Employee and desires to continue such employment relationship and Employee desires to continue such employment; and WHEREAS, the Company and Employee desire to enter into an agreement reflecting the current terms of such employment relationship that replaces the Employment Agreement; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Effect of Agreement. Effective as of the Effective Date, this Agreement supersedes and replaces the Employment Agreement in its entirety and the Employment Agreement shall be null and void and of no further force and effect. 2. Employment. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions set forth in this Agreement. 3. Term of Employment. Subject to the provisions for earlier termination provided in this Agreement, the term of this Agreement (the "Term") shall be five (5) years commencing on the Effective Date. 4. Employee's Duties. During the Term of this Agreement, Employee shall serve as _____________________________________________ of the Company, with such duties and responsibilities as may from time to time be assigned to him by the board of directors of the Company (the "Board"), provided that such duties are consistent with the customary duties of such position. Employee agrees to devote his full attention and time during normal business hours to the business and affairs of the Company and to use reasonable best efforts to perform faithfully and efficiently his duties and responsibilities. Employee shall not, either directly or indirectly, enter into any business or employment with or for any person, firm, association or corporation other 2 than the Company during the Term of this Agreement; provided, however, that Employee shall not be prohibited from making financial investments in any other company or business or from serving on the board of directors of any other company. Employee shall at all times observe and comply with all lawful directions and instructions of the Board. 5. Base Compensation. For services rendered by Employee under this Agreement, the Company shall pay to Employee a base salary ("Base Compensation") of ________________ per annum payable in accordance with the Company's customary pay periods and subject to customary withholdings. The amount of Base Compensation shall be reviewed by the Board on an annual basis as of the close of each fiscal year of the Company and may be increased as the Board may deem appropriate. In the event the Board deems it appropriate to increase Employee's annual base salary, said increased amount shall thereafter be the "Base Compensation." Employee's Base Compensation, as increased from time to time, may not thereafter be decreased unless agreed to by Employee. Nothing contained herein shall prevent the Board from paying additional compensation to Employee in the form of bonuses or otherwise during the Term of this Agreement. 6. Additional Benefits. In addition to the Base Compensation provided for in Section 5 herein, Employee shall be entitled to the following: (a) Expenses. The Company shall, in accordance with any rules and policies that it may establish from time to time for executive officers, reimburse Employee for business expenses reasonably incurred in the performance of his duties. It is understood that Employee is authorized to incur reasonable business expenses for promoting the business of the Company, including reasonable expenditures for travel, lodging, meals and client or business associate entertainment. Request for reimbursement for such expenses must be accompanied by appropriate documentation. (b) Disability Insurance. The Company has heretofore purchased and maintained a disability insurance policy on Employee. Employee owns and benefits from such insurance, and the Company has no interest whatsoever in such policy. The Company will continue to maintain such policy through February, 2000, and Employee will assume the responsibility for any maintenance of such policy after February, 2000. (c) Automobile Allowance. Employee shall be entitled to receive a monthly automobile allowance of up to $1,500.00 payable on the first of each month during the Term, which will fully reimburse Employee for the cost of leasing or purchasing, and the insurance therefor, of an automobile for Employee's business use. Employee shall purchase and maintain automobile insurance covering the automobile with such limits as may be required by the Company from time to time. In addition to the foregoing, the Company shall reimburse Employee for gasoline, repairs and maintenance expenditures 2 3 related to business use, provided the requests for reimbursement are accompanied by appropriate documentation. (d) Vacation. Employee shall be entitled to five (5) weeks of vacation per year, without any loss of compensation or benefits. Employee shall not be entitled to compensation for, or to carry forward, any unused vacation time. (e) General Benefits. Employee shall be entitled to participate in the various employee benefit plans or programs provided to the employees of the company in general, including but not limited to, health, dental, disability and life insurance plans, subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this paragraph shall be deemed to prohibit the Company from making any changes in any of the plans, programs or benefits described in this Section 6, provided the change similarly affects all executive officers of the Company similarly situated. (f) Options. Upon the occurrence of a "Corporate Change" as defined in Section 8(e), Employee shall be considered as immediately and totally vested in any and all stock options or other similar awards previously made to Employee by the Company or its subsidiaries under a "Long Term Incentive Plan" duly adopted by the Board (such options or similar awards are hereinafter collectively referred to as "Options"). 7. Confidential Information. Employee, during the Term, may have access to and become familiar with confidential information, secrets and proprietary information concerning the business and affairs of the Company. As to such confidential information, Employee agrees as follows: (a) During the employment of Employee with the Company and thereafter Employee will not, either directly or indirectly, disclose to any third party without the written permission of the Company, nor use in any way (except as required in the course of his employment with the Company) any confidential information, secret or proprietary information of the Company. In the event of a breach or threatened breach of the provisions of this Section 7(a), the Company shall be entitled, in addition to any other remedies available to the Company, to an injunction restraining Employee from disclosing such confidential information. (b) Upon termination of employment of Employee, for whatever reason, Employee shall surrender to the Company any and all documents, manuals, correspondence, reports, records and similar items then or thereafter coming into the possession of Employee which contain any confidential, secret or proprietary information of the Company. 3 4 8. Termination. This Agreement may be terminated prior to the end of its Term as set forth below: (a) Resignation (other than for Good Reason). Employee may resign, including by reason of retirement, his position at any time by providing written notice of resignation to the Company in accordance with Section 11 hereof. In the event of such resignation, except in the case of resignation for Good Reason (as defined below), this Agreement shall terminate and Employee shall not be entitled to further compensation pursuant to this Agreement other than the payment of any unpaid Base Compensation accrued hereunder as of the date of Employee's resignation. (b) Death. If Employee's employment is terminated due to his death, this Agreement shall terminate and the Company shall have no obligations to Employee or his legal representatives with respect to this Agreement other than the payment of any unpaid Base Compensation previously accrued hereunder. (c) Discharge. (i) The Company may terminate Employee's employment for any reason at any time upon written notice thereof delivered to Employee in accordance with Section 11 hereof. In the event that Employee's employment is terminated during the Term by the Company for any reason other than his Misconduct or Disability (both as defined below), then (A) the Company shall pay in lump sum in cash to Employee, within fifteen (15) days following the date of termination, an amount equal to the product of (i) Employee's Base Compensation as in effect immediately prior to Employee's termination, multiplied by (ii) three, (B) for three years following the date of termination, the Company, at its cost, shall provide or arrange to provide Employee (and, as applicable, Employee's dependents) with accident and group health insurance benefits substantially similar to those which Employee (and Employee's dependents) were receiving immediately prior to Employee's termination; however, the welfare benefits otherwise receivable by Employee pursuant to this clause (B) shall be reduced to the extent comparable welfare benefits are actually received by Employee (and/or Employee's dependents) during such period under any other employer's welfare plan(s) or program(s), with Employee being obligated to promptly disclose to the Company any such comparable welfare benefits, (C) in addition to the aforementioned compensation and benefits, the Company shall pay in lump sum in cash to Employee within fifteen (15) days following the date of termination an amount equal to the product of (i) Employee's average bonus paid by the Company during the most recent two (2) 4 5 years immediately prior to the date of termination, multiplied by (ii) three and (D) Employee shall be considered as immediately and totally vested in any and all Options previously made to Employee by Company or its subsidiaries. (ii) Notwithstanding the foregoing provisions of this Section 8, in the event Employee is terminated because of Misconduct, the Company shall have no obligations pursuant to this Agreement after the Date of Termination other than the payment of any unpaid Base Compensation accrued through the Date of Termination. As used herein, "Misconduct" means (A) the continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by Employee for Good Reason), after a written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, (B) the engaging by Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise (other than such conduct resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated conduct after the issuance of a Notice of Termination by Employee for Good Reason), or (C) Employee's conviction for the commission of a felony. Anything contained in this Agreement to the contrary notwithstanding, the Chief Executive Officer of the Company shall have the sole power and authority to terminate the employment of Employee on behalf of the Company. (d) Disability. If Employee shall have been absent from the full-time performance of Employee's duties with the Company for ninety (90) consecutive calendar days as a result of Employee's incapacity due to physical or mental illness, Employee's employment may be terminated by the Company for "Disability" and Employee shall not be entitled to further compensation pursuant to this Agreement, except that Employee shall be considered as immediately and totally vested in any and all Options previously granted to Employee by Company or its subsidiaries. (e) Resignation for Good Reason. Employee shall be entitled to terminate his employment for Good Reason as defined herein. If Employee terminates his employment for Good Reason he shall be entitled to the compensation and benefits provided in Paragraph 8(c)(i) hereof. "Good Reason" shall mean the occurrence of any of the following circumstances without Employee's express written consent unless such breach 5 6 or circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect hereof: (i) the material breach of any of the Company's obligations under this Agreement without Employee's express written consent, (ii) the continued assignment to Employee of any duties inconsistent with the office of ____________________________________; (iii) the failure by the Company to pay to Employee any portion of Employee's compensation on the date such compensation is due; (iv) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed by other executive officers who have entered into similar employment agreements with Employer under any of the Company's medical, health, accident, and/or disability plans in which Employee was participating immediately prior to such time; (v) a change in the location of Employee's principal place of employment by the Company by more than 50 miles from the location where he was principally employed immediately prior to the date of such change; or (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 13 hereof. In addition, the occurrence of any Corporate Change (as defined below), shall constitute "Good Reason" hereunder, but only if Employee terminates his employment within ninety (90) days following the effective date of such Corporate Change. A "Corporate Change" shall occur if (A) the Company (1) shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company) or (2) is to be dissolved and liquidated, and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board, (B) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 20% or more of the outstanding shares of the Company's voting stock (based upon voting power), and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board, or (C) the Company sells all or substantially all of the 6 7 assets of the Company to any other person or entity (other than a wholly-owned subsidiary of the Company) in a transaction that requires shareholder approval pursuant to the Texas Business Corporation Act. (f) Notice of Termination. Any purported termination of Employee's employment by the Company under Sections 8(c)(ii) or 8(d), or by Employee under Section 8(e), shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which, if by the Company and is for Misconduct or Disability, shall set forth in reasonable detail the reason for such termination of Employee's employment, or in the case of resignation by Employee for Good Reason, said notice must specify in reasonable detail the basis for such resignation. A Notice of Termination given by Employee pursuant to Section 8(e) shall be effective even if given after the receipt by Employee of notice that the Board has set a meeting to consider terminating Employee for Misconduct. Any purported termination for which a Notice of Termination is required which is not effected pursuant to this Section 8(f) shall not be effective. (g) Date of Termination. "Date of Termination" shall mean the date specified in the Notice of Termination, provided that the Date of Termination shall be at least 15 days following the date the Notice of Termination is given. Notwithstanding the foregoing, in the event Employee is terminated for Misconduct, the Company may refuse to allow Employee access to the Company's offices (other than to allow Employee to collect his personal belongings under the Company's supervision) prior to the Date of Termination. (h) Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 8 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer, except that any severance amounts payable to Employee pursuant to the Company's severance plan or policy for employees in general shall reduce the amount otherwise payable pursuant to Sections 8(c)(i) or 8(e). (i) Excess Parachute Payments. Notwithstanding anything in this Agreement to the contrary, to the extent that any payment or benefit received or to be received by Employee hereunder in connection with the termination of Employee's employment would, as determined by tax counsel selected by the Company, constitute an "Excess Parachute Payment" (as defined in Section 280G of the Internal Revenue Code), the Company shall fully "gross-up" such payment so that Employee is in the same "net" 7 8 after-tax position he would have been if such payment and gross-up payments had not constituted Excess Parachute Payments. (j) Resignation from Board. In the event Employee is a member of the board of directors of the Company or any of its subsidiaries, and Employee's employment by the Company is terminated for any reason (other than Employee's death), Employee shall immediately resign as a member of such board of directors upon the written request of the Chairman of the Board. Nothing herein shall be deemed to limit the power of the shareholders of the Company to at any time remove any director, including without limitation, Employee, in accordance with applicable law. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any of its affiliated companies and for which Employee may qualify, nor shall anything herein limit or otherwise adversely affect such rights as Employee may have under any Options with the Company or any of its affiliated companies. 10. Assignability. The obligations of Employee hereunder are personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder, either in whole or in part, to any parent, affiliate, successor or subsidiary organization or company of the Company, so long as the obligations of the Company under this Agreement remain the obligations of the Company. 11. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office address, directed to the attention of the Board with a copy to the Secretary of the Company, and to Employee at Employee's residence address on the records of the Company or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement 8 9 in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 13 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 14. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Employee and such officer as may be specifically authorized by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement is an integration of the parties agreement; no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party, except those which are set forth expressly in this Agreement. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Arbitration. Either party may elect that any dispute or controversy arising under or in connection with this Agreement be settled by arbitration in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect. If the parties cannot mutually agree on an arbitrator, then the arbitration shall be conducted by a three arbitrator panel, 9 10 with each party selecting one arbitrator and the two arbitrators so selected selecting a third arbitrator. The findings of the arbitrator(s) shall be final and binding, and judgment may be entered thereon in any court having jurisdiction. The findings of the arbitrator(s) shall not be subject to appeal to any court, except as otherwise provided by applicable law. The arbitrator(s) may, in his or her (or their) own discretion, award legal fees and costs to the prevailing party. IN WITNESS WHEREOF, the parties have executed this Agreement on _______________, effective for all purposes as provided above. OCEAN ENERGY, INC. By: -------------------------------- Name: Title: EMPLOYEE: ----------------------------------- 10 EX-10.5 7 FORM OF EMPLOYEE AGREEMENT - WILLIAM L. TRANSLER 1 exhibit 10.5 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of __________________ (the "Effective Date"), by and between Ocean Energy, Inc., a Texas corporation (the "Company"), and William L. Transier ("Employee"). WHEREAS, the Company employs Employee and desires to continue such employment relationship and Employee desires to continue such employment; and WHEREAS, the Company and Employee entered into a Severance Agreement effective as of March 17, 1997, which has been previously amended in certain respects and is currently in effect (the "Severance Agreement"); and WHEREAS, the Company and Employee desire to enter into an agreement reflecting the terms of the employment relationship, including the termination thereof, that replaces the Severance Agreement; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Effect of Agreement. Effective as of the Effective Date, this Agreement supersedes and replaces the Severance Agreement in its entirety and the Severance Agreement shall be null and void and of no further force and effect. 2. Employment. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions set forth in this Agreement. 3. Term of Employment. Subject to the provisions for earlier termination provided in this Agreement, the term of this Agreement (the "Term") shall be five (5) years commencing on the Effective Date. 4. Employee's Duties. During the Term of this Agreement, Employee shall serve as Executive Vice President and Chief Financial Officer of the Company, with such duties and responsibilities as may from time to time be assigned to him by the board of directors of the Company (the "Board"), provided that such duties are consistent with the customary duties of such position. Employee agrees to devote his full attention and time during normal business hours to the business and affairs of the Company and to use reasonable best efforts to perform faithfully and efficiently his duties and responsibilities. Employee shall not, either directly or indirectly, enter into any business or employment with or for any person, firm, association or corporation other than the Company during the Term of this Agreement; provided, however, that Employee shall not be prohibited from making financial investments in any other company or business or from 2 serving on the board of directors of any other company. Employee shall at all times observe and comply with all lawful directions and instructions of the Board. 5. Base Compensation. For services rendered by Employee under this Agreement, the Company shall pay to Employee a base salary ("Base Compensation") of $350,000 per annum payable in accordance with the Company's customary pay periods and subject to customary withholdings. The amount of Base Compensation shall be reviewed by the Board on an annual basis as of the close of each fiscal year of the Company and may be increased as the Board may deem appropriate. In the event the Board deems it appropriate to increase Employee's annual base salary, said increased amount shall thereafter be the "Base Compensation." Employee's Base Compensation, as increased from time to time, may not thereafter be decreased unless agreed to by Employee. Nothing contained herein shall prevent the Board from paying additional compensation to Employee in the form of bonuses or otherwise during the Term of this Agreement. 6. Additional Benefits. In addition to the Base Compensation provided for in Section 5 herein, Employee shall be entitled to the following: (a) Expenses. The Company shall, in accordance with any rules and policies that it may establish from time to time for executive officers, reimburse Employee for business expenses reasonably incurred in the performance of his duties. It is understood that Employee is authorized to incur reasonable business expenses for promoting the business of the Company, including reasonable expenditures for travel, lodging, meals and client or business associate entertainment. Request for reimbursement for such expenses must be accompanied by appropriate documentation. (b) Vacation. Employee shall be entitled to five (5) weeks of vacation per year, without any loss of compensation or benefits. Employee shall not be entitled to compensation for, or to carry forward, any unused vacation time. (c) General Benefits. Employee shall be entitled to participate in the various employee benefit plans or programs provided to the employees of the company in general, including but not limited to, health, dental, disability and life insurance plans, subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this paragraph shall be deemed to prohibit the Company from making any changes in any of the plans, programs or benefits described in this Section 6, provided the change similarly affects all executive officers of the Company similarly situated. (d) Options. Upon the occurrence of a "Corporate Change" as hereinafter defined, Employee shall be considered as immediately and totally vested in any and all 2 3 stock options or other similar awards previously made to Employee by the Company or its subsidiaries under a "Long Term Incentive Plan" duly adopted by the Board (such options or similar awards are hereinafter collectively referred to as "Options"). For purposes of this Agreement, a "Corporate Change" shall occur if (i) the Company (A) shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company) or (B) is to be dissolved and liquidated, and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board, (ii) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 20% or more of the outstanding shares of the Company's voting stock (based upon voting power), and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board, or (iii) the Company sells all or substantially all of the assets of the Company to any other person or entity (other than a wholly-owned subsidiary of the Company) in a transaction that requires shareholder approval pursuant to the Texas Business Corporation Act. 7. Confidential Information. Employee, during the Term, may have access to and become familiar with confidential information, secrets and proprietary information concerning the business and affairs of the Company. As to such confidential information, Employee agrees as follows: (a) During the employment of Employee with the Company and thereafter Employee will not, either directly or indirectly, disclose to any third party without the written permission of the Company, nor use in any way (except as required in the course of his employment with the Company) any confidential information, secret or proprietary information of the Company. In the event of a breach or threatened breach of the provisions of this Section 7(a), the Company shall be entitled, in addition to any other remedies available to the Company, to an injunction restraining Employee from disclosing such confidential information. (b) Upon termination of employment of Employee, for whatever reason, Employee shall surrender to the Company any and all documents, manuals, correspondence, reports, records and similar items then or thereafter coming into the possession of Employee which contain any confidential, secret or proprietary information of the Company. 3 4 8. Termination. This Agreement may be terminated prior to the end of its Term as set forth below: (a) Resignation (other than for Good Reason). Employee may resign, including by reason of retirement, his position at any time by providing written notice of resignation to the Company in accordance with Section 11 hereof. In the event of such resignation, except in the case of resignation for Good Reason (as defined below), this Agreement shall terminate and Employee shall not be entitled to further compensation pursuant to this Agreement other than the payment of any unpaid Base Compensation accrued hereunder as of the date of Employee's resignation. (b) Death. If Employee's employment is terminated due to his death, this Agreement shall terminate and the Company shall have no obligations to Employee or his legal representatives with respect to this Agreement other than the payment of any unpaid Base Compensation previously accrued hereunder. (c) Discharge. (i) The Company may terminate Employee's employment for any reason at any time upon written notice thereof delivered to Employee in accordance with Section 11 hereof. In the event that Employee's employment is terminated during the Term by the Company for any reason other than his Misconduct or Disability (both as defined below), then (A) the Company shall pay in lump sum in cash to Employee, within fifteen (15) days following the date of termination, an amount equal to the product of (i) Employee's Base Compensation as in effect immediately prior to Employee's termination, multiplied by (ii) three, (B) for three years following the date of termination, the Company, at its cost, shall provide or arrange to provide Employee (and, as applicable, Employee's dependents) with accident and group health insurance benefits substantially similar to those which Employee (and Employee's dependents) were receiving immediately prior to Employee's termination; however, the welfare benefits otherwise receivable by Employee pursuant to this clause (B) shall be reduced to the extent comparable welfare benefits are actually received by Employee (and/or Employee's dependents) during such period under any other employer's welfare plan(s) or program(s), with Employee being obligated to promptly disclose to the Company any such comparable welfare benefits, (C) in addition to the aforementioned compensation and benefits, the Company shall pay in lump sum in cash to Employee within fifteen (15) days following the date of termination an amount equal to the product of (i) Employee's average bonus paid by the Company during the most recent two (2) 4 5 years immediately prior to the date of termination, multiplied by (ii) three and(D) Employee shall be considered as immediately and totally vested in any and all Options previously made to Employee by Company or its subsidiaries. (ii) Notwithstanding the foregoing provisions of this Section 8, in the event Employee is terminated because of Misconduct, the Company shall have no obligations pursuant to this Agreement after the Date of Termination other than the payment of any unpaid Base Compensation accrued through the Date of Termination. As used herein, "Misconduct" means (A) the continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by Employee for Good Reason), after a written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, (B) the engaging by Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise (other than such conduct resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated conduct after the issuance of a Notice of Termination by Employee for Good Reason), or (C) Employee's conviction for the commission of a felony. Anything contained in this Agreement to the contrary notwithstanding, the Chief Executive Officer of the Company shall have the sole power and authority to terminate the employment of Employee on behalf of the Company. (d) Disability. If Employee shall have been absent from the full-time performance of Employee's duties with the Company for ninety (90) consecutive calendar days as a result of Employee's incapacity due to physical or mental illness, Employee's employment may be terminated by the Company for "Disability" and Employee shall not be entitled to further compensation pursuant to this Agreement, except that Employee shall be considered as immediately and totally vested in any and all Options previously granted to Employee by Company or its subsidiaries. (e) Resignation for Good Reason. Employee shall be entitled to terminate his employment for Good Reason as defined herein. If Employee terminates his employment for Good Reason he shall be entitled to the compensation and benefits provided in Paragraph 8(c)(i) hereof. "Good Reason" shall mean the occurrence of any of the following circumstances without Employee's express written consent unless such breach 5 6 or circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect hereof: (i) the material breach of any of the Company's obligations under this Agreement without Employee's express written consent; (ii) the continued assignment to Employee of any duties inconsistent with the office of Executive Vice President and Chief Financial Officer; (iii) the failure by the Company to pay to Employee any portion of Employee's compensation on the date such compensation is due; (iv) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed by other executive officers who have entered into similar employment agreements with Employer under any of the Company's medical, health, accident, and/or disability plans in which Employee was participating immediately prior to such time; (v) a change in the location of Employee's principal place of employment by the Company by more than 50 miles from the location where he was principally employed immediately prior to the date of such change; or (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 13 hereof. In addition, the occurrence of a Corporate Change other than as described in Section 6(d)(i)(A), shall constitute "Good Reason" hereunder, but only if Employee terminates his employment within ninety (90) days following the effective date of such Corporate Change. (f) Notice of Termination. Any purported termination of Employee's employment by the Company under Sections 8(c)(ii) or 8(d), or by Employee under Section 8(e), shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which, if by the Company and is for Misconduct or Disability, shall set forth in reasonable detail the reason for such termination of Employee's employment, or in the case of resignation by Employee for Good Reason, said notice must specify in reasonable detail the basis for such resignation. A Notice of Termination given by Employee pursuant to Section 8(e) shall be effective even if given after the receipt by Employee of notice that the Board has set a meeting to consider terminating Employee for Misconduct. Any purported termination for which a Notice of Termination is required which is not effected pursuant to this Section 8(f) shall not be effective. 6 7 (g) Date of Termination. "Date of Termination" shall mean the date specified in the Notice of Termination, provided that the Date of Termination shall be at least 15 days following the date the Notice of Termination is given. Notwithstanding the foregoing, in the event Employee is terminated for Misconduct, the Company may refuse to allow Employee access to the Company's offices (other than to allow Employee to collect his personal belongings under the Company's supervision) prior to the Date of Termination. (h) Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 8 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer, except that any severance amounts payable to Employee pursuant to the Company's severance plan or policy for employees in general shall reduce the amount otherwise payable pursuant to Sections 8(c)(i) or 8(e). (i) Excess Parachute Payments. Notwithstanding anything in this Agreement to the contrary, to the extent that any payment or benefit received or to be received by Employee hereunder in connection with the termination of Employee's employment would, as determined by tax counsel selected by the Company, constitute an "Excess Parachute Payment" (as defined in Section 280G of the Internal Revenue Code), the Company shall fully "gross-up" such payment so that Employee is in the same "net" after-tax position he would have been if such payment and gross-up payments had not constituted Excess Parachute Payments. (j) Resignation from Board. In the event Employee is a member of the board of directors of the Company or any of its subsidiaries, and Employee's employment by the Company is terminated for any reason (other than Employee's death), Employee shall immediately resign as a member of such board of directors upon the written request of the Chairman of the Board. Nothing herein shall be deemed to limit the power of the shareholders of the Company to at any time remove any director, including, without limitation, Employee, in accordance with applicable law. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any of its affiliated companies and for which Employee may qualify, nor shall anything herein limit or otherwise adversely affect such rights as Employee may have under any Options with the Company or any of its affiliated companies. 10. Assignability. The obligations of Employee hereunder are personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such 7 8 obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder, either in whole or in part, to any parent, affiliate, successor or subsidiary organization or company of the Company, so long as the obligations of the Company under this Agreement remain the obligations of the Company. 11. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office address, directed to the attention of the Board with a copy to the Secretary of the Company, and to Employee at Employee's residence address on the records of the Company or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 13 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the 8 9 terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 14. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Employee and such officer as may be specifically authorized by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement is an integration of the parties agreement; no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party, except those which are set forth expressly in this Agreement. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Arbitration. Either party may elect that any dispute or controversy arising under or in connection with this Agreement be settled by arbitration in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect. If the parties cannot mutually agree on an arbitrator, then the arbitration shall be conducted by a three arbitrator panel, with each party selecting one arbitrator and the two arbitrators so selected selecting a third arbitrator. The findings of the arbitrator(s) shall be final and binding, and judgment may be entered thereon in any court having jurisdiction. The findings of the arbitrator(s) shall not be subject to appeal to any court, except as otherwise provided by applicable law. The arbitrator(s) may, in his or her (or their) own discretion, award legal fees and costs to the prevailing party. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement on _____________, effective for all purposes as provided above. OCEAN ENERGY, INC. By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- EMPLOYEE: --------------------------------------- 10 EX-10.6 8 2ND AMEND. TO EMP. & CONSULT. AGMT. - MR. GALT 1 EXHIBIT 10.6 SECOND AMENDMENT TO EMPLOYMENT AND CONSULTING AGREEMENT WHEREAS, OCEAN ENERGY, INC., a Texas corporation, formerly known as Seagull Energy Corporation (the "Company"), and BARRY J. GALT ("Galt") have heretofore entered into an Employment and Consulting Agreement (the "Agreement"), which was effective as of August 24, 1998; and WHEREAS, the Company and Galt previously amended the Agreement in certain respects, contingent on, and effective upon, the merger of Ocean Energy, Inc., a Delaware corporation, with and into the Company, which was consummated on March 30, 1999 (the "Merger"); and WHEREAS, in connection with the Merger, the Company amended its Articles of Incorporation to change its name to "Ocean Energy, Inc.;" and WHEREAS, the Company and Galt desire to further amend the Agreement; NOW, THEREFORE, the Company and Galt agree that the Agreement shall be amended as follows, effective as of May 31, 1999: 1. References in the Agreement to "Seagull Energy Corporation" or "Seagull" shall be deemed to be references to "Ocean Energy, Inc." or "Ocean." 2. Paragraph 6(a)(vii) of the Agreement shall be deleted and the following shall be substituted therefor: "(vii) EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN. Prior to July 31, 1999, Ocean shall establish a trust (the "Trust") in connection with the Ocean Executive Supplemental Retirement Plan (the "ESRP"). The Trust is not intended to result in the ESRP being treated as funded for purposes of the Code and Title I of the Employee Retirement Income Security Act of 1974, as amended, and shall conform to the terms of the model rabbi trust set forth in Revenue Procedure 92-64, 1992-2 C.B. 422. Prior to July 31, 1999, Ocean shall contribute to the Trust the Actuarially Equivalent (as such term is defined in the ESRP) present value of Galt's Accrued Benefit (as such term is defined in the ESRP) under the ESRP. Further, Ocean shall cause the ESRP to be amended to expand Section 7.01 to provide that no amendment to the ESRP shall deprive any Member (as such term is defined in the ESRP) of any Accrued Benefit under the ESRP to the extent that such Member has a Vested Interest (as such term is defined in the ESRP) in such Accrued Benefit at the time of such amendment." 3. As amended hereby, the Agreement is specifically ratified and reaffirmed. 2 4. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Amendment. EXECUTED effective as of May 31, 1999. OCEAN ENERGY, INC. BY: ------------------------- NAME: -------------------- TITLE: ------------------- "COMPANY" ---------------------------- BARRY J. GALT "GALT" -2- EX-10.7 9 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of __________________ (the "Effective Date"), by and between Ocean Energy, Inc., a Texas corporation (the "Company"), and _____________________ ("Employee"). WHEREAS, the Company has heretofore assumed the Employment Agreement entered into effective as of ___________________, by and between Ocean Energy, Inc. a Delaware corporation, and Employee which has been previously amended in certain minor respects and is currently in effect (the "Employment Agreement"); and WHEREAS, the Company employs Employee and desires to continue such employment relationship and Employee desires to continue such employment; and WHEREAS, the Company and Employee desire to enter into an agreement reflecting the current terms of such employment relationship that replaces the Employment Agreement; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties, and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Effect of Agreement. Effective as of the Effective Date, this Agreement supersedes and replaces the Employment Agreement in its entirety and the Employment Agreement shall be null and void and of no further force and effect. 2. Employment. The Company hereby employs Employee, and Employee hereby accepts employment by the Company, on the terms and conditions set forth in this Agreement. 3. Term of Employment. Subject to the provisions for earlier termination provided in this Agreement, the term of this Agreement (the "Term") shall be five (5) years commencing on the Effective Date. 4. Employee's Duties. During the Term of this Agreement, Employee shall serve as ____________________________________ of the Company, with such duties and responsibilities as may from time to time be assigned to him by the board of directors of the Company (the "Board"), provided that such duties are consistent with the customary duties of such position. Employee agrees to devote his full attention and time during normal business hours to the business and affairs of the Company and to use reasonable best efforts to perform faithfully and efficiently his duties and responsibilities. Employee shall not, either directly or indirectly, enter into any business or employment with or for any person, firm, association or corporation other than the Company during the Term of this Agreement; provided, however, that Employee shall not be prohibited from making financial investments in any other company or business or from 2 serving on the board of directors of any other company. Employee shall at all times observe and comply with all lawful directions and instructions of the Board. 5. Base Compensation. For services rendered by Employee under this Agreement, the Company shall pay to Employee a base salary ("Base Compensation") of ______________ per annum payable in accordance with the Company's customary pay periods and subject to customary withholdings. The amount of Base Compensation shall be reviewed by the Board on an annual basis as of the close of each fiscal year of the Company and may be increased as the Board may deem appropriate. In the event the Board deems it appropriate to increase Employee's annual base salary, said increased amount shall thereafter be the "Base Compensation." Employee's Base Compensation, as increased from time to time, may not thereafter be decreased unless agreed to by Employee. Nothing contained herein shall prevent the Board from paying additional compensation to Employee in the form of bonuses or otherwise during the Term of this Agreement. 6. Additional Benefits. In addition to the Base Compensation provided for in Section 5 herein, Employee shall be entitled to the following: (a) Expenses. The Company shall, in accordance with any rules and policies that it may establish from time to time for executive officers, reimburse Employee for business expenses reasonably incurred in the performance of his duties. It is understood that Employee is authorized to incur reasonable business expenses for promoting the business of the Company, including reasonable expenditures for travel, lodging, meals and client or business associate entertainment. Request for reimbursement for such expenses must be accompanied by appropriate documentation. (b) Disability Insurance. The Company has heretofore purchased and maintained a disability insurance policy on Employee. Employee owns and benefits from such insurance, and the Company has no interest whatsoever in such policy. The Company will continue to maintain such policy through February, 2000, and Employee will assume the responsibility for any maintenance of such policy after February, 2000. (c) Vacation. Employee shall be entitled to five (5) weeks of vacation per year, without any loss of compensation or benefits. Employee shall not be entitled to compensation for, or to carry forward, any unused vacation time. (d) General Benefits. Employee shall be entitled to participate in the various employee benefit plans or programs provided to the employees of the company in general, including but not limited to, health, dental, disability and life insurance plans, subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this paragraph shall be deemed to prohibit the 2 3 Company from making any changes in any of the plans, programs or benefits described in this Section 6, provided the change similarly affects all officers of the Company similarly situated. (e) Options. Upon the occurrence of a "Corporate Change" as defined in Section 8(e), Employee shall be considered as immediately and totally vested in any and all stock options or other similar awards previously made to Employee by the Company or its subsidiaries under a "Long Term Incentive Plan" duly adopted by the Board (such options or similar awards are hereinafter collectively referred to as "Options"). 7. Confidential Information. Employee, during the Term, may have access to and become familiar with confidential information, secrets and proprietary information concerning the business and affairs of the Company. As to such confidential information, Employee agrees as follows: (a) During the employment of Employee with the Company and thereafter Employee will not, either directly or indirectly, disclose to any third party without the written permission of the Company, nor use in any way (except as required in the course of his employment with the Company) any confidential information, secret or proprietary information of the Company. In the event of a breach or threatened breach of the provisions of this Section 7(a), the Company shall be entitled, in addition to any other remedies available to the Company, to an injunction restraining Employee from disclosing such confidential information. (b) Upon termination of employment of Employee, for whatever reason, Employee shall surrender to the Company any and all documents, manuals, correspondence, reports, records and similar items then or thereafter coming into the possession of Employee which contain any confidential, secret or proprietary information of the Company. 8. Termination. This Agreement may be terminated prior to the end of its Term as set forth below: (a) Resignation (other than for Good Reason). Employee may resign, including by reason of retirement, his position at any time by providing written notice of resignation to the Company in accordance with Section 11 hereof. In the event of such resignation, except in the case of resignation for Good Reason (as defined below), this Agreement shall terminate and Employee shall not be entitled to further compensation pursuant to this Agreement other than the payment of any unpaid Base Compensation accrued hereunder as of the date of Employee's resignation. (b) Death. If Employee's employment is terminated due to his death, this Agreement shall terminate and the Company shall have no obligations to Employee or his 3 4 legal representatives with respect to this Agreement other than the payment of any unpaid Base Compensation previously accrued hereunder. (c) Discharge. (i) The Company may terminate Employee's employment for any reason at any time upon written notice thereof delivered to Employee in accordance with Section 11 hereof. In the event that Employee's employment is terminated during the Term by the Company for any reason other than his Misconduct or Disability (both as defined below), then (A) the Company shall pay in lump sum in cash to Employee, within fifteen (15) days following the date of termination, an amount equal to the product of (i) Employee's Base Compensation as in effect immediately prior to Employee's termination, multiplied by (ii) three, (B) for three years following the date of termination, the Company, at its cost, shall provide or arrange to provide Employee (and, as applicable, Employee's dependents) with accident and group health insurance benefits substantially similar to those which Employee (and Employee's dependents) were receiving immediately prior to Employee's termination; however, the welfare benefits otherwise receivable by Employee pursuant to this clause (B) shall be reduced to the extent comparable welfare benefits are actually received by Employee (and/or Employee's dependents) during such period under any other employer's welfare plan(s) or program(s), with Employee being obligated to promptly disclose to the Company any such comparable welfare benefits, (C) in addition to the aforementioned compensation and benefits, the Company shall pay in lump sum in cash to Employee within fifteen (15) days following the date of termination an amount equal to the product of (i) Employee's average bonus paid by the Company during the most recent two (2) years immediately prior to the date of termination, multiplied by (ii) three and (D) Employee shall be considered as immediately and totally vested in any and all Options previously made to Employee by Company or its subsidiaries. (ii) Notwithstanding the foregoing provisions of this Section 8, in the event Employee is terminated because of Misconduct, the Company shall have no obligations pursuant to this Agreement after the Date of Termination other than the payment of any unpaid Base Compensation accrued through the Date of Termination. As used herein, "Misconduct" means (A) the continued failure by Employee to substantially perform his duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of 4 5 Termination by Employee for Good Reason), after a written demand for substantial performance is delivered to Employee by the Board, which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed his duties, (B) the engaging by Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise (other than such conduct resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated conduct after the issuance of a Notice of Termination by Employee for Good Reason), or (C) Employee's conviction for the commission of a felony. Anything contained in this Agreement to the contrary notwithstanding, the Chief Executive Officer of the Company shall have the sole power and authority to terminate the employment of Employee on behalf of the Company. (d) Disability. If Employee shall have been absent from the full-time performance of Employee's duties with the Company for ninety (90) consecutive calendar days as a result of Employee's incapacity due to physical or mental illness, Employee's employment may be terminated by the Company for "Disability" and Employee shall not be entitled to further compensation pursuant to this Agreement, except that Employee shall be considered as immediately and totally vested in any and all Options previously granted to Employee by Company or its subsidiaries. (e) Resignation for Good Reason. Employee shall be entitled to terminate his employment for Good Reason as defined herein. If Employee terminates his employment for Good Reason he shall be entitled to the compensation and benefits provided in Paragraph 8(c)(i) hereof. "Good Reason" shall mean the occurrence of any of the following circumstances without Employee's express written consent unless such breach or circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect hereof: (i) the material breach of any of the Company's obligations under this Agreement without Employee's express written consent; (ii) the continued assignment to Employee of any duties inconsistent with the office of __________________________; (iii) the failure by the Company to pay to Employee any portion of Employee's compensation on the date such compensation is due; (iv) the failure by the Company to continue to provide Employee with benefits substantially similar to those enjoyed by other officers who have entered into similar employment agreements with Employer under any of the Company's 5 6 medical, health, accident, and/or disability plans in which Employee was participating immediately prior to such time; (v) a change in the location of Employee's principal place of employment by the Company by more than 50 miles from the location where he was principally employed immediately prior to the date of such change; or (vi) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 13 hereof. In addition, the occurrence of any Corporate Change (as defined below), shall constitute "Good Reason" hereunder, but only if Employee terminates his employment within ninety (90) days following the effective date of such Corporate Change. A "Corporate Change" shall occur if (A) the Company (1) shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company) or (2) is to be dissolved and liquidated, and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board, (B) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 20% or more of the outstanding shares of the Company's voting stock (based upon voting power), and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board, or (C) the Company sells all or substantially all of the assets of the Company to any other person or entity (other than a wholly-owned subsidiary of the Company) in a transaction that requires shareholder approval pursuant to the Texas Business Corporation Act. (f) Notice of Termination. Any purported termination of Employee's employment by the Company under Sections 8(c)(ii) or 8(d), or by Employee under Section 8(e), shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which, if by the Company and is for Misconduct or Disability, shall set forth in reasonable detail the reason for such termination of Employee's employment, or in the case of resignation by Employee for Good Reason, said notice must specify in reasonable detail the basis for such resignation. A Notice of 6 7 Termination given by Employee pursuant to Section 8(e) shall be effective even if given after the receipt by Employee of notice that the Board has set a meeting to consider terminating Employee for Misconduct. Any purported termination for which a Notice of Termination is required which is not effected pursuant to this Section 8(f) shall not be effective. (g) Date of Termination. "Date of Termination" shall mean the date specified in the Notice of Termination, provided that the Date of Termination shall be at least 15 days following the date the Notice of Termination is given. Notwithstanding the foregoing, in the event Employee is terminated for Misconduct, the Company may refuse to allow Employee access to the Company's offices (other than to allow Employee to collect his personal belongings under the Company's supervision) prior to the Date of Termination. (h) Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 8 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Employee as a result of employment by another employer, except that any severance amounts payable to Employee pursuant to the Company's severance plan or policy for employees in general shall reduce the amount otherwise payable pursuant to Sections 8(c)(i) or 8(e). (i) Excess Parachute Payments. Notwithstanding anything in this Agreement to the contrary, to the extent that any payment or benefit received or to be received by Employee hereunder in connection with the termination of Employee's employment would, as determined by tax counsel selected by the Company, constitute an "Excess Parachute Payment" (as defined in Section 280G of the Internal Revenue Code), the Company shall fully "gross-up" such payment so that Employee is in the same "net" after-tax position he would have been if such payment and gross-up payments had not constituted Excess Parachute Payments. (j) Resignation from Board. In the event Employee is a member of the board of directors of the Company or any of its subsidiaries, and Employee's employment by the Company is terminated for any reason (other than Employee's death), Employee shall immediately resign as a member of such board of directors upon the written request of the Chairman of the Board. Nothing herein shall be deemed to limit the power of the shareholders of the Company to at any time remove any director, including, without limitation, Employee, in accordance with applicable law. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Employee's continuing or future participation in any benefit, bonus, incentive, or other plan or 7 8 program provided by the Company or any of its affiliated companies and for which Employee may qualify, nor shall anything herein limit or otherwise adversely affect such rights as Employee may have under any Options with the Company or any of its affiliated companies. 10. Assignability. The obligations of Employee hereunder are personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder, either in whole or in part, to any parent, affiliate, successor or subsidiary organization or company of the Company, so long as the obligations of the Company under this Agreement remain the obligations of the Company. 11. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Company at its principal office address, directed to the attention of the Board with a copy to the Secretary of the Company, and to Employee at Employee's residence address on the records of the Company or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 13 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. 8 9 (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. 14. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Employee and such officer as may be specifically authorized by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement is an integration of the parties agreement; no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party, except those which are set forth expressly in this Agreement. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. Arbitration. Either party may elect that any dispute or controversy arising under or in connection with this Agreement be settled by arbitration in Houston, Texas in accordance with the rules of the American Arbitration Association then in effect. If the parties cannot mutually agree on an arbitrator, then the arbitration shall be conducted by a three arbitrator panel, with each party selecting one arbitrator and the two arbitrators so selected selecting a third arbitrator. The findings of the arbitrator(s) shall be final and binding, and judgment may be entered thereon in any court having jurisdiction. The findings of the arbitrator(s) shall not be subject to appeal to any court, except as otherwise provided by applicable law. The arbitrator(s) may, in his or her (or their) own discretion, award legal fees and costs to the prevailing party. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement on _____________, effective for all purposes as provided above. OCEAN ENERGY, INC. By: --------------------------- Name: Title: EMPLOYEE: ------------------------------ 10 EX-10.8 10 SEVERANCE AGREEMENT - COMPANY & BARNES 1 EXHIBIT 10.8 SEVERANCE AGREEMENT AGREEMENT between OCEAN ENERGY, INC., a Texas corporation (the "COMPANY") formerly known as Seagull Energy Corporation, and Richard F. Barnes ("EXECUTIVE"), W I T N E S S E T H : WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "AVERAGE BONUS" shall mean the average of the bonus payments, if any, received by Executive for the two immediately preceding fiscal years of the Company. (b) "CHANGE IN DUTIES" shall mean the occurrence, within two years after the date upon which a Change of Control occurs, of any one or more of the following: (i) A significant reduction in the duties of Executive from those applicable to him immediately prior to the date on which a Change of Control occurs; (ii) A reduction in Executive's annual salary or bonus opportunity under any applicable bonus or incentive compensation plan from that provided to him immediately prior to the date on which a Change of Control occurs; (iii) Receipt of employee benefits (including but not limited to medical, dental, life insurance, accidental death and dismemberment, and long-term disability plans) and perquisites by Executive that are materially inconsistent with the employee benefits and perquisites provided by the Company to executives with comparable duties; or (iv) A change in the location of Executive's principal place of employment by the Company by more than 50 miles from the location where he was principally employed immediately prior to the date on which a Change of Control occurs; 2 provided, however, that with respect to the merger of Ocean Energy, Inc., a Delaware corporation, with and into the Company, which was consummated on March 30, 1999 (the "OEI Merger"), this Paragraph 1(b) shall be applied with reference to Executive's duties, annual salary or bonus opportunity, employee benefits, and location of principal place of employment by the Company as of the effective date of this Agreement rather than prior to the OEI Merger. (c) "CHANGE OF CONTROL" means the occurrence of one of the following events: (i) The Company (A) shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company) or (B) is to be dissolved and liquidated, and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board; (ii) Any person or entity, including a "GROUP" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of 20% or more of the outstanding shares of the Company's voting stock (based upon voting power), and as a result of or in connection with such transaction, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board; (iii) The Company sells all or substantially all of the assets of the Company to any other person or entity (other than a wholly-owned subsidiary of the Company) in a transaction that requires shareholder approval pursuant to the Texas Business Corporation Act; or (iv) The Company sells all or substantially all of the assets of the ENSTAR Natural Gas Company division of the Company to any other person or entity (other than a wholly-owned subsidiary of the Company); provided, however, that the OEI Merger shall constitute a "Change of Control" for purposes of this Agreement. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPENSATION" shall mean the greater of: (i) Executive's annual salary plus his Average Bonus immediately prior to the date on which a Change of Control occurs, or (ii) Executive's annual salary plus his Average Bonus at the time of his Involuntary Termination. (f) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: 2 3 (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (f) or a resignation at the request of the Company); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause, a termination of Executive's employment occurring as a result of or in connection with the sale or other divestiture by the Company of a division, subsidiary, or other business segment (including, without limitation, a divestiture by sale of shares of stock or of assets) if Executive is offered continued employment on terms that would not constitute a Change in Duties by the acquiror of such business segment immediately upon such sale or divestiture, or any termination as a result of death, disability under circumstances entitling him to benefits under the Company's long-term disability plan, or Retirement. (g) "RETIREMENT" shall mean Executive's voluntary resignation on or after the date he reaches age sixty-five (other than a resignation within sixty days after the date Executive receives notice of a Change in Duties or a resignation at the request of the Company). (h) "SEVERANCE AMOUNT" shall mean an amount equal to 2.99 times Executive's Compensation. (i) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's gross negligence, gross neglect or willful misconduct in the performance of his duties or Executive's final conviction of a felony or of a misdemeanor involving moral turpitude, excluding misdemeanor convictions relating to the operation of a motor vehicle. (j) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental, life insurance and accidental death and dismemberment coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to an Involuntary Termination which occurs within two years after the date upon which a Change of Control occurs, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. 3 4 (b) Executive shall be entitled to continue the Welfare Benefit Coverages for himself and, where applicable, his eligible dependents following his Involuntary Termination for up to thirty-six months (the "Continuation Period"), as long as Executive continues either to pay the premiums paid by active employees of the Company for such coverages or to pay the actual (nonsubsidized) cost of such coverages for which the Company does not subsidize for active employees. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees, and the applicable payments shall adjust as premiums for active employees of the Company or actual costs, whichever is applicable, change. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for similar Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). Nothing herein shall be deemed to adversely affect in any way the additional rights, after consideration of the Continuation Period, of Executive and his eligible dependents to health care continuation coverage as required pursuant to Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended. If, for any reason, Company is unable to continue any of the Welfare Benefit Coverages during a period in which Executive would otherwise be entitled to continue such Welfare Benefit Coverage(s), Company shall pay Executive an amount equal to the economic value of such Welfare Benefit Coverage(s). (c) Executive shall be entitled to receive out-placement services in connection with obtaining new employment up to a maximum cost of $6,000, or an equivalent cash payment, if Executive either has or is not seeking new employment. (d) The severance benefits payable under this Agreement shall be paid to Executive on or before the tenth business day after the last day of Executive's employment with the Company; provided, however, that such severance benefits shall not be paid earlier than the day after expiration of the revocation period for the release required by Paragraph 6(i). Any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified plans and shall be subject to any required tax withholding. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3(a) or 3(b) hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at a rate equal to two percentage points over the prime or base rate of interest announced by Chase Bank of Texas, N.A. (or any successor thereto) at its principal office in Houston, Texas and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in this Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any 4 5 Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payment. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within ten days of the receipt of such claim. The Company shall notify Executive in writing at least ten days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. GENERAL. (a) TERM. The effective date of this Agreement is ___________. The initial term of this Agreement shall be the period beginning on said effective date and ending on the three-year anniversary of said effective date. Within sixty days following the expiration of the initial term of this Agreement and within sixty days after each successive three-year period of time thereafter that this Agreement is in effect, the Company shall have the right to review this Agreement, and in its sole discretion either continue and extend this Agreement, terminate this Agreement, and/or offer Executive a different agreement. The Board (excluding any member of the Board who is covered by this Agreement or by a similar agreement with the Company) will vote on whether to so extend, terminate, and/or offer Executive a different agreement and will notify Executive of such action before the end of said sixty-day time period mentioned above. This Agreement shall remain in effect until so terminated and/or modified by the Company. Failure of the Board to take any action within said sixty-day time period shall be considered as an extension of this Agreement for an additional three-year period of time. Notwithstanding anything to the contrary contained in this "SUNSET PROVISION," it is agreed that if a Change of Control occurs while this Agreement is in effect, then this Agreement shall not be subject to termination or modification under this "SUNSET PROVISION," and shall remain in force for a period of two years after such Change of Control, and if within said two years the contingency factors occur which would entitle Executive to the benefits as provided herein, this Agreement shall remain in effect in accordance with its terms. If, within such two years after a Change of Control, the contingency factors that would entitle Executive to said benefits do not occur, thereupon this three-year "SUNSET PROVISION" shall again be applicable with the sixty-day time period for Board action to thereafter commence at the expiration of said two years after such Change of Control and on each three-year anniversary date thereafter. (b) INDEMNIFICATION. If Executive shall obtain any money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce 5 6 or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agrees (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at a rate equal to two percentage points over the prime or base rate of interest announced by Chase Bank of Texas, N.A. (or any successor thereto) at its principal office in Houston, Texas, and shall change when and as any such change in such prime or base rate shall be announced by such bank. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3(b) hereof, the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts due pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. 6 7 (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. Further, Executive agrees that any legal proceeding to enforce the provisions of this Agreement shall be brought in Houston, Harris County, Texas, and hereby waives his right to any pleas regarding subject matter or personal jurisdiction and venue. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, Executive shall first execute a release, in the form established by the Company, releasing the Company, its affiliates, predecessors, successors, shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims that Executive might otherwise assert against the Company on account of his termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (i) the right of the Company (or its subsidiaries) to discharge Executive at will or (ii) the terms and conditions of any signed written agreement hereafter executed by Company and Executive. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to any termination of Executive's employment with the Company. Without limiting the scope of the preceding sentence, all prior understandings and agreements among the parties hereto relating to the subject matter hereof are hereby null and void and of no further force and effect. Further, without limiting the scope of this paragraph, this Agreement supersedes and replaces any Severance Agreement between Company (or its predecessors) and Executive (a "Prior Agreement") in its entirety and any such Prior Agreement shall be null and void and of no further force and effect. Any modification of this Agreement will be effective only if it is in writing and signed by the party to be charged. (m) NUMBER AND GENDER. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. (n) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 7 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the _____ day of __________________, 1999. "EXECUTIVE" ------------------------------------------ "COMPANY" OCEAN ENERGY, INC. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ 8 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JUN-30-1999 46,366 0 137,539 0 26,592 232,669 4,258,286 1,805,579 3,180,345 323,629 1,798,845 0 1 16,653 891,537 3,180,345 301,900 301,900 0 287,223 40,538 0 56,191 (95,135) (15,673) (79,462) 547 0 0 (80,552) (0.60) (0.60)
-----END PRIVACY-ENHANCED MESSAGE-----