<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999
REGISTRATION NO. 333-83651
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
BENZ ENERGY INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 76-0577348
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1000 LOUISIANA STREET, 15TH FLOOR
HOUSTON, TEXAS 77002
(713) 739-0351
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
------------------------
PRENTIS B. TOMLINSON, PRESIDENT
1000 LOUISIANA STREET, 15TH FLOOR
HOUSTON, TEXAS 77002
(713) 739-0351
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
With a copy to:
PORTER & HEDGES, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002
(713) 226-0629
Attn: Samuel N. Allen
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A, Series II Convertible Preferred
Stock, $1.00 par value.................... 239,701 90.91(1) 21,791,217 6,603.40(4)
Common Stock, $.01 par value, issuable upon
conversion of the convertible preferred
stock..................................... 101,407,269(3) N/A N/A N/A
Common Stock, $.01 par value, issuable upon
exercise of warrants or otherwise
previously issued......................... 8,558,649(3) .2179(2) 1,864,704 565.06
</TABLE>
(1) Pursuant to Rule 457(a) the registration fee is calculated based on the
offering price of the convertible preferred stock when originally issued.
(2) Pursuant to Rule 457(c), the registration fee is calculated based on the
average of the bid and ask prices for the Common Stock reported on the
Vancouver Stock Exchange July 19, 1999.
(3) Includes an additional indeterminate number of shares that may be required
for issuance upon conversion of preferred stock or exercise of warrants due
to the application of anti-dilution provisions.
(4) $6,562.08 of this fee has previously been paid. The remaining $41.32 of this
fee relates to an additional 1,500 shares of Class A, Series II Convertible
Preferred Stock being registered pursuant to this Amendment No. 1. Pursuant
to Rule 457(a), the additional registration fee was calculated based on the
offering price of such shares when originally issued.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1999
PROSPECTUS
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not offer these securities until the registration statement filed with the SEC
is effective. This prospectus is not an offer to sell these securities and we
are not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
- --------------------------------------------------------------------------------
BENZ ENERGY INC.
239,701 SHARES OF CLASS A, SERIES II CONVERTIBLE PREFERRED STOCK
109,965,918 SHARES OF COMMON STOCK
------------------
This prospectus relates to the resale by certain of our securityholders of:
- 239,701 shares of our class A, series II convertible preferred stock;
- 101,407,269 shares of our common stock issuable upon conversion of the
convertible preferred stock;
- 3,974,923 shares of common stock issuable upon the exercise of
outstanding warrants to purchase our common stock; and
- 4,583,726 shares of our issued and outstanding common stock held by
certain of our securityholders.
The convertible preferred stock currently is not listed on any securities
exchange.
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has approved these
securities or determined that
this prospectus is accurate or complete. Any representation to the contrary is
illegal.
- --------------------------------------------------------------------------------
------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary.................................................................................................... 3
Summary Financial Information.............................................................................. 4
Risk Factors............................................................................................... 5
Cautionary Statement Regarding Forward-looking Statements.................................................. 7
Capitalization............................................................................................. 8
Common Stock Price Range and Dividend Policy............................................................... 9
Selected Consolidated Financial Information................................................................ 10
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 11
Business and Properties.................................................................................... 22
Management................................................................................................. 39
Certain Transactions....................................................................................... 43
Principal Stockholders..................................................................................... 47
Selling Securityholders.................................................................................... 49
Plan of Distribution....................................................................................... 51
Description of Capital Stock............................................................................... 53
Legal Matters.............................................................................................. 56
Experts.................................................................................................... 56
Available Information...................................................................................... 56
Index to Financial Statements.............................................................................. F-1
</TABLE>
2
<PAGE>
SUMMARY
THIS SUMMARY SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION AND FINANCIAL INFORMATION, INCLUDING THE NOTES TO THE FINANCIAL
INFORMATION, APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS
OTHERWISE INDICATED, ALL DOLLAR AMOUNTS ARE IN UNITED STATES DOLLARS. UNLESS
OTHERWISE NOTED, REFERENCES IN THIS PROSPECTUS TO US INCLUDE OUR WHOLLY OWNED
SUBSIDIARIES.
BENZ ENERGY INC.
We are an independent energy company engaged in the exploration for and
development of oil and natural gas. We have interests in more than 25 oil and
gas prospects and projects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana.
Our principal executive offices are located at 1000 Louisiana Street, 15th
Floor, Houston, Texas 77002, and our telephone number at that address is (713)
739-0351.
THE OFFERING
The securities listed below are being offered through this prospectus for
resale. None of these securities are being offered by us.
- 239,701 shares of our class A, series II convertible preferred stock;
- 101,407,269 shares of our common stock issuable upon conversion of the
convertible preferred stock;
- 3,974,923 shares of common stock issuable upon the exercise of outstanding
warrants to purchase our common stock; and
- 4,583,726 shares of our issued and outstanding common stock held by
certain of our securityholders.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
OCTOBER 31,
1996
FOR THE SIX MONTHS ENDED SEPTEMBER 1, (INCEPTION)
JUNE 30, YEAR ENDED 1997 TO TO
-------------------------- DECEMBER 31, DECEMBER 31, AUGUST 31,
1999 1998 1998 1997 1997
------------ ------------ ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Petroleum revenues................. $ 3,278,328 $ 2,040,405 $ 4,947,457 $ 707,987 $ 444,203
Net loss applicable to common
stockholders..................... (4,572,837) (5,404,079) (11,915,191) (2,739,322) (1,917,141)
Loss per share:
Basic............................ (0.13) (0.17) (0.37) (0.10) (0.09)
Diluted.......................... (0.13) (0.17) (0.37) (0.10) (0.09)
<CAPTION>
AS OF
JUNE 30, AS OF AS OF AS OF
-------------------------- DECEMBER 31, DECEMBER 31, AUGUST 31,
1999 1998 1998 1997 1997
------------ ------------ ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit).. $(41,127,834) $ (5,807,235) $ (27,490,946) $ (15,290,406) $ 1,784,075
Properties and equipment, net...... 90,487,669 62,810,529 79,412,241 25,319,771 11,916,817
Total assets..................... 102,367,148 89,496,450 95,240,247 36,216,129 21,520,880
Long-term debt, including current
maturities....................... 63,133,474 51,569,292 59,490,912 12,708,303 781,326
Redeemable preferred shares........ 9,488,140 12,000,000 9,488,140 -- --
Stockholders' equity............... 2,832,347 12,384,549 6,990,828 11,806,496 14,089,948
</TABLE>
4
<PAGE>
RISK FACTORS
OUR LIMITED OPERATING HISTORY, HISTORY OF FINANCIAL LOSSES, AND SIGNIFICANT DEBT
MAY IMPAIR OUR ABILITY TO OBTAIN THE FUNDS NECESSARY TO FUND OUR CAPITAL
EXPENDITURE NEEDS.
We commenced operations in 1991 and acquired a substantial portion of our
operating assets through the acquisition of Texstar Petroleum, Inc. in October
1996. Potential purchasers, therefore, have limited historical financial and
operating information upon which to base an evaluation of our performance and
whether to invest in our securities. We have incurred aggregate net operating
losses of $19.9 million as of June 30, 1999. Our working capital deficit was
$41.1 million and our total indebtedness was $63.1 million at June 30, 1999.
This indebtedness places significant restrictions on our ability to access
capital markets. In addition, our indebtedness has several important
consequences, including, but not limited to, the following:
- our ability to obtain additional financing is limited;
- our leverage position and the covenants contained in our existing
contractual arrangements limit our ability to expand our business and take
advantage of certain business opportunities;
- our leverage makes us more vulnerable to economic downturns, limits our
ability to withstand competitive pressures, and reduces our flexibility in
responding to changing business and economic conditions; and
- the holders of our convertible preferred stock are subordinate to our debt
holders in right of payment.
We have experienced and expect to continue to experience substantial working
capital needs. Our ongoing capital requirements consist primarily of the
following items:
- funding the remainder of our 1999 capital and exploration budget;
- payment of preferred dividends not otherwise payable in common stock; and
- payment of interest on our outstanding 9% convertible debentures and bank
obligations.
Our 1999 net capital and exploration budget is $11.3 million (excluding
capitalized interest and overhead). Approximately $2.5 million of the net
capital and exploration budget remains to be used in 1999. No assurance can be
given as to the availability or terms of additional financing that will be
required. If adequate capital resources are not available, we:
- may be required to curtail our drilling, development and other operations;
- may not be able to participate in operations proposed by others with an
interest in our properties and be subjected to applicable non-consent
penalties; and
- may not be able to meet certain of our existing contractual obligations.
OUR HISTORICAL INABILITY TO PAY OUR TRADE PAYABLES ON A TIMELY BASIS COULD
IMPAIR OUR OPERATIONS.
At June 30, 1999, we had outstanding approximately $14,377,000 of accounts
payable to industry partners and trade creditors. Approximately $12,160,000 of
this amount was past due. On July 12, 1999, we met with our trade creditors to
outline a proposed repayment plan for past-due amounts. This plan included
proposed discounts, payment over an extended period of time and other revised
payment terms. As of September 8, 1999, trade creditors representing over 93% of
our past-due trade payables elected to participate in the repayment plan. Our
trade creditors that have not elected to participate in our repayment plan have
retained their remedies against us and will be able to assert those remedies if
we are unable to pay them. We anticipate funding our payment obligations by
using the proceeds received from a new production payment we recently arranged,
the sale of assets and production revenue. However, there can be no assurance
that these funding sources will be sufficient to repay our past-due trade
payables under the newly negotiated repayment terms.
5
<PAGE>
THE REPORT OF OUR INDEPENDENT ACCOUNTANTS WITH RESPECT TO OUR FINANCIAL
STATEMENTS DISCUSSES OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Note 18 to our audited consolidated financial statements states that those
financial statements were prepared assuming that we are able to continue as a
going concern assuming certain events, such as refinancing of our indebtedness
and the anticipated success of certain of our oil and gas wells. There can be no
assurance that all the events described in the going concern note will occur,
and if they do not occur, we may be unable to continue as a going concern.
WE ARE HIGHLY DEPENDENT ON A SMALL NUMBER OF PRODUCING OIL AND GAS WELLS, THE
LOSS OF PRODUCTION FROM WHICH WOULD HAVE A SERIOUS IMPACT ON OUR ABILITY TO
CONTINUE OPERATIONS.
For the first two quarters of 1999, revenue from the K.S. Byrd 31-1#1 well
totaled approximately $1.2 million, or 37% of our total revenue. The K.S. Byrd
31-1#1 well accounted for approximately $2.4 million of our revenues for the
year ended December 31, 1998, or 49% of total revenue. The K.S. Byrd 31-1 #1
will continue to be a major contributor to our net production. After year-end
1998, we put the Howell #1 on production at a high rate of gas flow. For the
first half of 1999, the Howell well contributed revenue of approximately
$602,900. The loss of the production from either of these wells would have a
substantial negative impact on our revenue, and as a result, on our ability to
meet our obligations when due or to participate in other exploration and
development activities.
WE HAVE ENGAGED IN SUBSTANTIAL TRANSACTIONS WITH CERTAIN OF OUR OFFICERS,
DIRECTORS AND AFFILIATES THAT WERE NOT NEGOTIATED AT ARMS-LENGTH.
We have engaged in acquisitions, financings and other transactions with
entities that are owned in part by certain of our officers, directors and
affiliates. These transactions did not result from arms length negotiations.
There can be no assurance that better terms would not have been negotiated in
these transactions through arms-length negotiations with unaffiliated third
parties.
A SUBSTANTIAL PORTION OF OUR OUTSTANDING VOTING STOCK IS CONTROLLED BY A FEW
SHAREHOLDERS THAT HAVE SUBSTANTIAL INFLUENCE OVER OUR BUSINESS DECISIONS.
At August 31, 1999, our chairman and chief executive officer, Prentis B.
Tomlinson, Jr. and his wife Heather Tomlinson, beneficially owned approximately
37.1% and 7.1%, respectively, of our outstanding common stock. Mr. and Mrs.
Tomlinson are able to exercise significant influence over our affairs, including
election of the board of directors and other matters submitted to a vote of our
stockholders. The interests of the Tomlinsons may differ from our interests in
certain respects and there can be no assurance that the Tomlinsons will not vote
their common stock on matters that come before a vote of our stockholders in
accordance with their own, rather than our, interests.
PURCHASERS OF OUR SECURITIES MUST BEAR THE RISK THAT NO LIQUID TRADING IN THOSE
SECURITIES WILL EXIST IN ANY UNITED STATES MARKET.
Our common stock currently is traded on the Vancouver Stock Exchange. There
is no established trading market for any of our securities in the United States,
and we currently do not meet the listing requirements for any national or
regional United States stock exchange. We cannot assure that any of our
securities will be listed on a U.S. exchange, that an active United States
public market will develop for our securities or that holders of our securities
will be able to resell them in the United States.
THE CONVERTIBLE PREFERRED STOCK SUBJECT TO RESALE UNDER THIS PROSPECTUS IS
SUBORDINATE IN CERTAIN RESPECTS TO OTHER OF OUR ISSUED AND OUTSTANDING
SECURITIES.
Our class A, series II convertible preferred stock ranks PARI PASSU with
certain other of our issued and outstanding preferred stock and any new issue of
preferred stock that stipulates a liquidation preference PARI PASSU with the
class A, series II convertible preferred stock. The class A, series II
convertible preferred
6
<PAGE>
stock is subordinate to claims of creditors, including holders of our
outstanding debt instruments. We and our subsidiaries may from time to time
incur additional debt. In the event of our liquidation, dissolution or winding
up, our lenders and other creditors and our subsidiaries would be entitled to
payment in full before satisfaction of the liquidation preference on the class
A, series II convertible preferred stock subject to this prospectus.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements made in this prospectus that are not statements of historical
fact are "forward looking statements." Forward-looking statements generally can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate" or "believe," or similar
terminology.
The forward-looking statements include discussions about our business
strategy and expectations concerning market position, future operations,
seismic, drilling or exploration operations, profitability, liquidity and
capital resources, and statements concerning the integration into our business
of the operations we have acquired. Although we believe that the expectations in
these statements are reasonable, we cannot give any assurance that those
expectations will be correct or that the risks to investors in this offering
will not occur.
We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
Uncertainties are inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond our control. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way, and the accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary from one another. In addition, results of
drilling, testing and production after the date of an estimate may justify
revisions of the estimate, and the revisions, if significant, could change the
schedule of any further production and development drilling. Accordingly,
reserve estimates generally are different from quantities of oil and natural gas
that ultimately are recovered. Drilling and exploration plans are subject to
modification based upon seismic analysis, drilling results, production results,
and capital availability. Capital availability may also be affected by many
factors including market conditions and exploration results.
Additional important factors that could cause actual results to differ
materially from our expectations are disclosed elsewhere in this prospectus.
All subsequent written and oral forward-looking statements attributable to
the company or persons acting on its behalf are expressly qualified in their
entirety by such factors.
7
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at June 30, 1999 and our
pro forma capitalization giving effect to:
- the exchange on July 9, 1999 of 158,455 shares of our class A, series II
convertible preferred stock for $15,145,000 principal amount of our 9%
convertible debentures, series I due March 31, 2003 and the sale of 45,150
shares of class A, series II convertible preferred stock;
- 34,596 shares of our class A, series II convertible preferred stock issued
to retire $2.1 million principal amount of the Old Ocean loan plus accrued
interest and repurchase of the EnCap net profits interest;
- issuance of $4.4 million in class A, series I preferred stock;
- completion of a long-term production financing with Aquila Energy Capital
Corporation in the amount of $26.2 million;
- arrangements with trade creditors for repayment of $11.3 million in past
due amounts over an extended time;
- issuance of 1,500 shares of class A, series II convertible preferred stock
issued on part of the repayment of the Shell Capital financing; and
- the application of the proceeds from these financings.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------
HISTORICAL PRO FORMA
-------------- --------------
<S> <C> <C>
Long-term debt, including current maturities, net of unamortized discount of
$875,000........................................................................ $ 63,133,474 $ 61,454,226
Redeemable preferred stock, no par value, unlimited shares authorized; 9,488,140
shares issued and outstanding; redemption value of $9,488,140; $1.00 par value,
100,000,000 shares authorized, 13,888,140 shares issued and outstanding pro
forma........................................................................... 9,488,140 13,888,140
Stockholders' equity:
Preferred stock, $1.00 par value, 100,000,000 shares authorized; no shares
issued or outstanding; (239,701 shares outstanding as pro forma).............. -- 239,701
Common stock; $.01 par value, unlimited shares authorized; 34,784,224 shares
issued and outstanding........................................................ 20,742,246 21,448,047
Common stock reserved for issuance, 1,927,436 shares............................ 2,496,030 2,496,030
Additional paid-in capital...................................................... 878,067 22,721,062
Accumulated deficit............................................................. (21,144,491) (23,289,285)
Unrealized losses on available for sale marketable securities................... -- --
Cumulative foreign currency translation adjustment.............................. (139,506) (139,506)
-------------- --------------
Total stockholders' equity.................................................... 2,832,347 23,476,049
-------------- --------------
Total capitalization...................................................... $ 75,453,960 $ 98,818,415
-------------- --------------
-------------- --------------
</TABLE>
8
<PAGE>
The reduction in accumulated deficit results from early repayment of the
Shell financing recorded as an extraordinary loss.
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
Our common stock is listed on the Vancouver Stock Exchange under the symbol
"BZG." At August 31, 1999, there were approximately 1,166 shareholders of record
of common stock and 946 beneficial owners.
The following table sets forth, for the periods indicated, the high and low
sales prices per share, in Canadian dollars and in U.S. dollar equivalents, for
our common stock as reported on Canada Stockwatch. We commenced operations on
October 31, 1996. In 1997, we changed our fiscal year-end from August 31 to
December 31.
The share price was converted from Canadian dollars to U.S. dollars using
the average of the high and low exchange rate in effect during the respective
periods.
<TABLE>
<CAPTION>
COMMON COMMON
SHARE PRICE SHARE PRICE
RANGE (CDN) RANGE (US$)(1)
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
TEN MONTHS ENDED AUGUST 31, 1997:
Month ended November 30, 1996............................................ $ 2.50 $ 1.90 $ 1.88 $ 1.41
Second quarter ended February 28, 1997................................... $ 4.30 $ 2.00 $ 3.15 $ 1.48
Third quarter ended May 31, 1997......................................... $ 4.40 $ 3.00 $ 3.23 $ 2.19
Fourth quarter ended August 31, 1997..................................... $ 3.35 $ 2.50 $ 2.44 $ 1.82
FOUR MONTHS ENDED DECEMBER 31, 1997 (2):................................... $ 3.50 $ 1.55 $ 2.53 $ 1.08
1998
First quarter ended March 31, 1998....................................... $ 2.10 $ 1.10 $ 1.49 $ 0.77
Second quarter ended June 30, 1998....................................... $ 2.04 $ 1.30 $ 1.43 $ 0.89
Third quarter ended September 30, 1998................................... $ 1.80 $ 0.45 $ 1.24 $ 0.30
Fourth quarter ended December 31, 1998................................... $ 1.15 $ 0.32 $ 0.74 $ 0.21
1999
First quarter............................................................ $ 0.75 $ 0.28 $ 0.49 $ 0.18
Second quarter........................................................... $ 0.50 $ 0.28 $ 0.34 $ 0.19
Third quarter (through September 10, 1999)............................... $ 0.37 $ 0.20 $ 0.25 $ 0.13
</TABLE>
DIVIDEND POLICY
To date, we have not paid any cash dividends on our common stock. We intend
to retain our earnings, if any, to provide funds for reinvestment in our
exploration, development and production activities and, therefore, do not
anticipate declaring or paying cash dividends on our common stock in the
foreseeable future. Furthermore, payment of dividends, if any, in the future is
within the discretion of our board of directors and will depend on our earnings,
if any, our capital requirements and financial condition and other relevant
factors. Presently, our payment of cash dividends on our common stock is
restricted under the terms of certain of our financing arrangements. We
currently have the right to pay dividends due on our class A, series I and
series II preferred stock with common stock. To date, we have elected this
option with respect to all dividends due on the class A, series I preferred
stock and anticipate making this option with respect to all dividends on our
class A, series II preferred stock.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data as of and for the ten-month period
ended August 31, 1997, the four-month period ended December 31, 1997, and the
year ended December 31, 1998, have been derived from our audited consolidated
financial statements. The selected consolidated financial data as of and for the
six-month period ended June 30, 1998 and 1999 have been derived from our
unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments consisting of normal recurring
accruals that we consider necessary for a fair presentation of our financial
position as of the dates presented and the results of operations and cash flows
for those periods. Operating results for the six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED SEPTEMBER 1,
JUNE 30, YEAR ENDED 1997 TO OCTOBER 31, 1996
-------------------------- DECEMBER 31, DECEMBER 31, (INCEPTION) TO
1999 1998 1998 1997 AUGUST 31, 1997
------------ ------------ ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Petroleum revenues................. $ 3,278,328 $ 2,040,405 $ 4,947,457 $ 707,987 $ 444,203
Net loss applicable to common
stockholders..................... (4,572,837) (5,404,079) (11,915,191) (2,739,322) (1,917,141)
Loss per share:
Basic............................ (0.13) (0.17) (0.37) (0.10) (0.09)
Diluted.......................... (0.13) (0.17) (0.37) (0.10) (0.09)
<CAPTION>
AS OF JUNE 30, AS OF AS OF
-------------------------- DECEMBER 31, DECEMBER 31, AS OF
1999 1998 1998 1997 AUGUST 31, 1997
------------ ------------ ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (AUDITED) (AUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit).. $(41,238,336) $ (5,807,235) $ (27,360,635) $ (15,290,406) $ 1,784,075
Properties and equipment, net...... 90,487,669 62,810,529 79,412,241 25,319,771 11,916,817
Total assets....................... 102,367,148 89,496,450 95,240,247 36,216,129 21,520,880
Long-term debt, including current
maturities....................... 63,133,474 51,569,292 59,490,912 12,708,303 781,326
Redeemable preferred shares........ 9,488,140 12,000,000 9,488,140 -- --
Stockholders' equity............... 2,832,347 12,384,549 6,990,828 11,806,496 14,089,948
</TABLE>
The audited income statement data for the periods ended August 31 and
December 31, 1997, and the audited balance sheet data as of August 31 and
December 31, 1997 and as of December 31, 1998, have been included because we
have changed our fiscal year end from August 31 to December 31.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with our
consolidated financial statements beginning on page F-1 of this prospectus.
RECENT DEVELOPMENTS
On July 12, 1999, we conducted a meeting with our trade creditors to outline
a proposed repayment plan for past due amounts. The plan included proposed
discounts, payment over an extended time and other revised payment terms. As of
September 8, 1999, creditors representing 93% of past due amounts, for an
aggregate of $11.3 million, elected to participate in the repayment plan.
In July 1999, we completed an exchange offer and private placement with
European holders of our 9% debentures series I. Approximately $15.1 million of
the debentures' principal amount was exchanged for approximately $15.8 million
principal amount of our class A series II convertible preferred stock. We also
raised approximately $8 million of new equity through a private placement of the
same preferred stock series in Europe. The $8 million of new equity includes
$3.5 million of preferred stock issued to redeem the previously outstanding Old
Ocean prospect bridge loan and to repurchase the net profits interest assigned
to the lenders under that loan. A total of 238,201 shares of preferred stock
were issued in the exchange and private placement. The preferred stock issued
has a dividend rate of 8% payable semi-annually on September 30th and March 31st
in cash or our common stock at our election. The conversion price is Cdn. $0.35
per share. We have the right to redeem the preferred stock in cash at any time
upon thirty days' notice at 105% of the principal amount.
In August 1999, we sold 37.5% of our interest in the Old Ocean prospect to
Prime Natural Resources. Prime paid us $3.5 million at closing and will pay an
additional $1,978,098 on or before September 16, 1999. The sale proceeds were
used to pay the remaining costs associated with the Old Ocean 3-D seismic survey
and for general corporate purposes.
Also in August 1999, we completed a new, long-term production financing with
Aquila Energy Capital Corporation in the amount of $26.2 million. This amount
may be increased to $27.7 million based on near term production results in our
Fortenberry well. The new facility also provides for the lender to fund
additional development drilling at our Oakvale Dome field in Mississippi to a
maximum of $3.8 million. The new production financing is secured by our proven
oil and gas properties and is to be repaid through a dedicated portion of the
property income. Terms of the financing include a 12% interest rate and
assignment of 1/16th of our interest in the proven properties following full
repayment of the new production financing. Proceeds from the financing were used
to retire existing senior secured debt.
August activity also included a private placement of $4 million in new
equity through the issuance of $4.4 million of redeemable class A preferred
stock, series I to investment entities affiliated and managed by EnCap
Investments, L.C. We paid a placement fee of $100,000 to EnCap Investments, L.C.
Proceeds were used to fund arrangements under the trade creditor agreement
described above and for general corporate purposes.
11
<PAGE>
OVERVIEW
The following matters had a significant impact on our results of operations
and financial position for the six months ended June 30, 1999:
OUTSTANDING DEBT. At June 30, 1999, we had outstanding debt of $63.1
million comprised of the following:
- $36.3 million principal amount of convertible debentures, of which
approximately $15.1 million was converted into class A, series II
convertible preferred stock in July 1999;
- $12.0 million principal amount outstanding under the EnCap credit
facility;
- $6.0 million principal amount outstanding under the BOCP credit facility;
- $2.2 million principal amount outstanding under the Old Ocean loan.
Repayment of the outstanding balance was made through the issuance of
class A, series II convertible preferred stock in July 1999;
- $5.5 million, net of discount, due Shell Capital, Inc.;
- $1.1 million advanced by certain lenders who invested additional capital
in us through the exchange offer in July 1999.
We repaid the EnCap credit facility, the BOCP credit facility and the Shell
financing with funds obtained in connection with the Aquila production payment
financing discussed above and a new note with EnCap in the amount of $2.9
million. The new EnCap note matures December 31, 2000 and accrues interest at a
rate of 10% per annum.
VOLUME AND PRICE INFORMATION. Revenue for the first half of 1999 was
significantly impacted by first sales of production from the Howell 32-4 #1 well
(Oakvale Dome development well), the BOE 16-12 #1 well (Wausau exploratory well)
and the BOE 16-14 #1 well (E. Morgantown exploratory well). Production from
these wells averaged 3,698 Mcfe/d, favorably impacting revenue by approximately
$1.3 million for the six months ended June 30, 1999.
The following table summarizes volume and price information with respect to
our oil and gas production for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------- INCREASE
1999 1998 (DECREASE)
--------- --------- -----------
<S> <C> <C> <C>
Gas Volume--Mcfgd............................................. 8,569 4,535 4,034
Average Gas Price--per Mcf.................................... $ 1.82 $ 2.23 $ (0.41)
Oil Volume--Bod............................................... 226 104 122
Average Oil Price--per barrel................................. $ 12,56 $ 11.37 $ 1.19
</TABLE>
The following had a significant impact on our results of operations and
financial position for the year ended December 31, 1998:
CAPITALIZATION. In March and April of 1998, we completed the private
placement of $37.5 million principal amount of 9% convertible debentures. After
expenses and escrow of $1.056 million for the satisfaction of certain put rights
of holders of the 9% convertible debentures (of which approximately $988,000 has
been put), $32.5 million of the proceeds remained available to us. In April
1999, we agreed to lower the conversion price of the debentures from Cdn.$1.70
per common share to Cdn.$1.40 per common share in exchange for certain
amendments to the indentures. Series 3 debentureholders and the Series A
12
<PAGE>
special noteholders have the same amendments. The 9% notes outstanding after the
exchange offer are convertible into 12,859,241 shares of common stock, based on
a conversion price of Cdn.$1.40 and an exchange rate of $0.6696 per Cdn.$1.00
(the exchange rate as of September 7, 1999). The remaining 9% convertible
debentures are convertible into 9,987,859 shares of common stock based on a
current conversion price of Cdn.$1.40, adjusted for a 10% penalty on conversion
due to our failure to meet our contractual obligations to register these
debentures for resale under the Securities Act by a specified deadline.
DISCOVERY WELL. The K. S. Byrd Well, which began producing in September of
1997, contributed an average of 2,402 Mcf per day during 1998, before including
747 Mcf per day for acquired interests.
ACQUISITIONS. We acquired certain producing properties from Lasco Energy
Partners in January 1998, Calibre Energy, L.L.C. in April 1998 and Southern Gas
Company in May 1998. The assets acquired in these transactions and certain other
acquisitions contributed an average of 2,982 Mcf per day during 1998, of which
747 Mcf per day was additional production to us related to the K. S. Byrd well
not included in the discussion above.
VOLUME AND PRICE INFORMATION. Our average realized price for natural gas
decreased $0.56 per Mcf from $2.80 per Mcf for the year ended December 31, 1997
to $2.24 per Mcf for the comparable period in 1998. Income in 1998 from hedging
gains increased gas realizations by $0.18 per Mcf. The average realized oil
price decreased $8.25 per barrel from $19.08 per barrel in 1997 to $10.83 per
barrel in 1998.
The following table summarizes volume and price information with respect to
our oil and gas production for the years ended December 31, 1998 and 1997, the
four-month period ended December 31, 1997 and the ten-month period ended August
31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS TEN MONTHS
DECEMBER 31, ENDED ENDED
-------------------- INCREASE DECEMBER 31, AUGUST 31,
1998 1997 (DECREASE) 1997 1997
--------- --------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Gas Volume--Mcfgd...................................... 5,506 788 4,718 1,834 276
Average Gas Price--per Mcf............................. $ 2.24 2.80 (0.56) 2.79 3.05
Oil Volume--Bod........................................ 111 33 78 37 31
Average Oil Price--per barrel.......................... $ 10.83 19.08 (8.25) 18.54 20.28
</TABLE>
The amounts for the year ended December 31, 1997 were derived by adding the
audited four month period ended December 31, 1997 and the audited ten month
period ended August 31, 1997 and then subtracting the unaudited two month period
ended December 31, 1996.
OUTSTANDING DEBT. At December 31, 1998, we had outstanding debt of $59.5
million, compared to $12.7 million at December 31, 1997. The increase reflects
the issuance of $37.5 million of 9% convertible debentures, proceeds from which
were used to:
- fund oil and gas prospect drilling, leasing and seismic data acquisition
activities in the onshore Texas and Mississippi Gulf of Mexico region;
- repayment of a portion of our outstanding debt; and
- other working capital uses.
In addition, we entered into a financing agreement with Shell Capital under
which we sold a term production payment to Shell Capital for $7.0 million.
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
NET LOSS. For the six months ended June 30 , 1999, the Company reported a
net loss applicable to common stockholders of $4.6 million, or $0.13 per share,
compared to a net loss of $5.4 million, or $0.17 per share, in the comparable
1998 period. Weighted average shares outstanding increased from approximately
31.7 million in the first half of 1998 to over 33.9 million in the comparable
1999 period as a result of the issuance of common stock as a dividend payment on
our preferred stock as well as the exercise of warrants and options in the
second half of 1998.
REVENUE. For the six months ended June 30, 1999, revenue from crude oil and
natural gas production increased 61% over the same period in 1998. Natural gas
contributed 84% and crude oil contributed 16% of total oil and gas production
revenue.
GAS SALES. Natural gas sales increased 51%, from $1.8 million for the six
months ended June 30, 1998 to approximately $2.8 million for the same period in
1999, due primarily to increased production compared to the prior year period.
The Howell 32-14 #1 well was completed in late February 1999 and contributed a
total of approximately $590,600 in natural gas revenue on average production of
1,799 Mcf/d during the first six months of 1999. Two exploratory wells also had
first sales in the first half of 1999. The BOE 16-12 #1 and the BOE 16-14 #1
wells averaged 611 Mcf/d and 490 Mcf/d, respectively, for the first half of 1999
for combined natural gas revenue of approximately $384,100. In addition, the KS
Byrd well averaged 3,630 Mcf/d for the six months ended June 30, 1999 compared
to 2,636 Mcf/d for the same period in 1998. This increase in average production
increased revenue by approximately $179,900. The favorable impact of increased
production was partially offset by a decline in the average realized price for
natural gas sales from $2.23 per Mcf in the first half of 1998 to $1.82 per Mcf
in the comparable 1999 period. If we had received the same pricing as in the
prior year period at current production levels, natural gas revenue would have
been higher by approximately $627,100.
OIL SALES. For the six months ended June 30, 1999, oil sales increased 141%
to $514,500, compared to $213,700 for the same period in 1998, due primarily to
sales of production from new wells drilled and completed. The BOE 16-12 #1 had
first oil sales totaling approximately $251,200 for the period reported on
average production of 110 Bopd. In addition, the Rau Allen and the BOE 16-14 #1
wells contributed combined revenue of approximately $112,800 on average net
production of 46 Bopd. Oil revenue was also impacted by improved average
realized prices. Our average realized price for sales of crude oil in the first
half of 1999 increased by $1.19 per barrel, or 10%, increasing revenue by
$41,000 compared to the same period in 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion and
amortization expense for the first half of 1999 totaled $2.2 million compared to
$1.1 million in the comparable period for 1998. Full cost DD&A totaled $2.0
million for the six months ended June 30, 1999 compared to $1.0 million for the
same period in 1998. The increase in DD&A is consistent with a higher
amortizable asset base and an increase in production for the 1999 period
compared to the prior year period. On an equivalent Mcf basis, full cost DD&A
increased $0.07 per mcfe, from $1.03 per mcfe for the six months ended June 30,
1998 to $1.10 per Mcfe in the comparable 1999 period. DD&A of other assets for
the first half of 1999 totaled $189,400, an increase of $58,600 over the
comparable period in 1998, due primarily to an increase in the related asset
base.
OPERATING COSTS. Operating costs, including lease operating expense and
production taxes, increased 39% from $346,600 in the first half of 1998 to
$482,600 for the same period in 1999. The increase was due primarily to
increased production from wells drilled or acquired since the prior year period.
For the six months ended June 30, 1999, LOE, excluding severance taxes, totaled
$441,600 compared to $298,500 for the comparable period in 1998. On an
equivalent Mcf basis, average LOE for the first quarter of 1999 decreased from
$0.32 per Mcfe in 1998 to $0.25 per Mcfe in the same 1999 period.
14
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the six months ended June 30, 1999 decreased $1.5 million, or 47%, compared to
the same period in 1998. On an equivalent Mcf basis, general and administrative
costs declined 73% to $0.93 per Mcfe for the six months ended June 30, 1999
compared to $3.39 per Mcfe for the same period in 1998. The decrease in general
and administrative costs was due primarily to lower compensation expense
generated by staff reductions during the fourth quarter of 1998 and the first
quarter of 1999. These staff reductions, as well as salary reductions for
certain of the remaining employees, are expected to significantly reduce general
and administrative costs in 1999.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
totaled $1.9 million compared to $2.3 million in the comparable prior year
period. Average debt was approximately $61.0 million for the first half of 1999,
resulting in gross interest costs of $4.0 million. Other financing costs include
the amortization of discount and the amortization of the original issue discount
for the EnCap NPI totaling $156,000. Partially offsetting these costs was
capitalized interest of $2.3 million, which was based on the carrying value of
unproved properties. Financing costs also included amortization of debt issuance
costs totaling $1.0 million for the first half of 1999. For the first half of
1998, average debt was approximately $39.1 million, resulting in gross interest
costs of $2.1 million. Other financing costs included the amortization of the
original issue discount for the EnCap NPI of $871,500. Partially offsetting
these costs was capitalized interest of $705,100. Amortization of debt issuance
costs totaled $485,100 for the first half of 1998.
OTHER. Other income (expense) for the six months ended June 30, 1999
included losses on the sale of marketable securities totaling $148,100 and the
write-off of an investment in equipment for a loss of $182,300. These costs were
partially offset by interest income of $163,300. For the comparable period in
1998 other income included interest income of $319,400 slightly offset by losses
on the sale of marketable securities totaling $17,000.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
NET LOSS. For the year ended December 31, 1998, we reported a net loss
applicable to common stockholders of $11.9 million, or $0.37 per share, compared
to a net loss of $4.4 million, or $0.18 per share, in the comparable 1997
period. Weighted average shares outstanding increased from approximately 24.1
million in 1997 to over 32.4 million in 1998 as a result of the conversion and
exercise of warrants in late 1997 and the issuance of common stock to acquire
certain properties in 1998 and to pay interest and dividends on the Lasco
acquisition note and subsequent preferred shares.
REVENUE. For the year ended December 31, 1998, revenue from crude oil and
natural gas production increased 378% over the same period in 1997. Natural gas
contributed 91% and crude oil contributed 9% of total oil and gas production
revenue.
GAS SALES. Natural gas sales increased over 460%, from $804,700 for the
year ended December 31, 1997 to approximately $4.5 million for the same period
in 1998, as the impact of increased production more than offset the impact of
the decline in natural gas prices. Production for 1998 increased significantly
over the comparable prior year period due primarily to production from the
assets purchased in our recent acquisitions and production from the K. S. Byrd
Well. This increase in production improved revenue for 1998 by $4.8 million. The
average realized price for natural gas sales declined from $2.80 per Mcf in 1997
to $2.24 per Mcf in the comparable 1998 period, decreasing revenues by $1.1
million. Income in 1998 from hedging gains increased gas realizations by $0.18
per Mcf.
OIL SALES. For the year ended December 31, 1998, oil sales increased 91% to
$440,500, compared to $231,100 for the same period in 1997, due primarily to
sales of production for properties acquired in our recent acquisitions and
production from our Reedy Creek properties. This increase in production improved
revenue for 1998 by approximately $544,700. Our average realized price for sales
of crude oil in
15
<PAGE>
1998 decreased by $8.25 per barrel, or 43%, decreasing revenue by $335,300
compared to the same period in 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION. Our depreciation, depletion and
amortization expense for 1998 totaled $3.2 million compared to $854,100 in the
comparable period for 1997. Full cost DD&A totaled $2.8 million for the year
ended December 31, 1998 compared to $709,200 for the same period in 1997. The
increase in DD&A is consistent with the increased production for 1998 compared
to the prior year period. Included in DD&A for the year ended December 31, 1997
was $221,000 of non-cash charges attributable to a price-related reduction in
the book value of our oil and gas reserves. On an equivalent Mcf basis, full
cost DD&A decreased $0.71 per Mcfe, from $1.97 per Mcfe for the year ended
December 31, 1997 to $1.26 per Mcfe in the comparable 1998 period. DD&A of other
assets for 1998 totaled $305,700, an increase of $160,800 over the comparable
period in 1997 due primarily to an increase in the related asset base.
OPERATING COSTS. Operating costs, including lease operating expense and
production taxes, increased 763% from $111,500 in 1997 to $962,700 for the same
period in 1998. The increase was due primarily to increased production from
wells drilled or acquired since the prior year period. For the year ended
December 31, 1998, lease operating expense, excluding severance taxes, totaled
$860,200 compared to $86,500 for the comparable period in 1997. On an equivalent
Mcf basis, average lease operating expense for 1998 increased from $0.24 per
Mcfe in 1997 to $0.38 per Mcfe in 1998. This increase is primarily due to the
Lasco acquisition that comprised older, lower rate wells.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the year ended December 31, 1998 increased over $1.9 million, or 52%, compared
to the same period in 1997. On an equivalent Mcf basis, general and
administrative costs declined 76% to $2.56 per Mcfe for the year ended December
31, 1998 compared to $10.51 per Mcfe for the same period in 1997. The increase
in general and administrative costs was due primarily to higher compensation
expense generated by a larger staff. We began 1998 with 26 employees, increasing
to 37 employees during the year. Staff reductions during the fourth quarter of
1998 reduced total employees to 29 at year-end. Further staff reductions during
the first quarter of 1999 reduced total employees to 21 at March 31, 1999. These
staff reductions, as well as salary reductions for the majority of the remaining
employees, are expected to significantly reduce general and administrative costs
in 1999. The overall high level of general and administrative expenses in 1997
was due to the initial costs associated with creating and managing our extensive
capital program.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1998
totaled $5.8 million compared to $689,219 in the comparable prior year period.
The increase was due primarily to the financing arrangements under the EnCap
credit facility entered into in December 1997 and interest on the $37.5 million
principal amount of 9% convertible debentures issued in March and April of 1998.
Average debt was approximately $44.6 million for 1998, resulting in gross
interest costs of $4.8 million. Other financing costs include the amortization
of the original issue discount for the EnCap NPI of $1.7 million and the
amortization of deferred loan and issuance costs of $1.2 million. Partially
offsetting these costs were capitalized interest of $1.9 million, which is based
on the carrying value of unproved properties.
OTHER. Other income (expense) for the year ended December 31, 1998 included
a charge of $1.0 million due to the termination of an employee recorded in
December 1998 to reflect settlement of his employment contract. The settlement
will be paid out through January 2001. Offsetting this expense was interest
income of $573,609 and gains on the sales of marketable securities totaling
$24,971. For the comparable period in 1997, interest income of $77,844 was
offset by losses on the sales of marketable securities totaling $86,824.
16
<PAGE>
FOUR MONTHS ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED AUGUST 31, 1997
NET LOSS. We reported a net loss of $2,739,300, or $0.10 per share, for the
four months ended December 31, 1997 and $1,917,100 or $0.09 per share, for the
ten months ended August 31, 1997. Weighted average shares outstanding were 27.9
million for the four months ended December 31, 1997 and 21.9 million for the ten
months ended August 31, 1997.
GAS SALES. Natural gas sales for the four months ended December 31, 1997
and the ten months ended August 31, 1997 totaled $624,400 and $256,000,
respectively. Production averaged 1,833 Mcfd for the four-month period ended
December 31, 1997 at an average price of $2.79 per Mcf and 276 Mcfd for the ten-
month period ended August 31, 1997 at an average price of $3.05 per Mcf. The
K.S. Byrd Well began production in September 1997 and averaged 1,605 Mcfd for
the four months ended December 31, 1997.
OIL SALES. Our crude oil sales for the four months ended December 31, 1997
and the ten months ended August 31, 1997 totaled $83,500 and $188,200,
respectively. Production averaged 36.9 barrels per day and 30.5 barrels per day,
respectively, for the four-month period ended December 31, 1997 and the
ten-month period ended August 31, 1997. Our average realized price for sales of
crude oil for the four-month period ended December 31, 1997 and the ten-month
period ended August 31, 1997 were $18.54 per barrel and $20.28 per barrel,
respectively.
DEPRECIATION, DEPLETION AND AMORTIZATION. For the four months ended
December 31, 1997, depreciation, depletion and amortization expense totaled
$634,500 and for the ten months ended August 31, 1997, DD&A expense was
$240,400. Full cost DD&A averaged $2.32 per Mcfe for the four months ended
December 31, 1997 and $1.07 per Mcfe for the ten months ended August 31, 1997,
due primarily to a ceiling test write-down of $221,000 at December 31, 1997.
OPERATING COSTS. Operating costs totaled $49,800 and $68,500, respectively,
for the four-month period ended December 31, 1997 and the ten-month period ended
August 31, 1997. Lease operating expense, excluding severance taxes, totaled
$42,700 and $45,600 for the same periods, respectively. On an equivalent barrel
basis, LOE for the four months ended December 31, 1997 averaged $0.17 per Mcfe
and for the ten months ended August 31, 1997 averaged $0.33 per Mcfe.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative costs
totaled $2,087,100 for the four months ended December 31, 1997 and $2,026,400
for the ten months ended August 31, 1997. On an equivalent Mcf basis, general
and administrative expenses were $8.32 per Mcfe for the four months ended
December 31, 1997 and $14.53 per Mcfe for the ten months ended August 31, 1997.
General and administrative costs were significant during these periods and
reflected establishment of the infrastructure necessary to sustain the planned
expansion of our oil and gas operations and our desired position as operator of
many of our prospects. Costs included signing bonuses paid to professional and
senior management staff as inducements to leave their previous employment and
join us, legal and accounting fees, and the settlement of a lawsuit filed by a
former employee.
NET FINANCING COSTS. Net financing costs for the four months ended December
31, 1997 were $625,100, and consisted of gross interest expense of $286,700, the
amortization of the original issue discount for the EnCap NPI of $427,500 and
amortization of deferred loan costs of $42,900. Partially offsetting these costs
was capitalized interest of $108,200 and interest income of $23,800. For the
ten-months ended August 31, 1997, gross interest expense of $49,300 was more
than offset by interest income of $59,200. The higher financing costs in the
four-month period ended December 31, 1997 reflect our increase in long-term debt
from $759,300 at August 31, 1997 to $14.7 million at December 31, 1997. This
increase in debt relates to the EnCap credit facility entered into in late 1997,
that was used to finance the Oakvale Dome Field and Old Ocean acquisitions and
related development.
17
<PAGE>
OTHER. Other revenue for the four-month period ended December 31, 1997 and
the ten-month period ended August 31, 1997 represents losses on the sale of
marketable securities of $50,900 and $35,900, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for exploration, development and acquisition of
oil and gas properties, the repayment of trade payables and repayment of
principal and interest on outstanding debt. Our sources of financing include
sales of securities, revenue generated from operations, ongoing sales of
non-core assets and proceeds from production payment facilities. Based on the
foregoing, we will require additional capital from more than one of the sources
identified above to fund our ongoing activities and capital budget. If we are
unable to obtain additional capital, we will either have to sell interests in
our prospects to fund our drilling program, curtail our exploration activities
or curtail ongoing activities. The curtailing of activities could include
reducing the number of wells drilled, slowing activities on projects that we
operate, selling additional interests in our prospect inventory or a combination
of these alternatives.
Many of the factors that may affect our future operating performance and
long-term liquidity are beyond our control, including, but not limited to:
- oil and natural gas prices;
- governmental actions and taxes;
- the availability and attractiveness of financing; and
- our operational results.
We continue to examine alternative sources of long-term capital, including:
- bank borrowings;
- the issuance of debt instruments;
- the sale of common stock or other equity securities;
- the issuance of net profits interests;
- sales of promoted interests in our prospects; and
- various forms of joint venture financing.
In addition, the prices we receive for our future oil and natural
gas-production and the level of our production will have a significant impact on
future operating cash flows.
LIQUIDITY. At June 30, 1999, we had cash and cash equivalents on hand of
$29,100 and working capital deficit of $41.2 million, as compared to a cash
balance of $2.3 million and a working capital deficit of $27.5 million as at
December 31, 1998 and a cash balance of $3.2 million and a working capital
deficit of $15.3 million at December 31, 1997. Our ratio of current assets to
current liabilities was 0.13:1 at June 30, 1999, 0.25:1 at December 31, 1998 and
0.37:1 at December 31, 1997. The working capital deficit and low current ratio
were primarily due to the maturity dates of the EnCap credit facility and BOCP
credit facility discussed below, repayment of which was made in August 1999.
CASH FLOWS. Cash flows provided by operations totaled $153,600 for the six
months ended June 30, 1999, compared to cash flows used in operations of $4.1
million for the year ended December 31, 1998. Cash used in investing activities
for the six months ended June 30, 1999 and year ended December 31, 1998 was $9.3
million and $35.4 million, respectively. During the first half of 1999, costs
incurred for exploration and development expenditures totaled $10.0 million and
capital expenditures for furniture and equipment totaled $65,700. Partially
offsetting these costs were proceeds of $160,500 from the sale of marketable
securities and $534,700 in proceeds from the sale of non-core oil and gas
properties. Cash outlays for
18
<PAGE>
exploration and development expenditures totaled approximately $36.3 million and
capital expenditures for furniture and equipment totaled $745,400 during the
year ended December 31, 1998. Partially offsetting these costs were $1.1 million
in proceeds from the sale of non-core properties and $1.1 million in proceeds
from the sale of marketable securities.
Cash provided by financing activities totaled $3.0 million for the first
half of 1999 and included borrowings under the BOCP credit facility of
approximately $3.0 million and repayments under the Shell production payment
totaling approximately $550,200. For the year ended December 31, 1998 cash
provided by financing activities totaled approximately $38.7 million and
consisted primarily of proceeds from the issuance of 9% convertible debentures
and 9% notes. We also borrowed $3.0 million under the EnCap credit facility and
repaid $5.0 million thereunder during the first quarter of 1998. In December
1998, we entered into a financing agreement with Shell Capital under which we
sold a term production payment to Shell Capital for $7.0 million. Also in
December, we repaid $2.9 million on Tranche A and Tranche B loans under our BOCP
credit facility resulting in net borrowings under that facility of $2.3 million
for the year ended December 31, 1998. We also borrowed $2.2 million for the
acquisition of property interests from Mobil through the Old Ocean loan.
CREDIT FACILITIES
ENCAP CREDIT FACILITY. In 1997, we entered into a $20 million credit
agreement with EnCap Capital Fund III, L.P. consisting of an original promissory
note for $12 million and a supplemental promissory note for $8 million. The
original note bears interest at 10% per annum through December 31, 1998 and at
18% per annum thereafter. The original and supplemental note were repaid in full
and are no longer outstanding. The proceeds from the facility were applied to
the acquisition of Oakvale Dome ($8,000,000), and Old Ocean properties and the
drilling and completion of certain development wells ($4,000,000). A first lien
on certain properties and a second lien on certain other properties secure the
original note. Mr. Tomlinson, Calibre and certain affiliates of Calibre
guarantee the original note.
Under the terms of the original note, we agreed to convey to EnCap Energy,
on January 1, 1999, a 25% net profit interest from the properties acquired with
the proceeds of the borrowing. In connection with the original granting of the
EnCap NPI, we recorded a discount on the original note of $2,102,180 as of
December 31, 1997. The discount has been amortized over the term of the original
note. The carrying amount of the oil and gas interests has been reduced by the
same amount.
Under the terms of the supplemental note, EnCap Energy was issued warrants
to purchase up to 1.5 million shares of our common stock at an exercise price of
$1.28 per share. In connection with the issuance of these warrants, we recorded
a discount on the supplemental note of $367,881 as of December 31, 1997. This
discount is being amortized over the term of the supplemental note. Pursuant to
a financing agreement dated November 4, 1998 with EnCap Energy and as
consideration for enabling additional funding through the BOCP Credit Facility,
the warrants were re-priced to $0.46475 per share.
BOCP CREDIT FACILITY. In December 1998, our loan agreement with Bank One NA
was purchased by BOCP Energy Partners, L.P., an affiliate of EnCap. Pursuant to
an assignment of note and liens dated December 29, 1998, Bank One assigned the
original loan agreement, together with all loan documents referred to therein,
to BOCP. In December 1998, the principal amount then outstanding under Tranche A
of $2.9 million plus interest was repaid and, per amendments to the loan
agreement, no further advances will be requested or made under Tranche A.
Interest accrued on Tranche A at prime plus 2.0% and on Tranche B at a rate of
15% per annum, payable monthly.
The amendments also modified the terms of Tranche B of the credit facility
as follows:
- Maximum availability of $6,000,000;
- No advances on Tranche B will be requested or made on or after April
30, 1999;
19
<PAGE>
- Maturity date of July 31, 1999; and
- Interest rate of prime plus 8% per annum through and including December
31, 1998, and 15% per annum from and after January 1, 1999.
The present outstanding balance of the BOCP credit facility of $6.0 million
plus all accrued interest was repaid in full in August 1999.
SHELL FINANCING. In December 1998, we entered into a financing agreement
with Shell Capital, Inc. whereby we sold a term production payment to Shell
Capital for $7.0 million. The production payment comprised a dedication of 42%
of the net revenues from the Wausau, Oak Hill and East Morgantown properties,
23.1% of Oakvale Dome's Howell well, 12.2% of Oakvale Dome's Fortenberry well
and 38.5% of Oakvale Dome's Byrd well. The interests conveyed are subject to
future adjustment. The Shell production payment is secured solely by the
properties and is non-recourse to us. Following full pay-out ($7.0 million plus
a 15% rate of return) of the production payment, the dedicated revenue interest
is returned to us less a permanent royalty interest equal to 8.75% of our net
revenue interest in Wausau, Oak Hill and East Morgantown; 4.8% of the Howell and
Byrd wells; and 2.5% of the Fortenberry well. We have the right to buy back the
production payment at a stated rate of return of 25% plus a payment of $1.0
million. In connection with the right to buy back the permanent overriding
royalty interest conveyance, we recorded a discount on the financing of $1.0
million. The carrying amount of the oil and gas interests has been reduced by
the same amount. Shell Capital further agreed to expand the Shell production
payment up to $25.0 million provided that we sell certain properties, enter into
a payment schedule for amounts owed to an industry partner, raise additional
capital and obtain certain minimum results from current development drilling
activity. We are currently negotiating with Shell Capital and other parties to
complete the expansion of the Shell production payment or the creation of a new
production payment.
This financing has been classified as debt on the balance sheet and began
being reduced in 1999 as production is delivered to Shell under the terms of the
contract. Volumes delivered to Shell are reported as revenue at prices received
by Shell. Interest expense is recorded based on a rate of 15% per annum.
OLD OCEAN LOAN. On December 31, 1998, we obtained a $2.2 million loan from
a group of lenders led by RP&C International, the Agent in our recently
completed offering of convertible preferred stock, the proceeds being used to
acquire additional interests in the Old Ocean Project from Mobil. The loan was
due, through extension, on July 31, 1999, and was secured by the acquired
interests and a junior lien on certain other properties. We have repaid a
majority of the loan through the issuance of our convertible preferred stock in
July 1999. We also granted the providers of the facility with an overriding
royalty that is to be converted into a participating net profit interest, which
interest can be repurchased by us for $1.1 million in cash or stock and $1.1
million principal amount of warrants. We repurchased the overriding interest and
participating net profits interest with preferred stock as well. One lender of
$100,000 elected to accept cash for repayment of their portion of the loan and
purchase of the overriding interest and was paid in July 1999.
CONVERTIBLE DEBENTURES
In April 1998, we issued to certain Canadian investors $1,652,000 principal
amount of our series A special notes, which are convertible into the same
principal amount of our series 2 debentures, and issued to certain United States
investors $6,960,000 principal amount of our series 3 debentures on
substantially similar terms as the series A notes. We intend to offer holders of
the series 3 debentures the ability to exchange their special notes or
debentures into class A, series II preferred stock on terms no more favorable
than the terms on which we recently completed the exchange of our 9% convertible
debentures, series I due March 31, 2003. The holders of series 2 debentures will
not be offered the opportunity to exchange their series 2 debentures for
preferred stock.
20
<PAGE>
CHANGES IN ISSUED SHARE CAPITAL
On May 28, 1999, we issued 1,057,500 shares of our common stock to certain
holders of our series 3 debentures in exchange for interest owed and due on
March 31, 1999. We also agreed to issue 541,700 shares of our common stock to a
holder of series 3 debentures to retire a $250,000 principal amount of the
debentures.
YEAR 2000
We operate on an externally designed software package that is compliant with
the year 2000. The year 2000 problem is the result of software that uses two
digits (rather than four) to define the applicable year. Any software or
hardware that uses time-sensitive coding may recognize a day using "00" as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures. We are attempting to identify other potential areas of risk and
have begun addressing these in our planning, purchasing and daily operations.
Based on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on our financial position,
results of operations, or cash flows in future periods. If, however, we, our
customers, or vendors are unable to adequately resolve such processing issues in
a timely manner, our operations and financial results may be adversely affected.
21
<PAGE>
BUSINESS AND PROPERTIES
BACKGROUND
We are an independent energy company engaged in the exploration for and
development of oil and natural gas. We have interests in over 25 oil and gas
prospects and projects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana. Most of these prospects have been, are being,
or are expected to be, enhanced with 3-D seismic data and CAEX technologies. The
3-D seismic data, when completed, will cover over 820 square miles. Our 1999
capital budget provides for a total of $11.3 million for drilling and prospect
development. Of this amount:
- approximately $7.3 million is budgeted for development drilling;
- approximately $1.0 million is budgeted for exploratory drilling, testing
and subsequent completions;
- $2.3 million is budgeted for net seismic data acquisitions; and
- the remainder is budgeted primarily for leasehold purchases.
We were originally formed on February 9, 1981, for the purpose of conducting
mineral exploration in Canada. In 1989, we changed our focus and concentrated on
investment and merchant banking activities. At that time, we wrote off our
mineral property costs and ceased all mineral exploration activities. From 1991
to 1993, we diversified into the acquisition and development of oil and gas
properties. During 1996, we sold substantially all of our investments outside of
oil and gas and refocused operations on oil and gas exploration and development
in the United States. Effective as of October 31, 1996, we acquired Texstar
Petroleum, Inc., and as a result, we focused our operations on oil and gas
exploration and development in the United States, specifically the Gulf Coast
areas of Mississippi, Texas and Louisiana. Former shareholders of Texstar
acquired our control, and Texstar became our wholly owned subsidiary. In July
1997, we changed our name from Benz Equities Ltd. to Benz Energy Ltd. We have
reincorporated in Delaware and are now a Delaware corporation under the name
Benz Energy Inc.
A substantial portion of our growth has been through acquisitions, including
the following 1998 acquisitions:
- the acquisition in January 1998 of certain oil and gas prospects from
Lasco Energy Partners, L.P.;
- the acquisition on April 22, 1998 of certain oil and gas property
interests of Calibre (certain closing matters to be completed);
- the acquisition on May 1, 1998 of certain oil and gas properties from
Southern Gas Corporation;
- the acquisition effective in July 1998 of certain oil and gas property
interests from Starbucks Trust (certain closing matters to be completed);
and
- the acquisition on December 29, 1998 of the Mobil interest in the Old
Ocean project.
RECENT DEVELOPMENTS
On August 25, 1999, we sold 37.5% of our interest in the Old Ocean Prospect
to Prime Natural Resources, Inc. Prime paid us $3,500,000 at closing and will
pay an additional $1,978,098 on or before September 15 in consideration of the
interest purchased. We reserved an overriding royalty interest in all leases and
contractual rights to volumes of production and all similar interests, whether
we currently own them or later acquire them, within the established area of
mutual interest for the project. Prime has an option for a six month period to
purchase an additional 12.5% of our interest in the Old Ocean prospect, subject
to the overriding royalty reservation set forth above, at a purchase price of
$1,826,033, plus $214,276 at the end of the six month period. We have agreed to
enter into an agreement under which Prime or one of its affiliates will have the
right to market the 3-D seismic geophysical data covering the Old Ocean Prospect
for a ten year period following a 120 day exclusivity period that we have
retained. Prime
22
<PAGE>
will be entitled to our share of the proceeds from the sale of the data, which
share may be no less than 66 2/3%, subject to applicable sales commissions. In
addition, Prime or its affiliate must grant us a license to other geophysical
data outside the Old Ocean prospect owned by Prime or its affiliate. We may
select the outside data of our choice covering up to 102 square miles.
Also in August 1999, we completed a new, long-term production financing with
Aquila Energy Capital Corporation in the amount of $26.2 million. This amount
may be increased to $27.7 million based on near term production results in our
Fortenberry well. The new facility also provides for the lender to fund
additional development drilling at our Oakvale Dome field in Mississippi to a
maximum of $3.8 million. The new production financing is secured by our proven
oil and gas properties and is to be repaid through a dedicated portion of the
property income. Terms of the financing include a 12% interest rate and
assignment of 1/16th of our interest in the proven properties following full
repayment of the new production financing. Proceeds from the financing were used
to retire existing senior secured debt.
August activity also included a private placement of $4 million in new
equity through the issuance of $4.4 million of redeemable class A preferred
stock, series I to investment entities affiliated and managed by EnCap
Investments, L.C. We paid a placement fee of $100,000 to EnCap Investments, L.C.
Proceeds were used to fund arrangements under the trade creditor agreement
described above and for general corporate purposes.
On July 12, 1999, we conducted a meeting with our trade creditors to outline
a proposed repayment plan for past due amounts. The plan included proposed
discounts, payment over an extended time and other revised payment terms. As of
September 8, 1999, creditors representing 93% of past due amounts, for an
aggregate of $11.3 million, elected to participate in the repayment plan.
On July 9, 1999, we consummated an offering pursuant to which we offered to
exchange up to 354,250 shares of our class A, series II convertible preferred
stock for any and all of our outstanding 9% convertible debentures, series I,
due March 31, 2003, and an offering to sell up to 121,000 shares of class A,
series II convertible preferred stock. At the closing, we exchanged $15,145,000
principal amount of the 9% convertible debentures and issued an aggregate of
238,201 shares of class A, series II convertible preferred stock, which included
44,600 shares issued under the primary offering and the remainder of which were
issued pursuant to the exchange offer. In addition, we issued 34,596 shares of
class A, series II convertible preferred stock and warrants to purchase
3,974,923 shares of common stock in connection with the retirement of a majority
of the Old Ocean loan. The proceeds from the exchange offer and offering of
convertible preferred stock were used to retire the Old Ocean loan, to
repurchase EnCap's portion of the Old Ocean NPI, the payment of a portion of the
seismic costs relating to the Old Ocean prospect, and for the fees and expenses
of the transactions.
In June 1999, we completed the drilling of our Fortenberry #1 well to a
depth of 16,126 feet at Oakvale Dome Field in Jefferson Davis County,
Mississippi. We elected to not drill deeper to the projected depth of 16,250
feet due to concerns that additional drilling difficulty could be encountered in
the sidetrack hole. Open hole electric and porosity logs which run to a depth of
16,088 feet indicate a total of 80 net feet of hydrocarbon bearing sands in the
primary objectives in the Hosston Formation at depths between 15,792 feet and
15,992 feet. An additional four feet of net pay was measured by electric and
porosity logs in the lower Booth zone starting at a depth of 16,075 feet based
on mud logs from the original sidetrack hole. The remainder of the zone could
not be logged due to existing hole conditions. We own a 70% working interest in
the well and an average 64% working interest in the field. We are proceeding to
complete the well for production.
In May 1999, we closed the sale of our interests in the Lisbon Field,
comprising essentially all of our proven reserves in Louisiana, for $507,500 in
gross proceeds to an unrelated party.
In January 1999, we acquired, on behalf of us and our partner in the Wausau
prospect, a gas pipeline in Mississippi for approximately $425,000 to provide
access for gas sales. Included in the purchase were a
23
<PAGE>
100% and a 93.75% Bpo working interest in two producing gas wells. We own a
53.8% interest in the pipeline and the Fairchild #1 well and a 50.5% interest in
the A. Foote Estate #1 well. Gas reserves net to us are estimated to be in
excess of 150 Mmcfg and net production of over 150 Mcfgpd.
STRATEGY
Our strategy is to expand our reserves, production and cash flow through the
implementation of an exploration and exploitation program that focuses on:
- obtaining dominant positions in core areas of exploration and development
in under-exploited areas in or adjacent to fields and trends that have
historically produced hydrocarbons in significant quantities;
- enhancing the value of our prospects and reducing exploration risks
through the use of 3-D seismic data and CAEX technologies;
- maintaining an experienced technical staff with the expertise necessary to
take advantage of our proprietary 3-D seismic data and CAEX technologies;
- adding reserves and production using modern reservoir stimulation methods;
and
- retaining control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. We have identified core areas for
exploration and development in geological trends with demonstrated histories of
prolific natural gas production from high porosity reservoir rocks with profiles
suitable for seismic evaluation. We believe that by obtaining substantial
working interests, related 3-D seismic data and significant acreage positions
within our core areas, we will be able to achieve a dominant position in focused
portions of those areas. With a dominant leasehold position, we believe we can
better control the core areas, drilling opportunities and future production and
can attempt to minimize costs through economies of scale and other efficiencies
inherent in our focused approach. These cost savings and efficiencies include
the ability to use our 3-D seismic data to reduce drilling risks and lower our
leasehold acquisition costs by identifying and purchasing leasehold interests
only in those focused areas in which we believe drilling is most likely to be
successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. We attempt to enhance the value
of our prospects through the use of 3-D seismic data and CAEX technologies, with
an emphasis on direct hydrocarbon detection technologies. These technologies
create a computer generated 3-dimensional display of subsurface geological
formations that help our professional staff detect seismic anomalies in
structural features that are not apparent in 2-D seismic surveys. We believe
that 3-D seismic data, if properly used, will reduce drilling risks and costs by
reducing the number of dry holes, optimizing well locations and reducing the
number of wells required to exploit a discovery.
EXPERIENCED TEAM. We maintain an experienced staff, including engineers,
geoscientists, landmen and other technical personnel. Our professional staff has
on average 18 years of experience in the oil and gas industry.
USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING TECHNOLOGY. In
addition to applying the latest in 3-D seismic and CAEX technology, we use the
latest in industry reservoir stimulation and directional drilling techniques.
For example, many of our development and exploitation opportunities are "tight"
reservoirs in which modern stimulation practices may significantly increase
production.
CONTROL OF DRILLING FUNCTIONS. We believe that controlling the most
critical functions in the drilling process will enhance our ability to
successfully develop our prospects. We have acquired a majority interest in many
of our prospects, including interests in most of the 3-D seismic data relating
to those prospects. In many cases where we do not own a majority interest in a
prospect we still own a greater interest than that of any other working interest
owner. As a result, in many of our prospects, we will be able to influence the
24
<PAGE>
areas to explore, manage the land permitting and option process, determine
seismic survey areas, oversee data acquisition and processing, prepare,
integrate and interpret the data and identify each prospect drillsite. In
addition, we will be the operator of many of the wells drilled on these
prospects.
THE PROSPECTS
Our prospects are located primarily in the Gulf Coast areas of Mississippi,
Texas and Louisiana. As of June 30, 1999, we owned interests in 12 producing
wells we operated and also owned non-operated interests in 13 producing wells.
Daily production from both operated and non-operated wells net to our interest
averaged 5,506 Mcfgd and 111.4 Bopd for the year ended December 31, 1998, and
8,494 Mcfgd and 226 Bopd for the six months ended June 30, 1999. Daily
production as of June 30, 1999, was approximately 9,324 Mcfgd and 137 Bopd.
25
<PAGE>
Each of our prospects differs in scope and character and consists of one or
more types of assets, such as 3-D seismic data, working interests in oil and gas
leases, oil and gas lease options, contractual rights to earn a working interest
in oil and gas leases, royalty interests or other mineral interests. Most of our
prospects have been, are being, or are expected to be enhanced with 3-D seismic
data and CAEX technologies. The 3-D seismic data acquired will, when completed
for the existing prospects, cover over 820 square miles. The table below gives
certain information regarding the location, objectives, and present status of
our most significant prospects as of June 30, 1999:
<TABLE>
<CAPTION>
LEASED ADDITIONAL GROSS
ACREAGE ACREAGE(4) SQUARE
------------------------ ------------------------ MILES OF APPROX.
GROSS NET GROSS NET 3-D SEISMIC FORMATION TOTAL
PROSPECT ACRES(1) ACRES(2) ACRES(1) ACRES(2) DATA(5) OBJECTIVE DEPTH
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MISSISSIPPI
Oakvale Dome(3,7)....................... 4,717 2,097 N/A N/A 33 Hosston 16,700'
Glancy Re-entry(3,8).................... 5,175 4,730 N/A N/A N/A Hosston; 21,000'
Cotton
Valley
Wausau(3)............................... 960 483 N/A N/A 55 Cotton 19,000'
Valley
Sardis Church Dome(3,8)................. 3,508 3,038 N/A N/A N/A Hosston 16,500'
TEXAS
LaHinch(3,9)............................ 1,382 1,036 N/A N/A 20 Wilcox 16,000'
Old Ocean(8,10,11,12,13)................ 2,082 1,493 15,107 7,296 102 Frio 16,000'
Oak Hill Field(3)....................... 793 698 N/A N/A N/A Cotton 9,500'
Valley
Rayburn(3,8)............................ 2,966 1,298 1,070 847 30 Yegua; 15,000'
Wilcox
OTHER
Louisiana............................... 7,362 704 N/A N/A 478
Mississippi............................. 26,034 10,581 N/A N/A 73
New Mexico.............................. 160 12 N/A N/A N/A
Texas................................... 5,680 2,405 N/A N/A 30
----------- ----------- ----------- ----------- ---
Total................................. 60,819 28,575 16,177 8,143 821
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
</TABLE>
- ------------------------
(1) "Gross Acres" means an acre in which we own a working interest. When used
in conjunction with acreage under options it means an acre in which we will
acquire a working interest if and when the option is exercised.
(2) "Net Acres" means the sum of the fractional working interest owned in gross
acres expressed as whole numbers and fractions thereof.
(3) Operated by us.
(4) "Additional Acreage" refers to the number of acres in which we own options
for oil and gas leases from mineral owners and, with respect to part of the
acreage reported for the Old Ocean Prospect, also has contractual rights to
earn a working interest in the 21,784 acre Old Ocean Unit.
26
<PAGE>
(5) Represents 3-D seismic data acquired, being acquired or expected to be
acquired.
(6) Drilling.
(7) Completing.
(8) Soliciting industry participant.
(9) Evaluating 3-D seismic data.
(10) Shooting 3-D seismic survey.
(11) Affiliates of EnCap own an overriding royalty interest that is convertible
into a participating net profit interest.
(12) We will earn an additional working interest in deep rights upon completion
and delivery of a 3-D survey over the unit and the establishment of
commercial production.
(13) Certain interest owners own an overriding royalty interest that is
convertible into a participating net profits interest. We have the right
to buy back the participating net profits interest and are currently
negotiating such purchase in exchange for Preferred Stock.
Set forth below are descriptions of our most significant prospects. Unless
otherwise indicated, all information is as of June 30, 1999.
OAKVALE DOME. The Oakvale Dome prospect, located in Jefferson Davis County,
Mississippi, is our most significant producing property. We own approximately
4,717 gross (2,097 net) acres in the prospect. We are the operator.
A 2-D seismic survey shot and processed originally in 1979, was reprocessed
in 1996 and confirmed the discovery well, which was the K.S. Byrd Well. The K.S.
Byrd Well was completed in June 1997 in the Harper formation from 15,964 feet to
15,988 feet, flowing 5.708 Mmcfgd. Initial reserve estimates as of August 1,
1997 conducted by an independent petroleum engineer gave the well proved
producing reserves of 8.7 Bcfg and 34,800 barrels of condensate. Later reserve
estimates as of January 1, 1999 conducted by an independent petroleum engineer
revised the well's proved producing reserves to 12.1 BCFG and 41,500 barrels of
condensate. The well began sales of production in September 1997 and, as of June
30, 1999, was flowing at the rate of 6,757 Mmcfgd and 21 Bopd.
In February of 1999 the Howell #1 well was completed and initial tests
indicate a commercial production rate of 21.1 Mmcfgd and 19 barrels of
condensate per day.
The Fortenberry #1 has just been drilled to total depth. The well is being
completed for production.
GLANCY. We own approximately 5,175 gross (4,730 net) acres in the Glancy
prospect in Copiah County, Mississippi. We are the operator. Glancy Field has
produced gas and condensate from the Lower Cretaceous Rodessa formation on
acreage not owned by us. The Glancy prospect is characterized as a simple
anticline structure that formed as a result of a deep-seated salt pillow. The
presence of reservoir quality sandstones at both the deeper Hosston and Cotton
Valley levels has been demonstrated by two well penetrations, both of which have
produced gas and had multiple shows of hydrocarbons. Early attempts (in 1971) to
fracture stimulated one of the test wells, having an initial production of 3.1
Mmcfgd on an extended test from the Cotton Valley, damaged the formation in the
near-wellbore area. We intend to reenter a deep test well and to apply modern
fracture stimulation to establish commercial production.
WAUSAU. We own approximately 960 gross (483 net) acres in the Wausau
prospect in Wayne County, Mississippi (surface to 15,360 feet only). We are the
operator. We have rights in a 3-D survey acquired by Compagnie Generale de
Geophysiqe over this prospect area. This project is located on two flanks of a
large salt ridge trending northwest to southeast. Based upon 3-D seismic data,
the Cotton Valley appears to be trapped in both a simple closure and an updip
pinchout along the salt ridge flank. We commenced
27
<PAGE>
drilling a test well in May 1998 and completed the well in November 1998 as a
Cotton Valley discovery. Production commenced in November 1998 and was increased
to a rate of over 400 Bopd and 2,000 Mcfd with the connection to a gas sales
pipeline in February 1999. The well has three additional shallower Cotton Valley
reservoirs behind pipe.
SARDIS CHURCH DOME. We own approximately 3,508 gross (3,038 net) acres in
the Sardis Church Dome prospect in Copiah County, Mississippi. We are the
operators. Our drilling objectives are the Paluxy, Hosston and Cotton Valley
sands. We anticipate we will sell at least 50% of the working interest to an
industry participant before spudding the test well. This prospect is an analog
to the Oakvale Dome discovery and is located along a trend. A nearby off
structure well has tested significant oil and gas shows in the Hosston objective
section.
LAHINCH. We own deep rights under approximately 1,382 gross ( 1,036 net)
acres in the LaHinch prospect in Duval County, Texas. We are the operator. The
objectives for the prospect are sands in the Upper Wilcox formation. The
adjoining operator has drilled an Upper Wilcox test on the same structure that,
if successful, will confirm our prospect and reclassify it as a proven location.
This well reached total depth in April 1999 and is currently being completed.
OLD OCEAN. We own leases, options for oil and gas leases and have
contractual rights to earn working interests in approximately 17,189 gross
(8,789 net) acres in the Old Ocean prospect in Brazoria and Matagorda Counties,
Texas. We own a 37.02% working interest within the Old Ocean unit and a 69.23%
working interest outside the unit, but within the 3-D area. A 3-D seismic survey
is underway and we are the operator. The Old Ocean prospect is the largest Frio
gas field in the Gulf Coast, having produced more than five Tcfge since its
discovery in 1934. In excess of 200 wells have been drilled in the Old Ocean
field. These reserves have been produced from four normally pressured reservoirs
between 9,500 and 11,000 feet.
The Old Ocean prospect actually consists of numerous prospects. The main
objective is in the over pressured Frio. Deep well information confirms
reservoir quality sands and scattered production of 45 BCFG in the immediate
vicinity. Precise structural mapping from the 3-D seismic survey will allow
accurate delineation of prospects.
OAK HILL FIELD. We own approximately 793 gross (698 net) acres in the Oak
Hill field in Gregg and Rusk Counties, Texas. We are the operator. This prospect
produces from the Lower Cotton Valley sands at depths of approximately 10,150 to
10,500 feet and from the Upper Cotton Valley sands at depths of approximately
9,000 to 10,000 feet. We have completed a recompletion program covering six
wells and involving up to eleven distinct zones. Six recompleted zones have been
fracture stimulated and have increased our net production by over 1,100 Mcfd.
Additionally, we expect an increase of approximately 800 Mcfd net production
when the original producing interval is reactivated and the pressures across the
zones equalize. We currently own interests in six producing wells in Oak Hill
field.
RAYBURN. We own approximately 2,966 gross (1,298 net) acres and have
options for oil and gas leases on an additional 1,070 gross (847 net) acres in
the Rayburn prospect in Liberty Co., Texas. We are the operator. This prospect
is within a 30 square mile 3-D survey we acquired in 1998, of which we intend to
sell up to 60% to industry partners. The objectives are sands primarily in the
Wilcox, Cockfield and Miocene formations ranging in depth from 2,000 to 16,000
feet.
OIL AND GAS RESERVES
The following table sets forth information regarding estimated oil and gas
reserve quantities, reserve values and discounted future net revenues as
estimated by our independent engineering consultant, Lenser & Associates, as of
January 1, 1999.
28
<PAGE>
There are numerous uncertainties inherent in estimating quantities of proven
reserves and projecting future rates of production and timing of development
expenditures. The following reserve information represents estimates only and
should not be construed for being exact.
<TABLE>
<CAPTION>
PRESENT VALUE
OF ESTIMATED
FUTURE NET
REVENUES
BEFORE INCOME
TAXES
GAS ESTIMATED (DISCOUNTED
GAS OIL EQUIVALENT FUTURE NET AT 10
(MMCF) (MBO) (MMCFE)(1) REVENUE(2) PERCENT)
--------- ----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proved developed reserves:(3)
Louisiana(5).......................................... 87 75 541 $ 349 $ 311
Mississippi........................................... 15,940 279 17,611 30,772 24,373
Texas................................................. 4,182 55 4,516 5,292 3,473
--------- --- ----------- ----------- -------------
20,209 409 22,668 $ 36,413 $ 28,157
--------- --- ----------- ----------- -------------
Proved undeveloped reserves:(4)
Louisiana(5).......................................... 1,359 119 2,072 $ 1,093 $ 362
Mississippi........................................... 14,837 56 15,171 25,816 17,154
Texas................................................. -- -- -- -- --
--------- --- ----------- ----------- -------------
16,196 175 17,243 $ 26,909 $ 17,516
--------- --- ----------- ----------- -------------
Total proved reserves................................. 36,405 584 39,911 $ 63,322 $ 45,673
--------- --- ----------- ----------- -------------
--------- --- ----------- ----------- -------------
</TABLE>
- ------------------------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas and
oil.
(2) Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated
production and future development costs, using prices and costs in effect as
of January 1, 1999. The amounts shown do not give effect to expenses
unrelated to property, such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization. The estimates shown do not include amounts dedicated to Shell
Capital pursuant to the Shell Production Payment, but do include the effect
of the EnCap NPI which vested on January 1, 1999. The EnCap NPI comprises a
6.25% interest in the producing Byrd #1 and Howell #1 wells.
(3) "Proved developed reserves" means those reserves estimated as recoverable
under current technology and projected economic conditions, from that
portion of a reservoir that can reasonably be evaluated as economically
productive on the basis of analysis of drilling, geological, geophysical and
to be obtained by enhanced recovery processes demonstrated to be economic
and technically successful in the subject reservoir.
(4) "Proved undeveloped reserves" means those reserves estimated as recoverable
under current technology and projected economic conditions from that portion
of a reservoir that can reasonably be evaluated as technologically
productive, but which requires the drilling and completion of a well to
initiate production.
(5) In May 1999, we sold our interest in the Lisbon Field, which accounted for
all of the proved developed and undeveloped reserves in Louisiana.
29
<PAGE>
ACREAGE
The following table sets forth as of June 30, 1999, the gross and net acres
of developed and undeveloped oil and gas acreage that we hold. Additionally, the
data set forth below is based on our before pay-out working interests. In
certain cases, we have a greater after pay-out working interest. In certain
other cases, we have only an after pay-out working interest. As such, the amount
of gross and net acreage will increase when and if certain wells pay out.
<TABLE>
<CAPTION>
DEVELOPED(1) UNDEVELOPED(2)
------------------------ ------------------------
GROSS NET GROSS NET
ACRES(3) ACRES(4) ACRES(3) ACRES(4)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATE:
Louisiana(5)............................................................. 2,086 481 5,276 224
Mississippi.............................................................. 1,920 1,130 38,474 19,800
New Mexico............................................................... 160 12 -- --
Texas.................................................................... 2,703 1,261 10,200 5,667
----- ----- ----------- -----------
Total.................................................................. 6,869 2,884 53,950 25,691
----- ----- ----------- -----------
----- ----- ----------- -----------
</TABLE>
- ------------------------
(1) "Developed acreage" is that acreage which is spaced or assignable to
productive wells.
(2) "Undeveloped acreage" is leased acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether or not such acreage contains
proved reserves.
(3) "Gross acres" means an acre in which we own a working interest. When used in
conjunction with acreage under options, it means an acre in which we will
acquire a working interest if and when the option is exercised.
(4) "Net acres" means the sum of the fractional working interest owned in gross
acres expressed as whole numbers and fractions thereof.
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth certain information regarding our ownership
as of June 30, 1999 of productive oil and gas wells, operated and non-operated,
in the areas indicated. Additionally, the data below are based on our before
pay-out working interest. In some cases we have only an after pay-out working
interest. As such, the number of gross and net wells will increase when and if
certain wells pay-out.
<TABLE>
<CAPTION>
GAS OIL
------------------------- -------------------------
GROSS GROSS
STATE WELLS(1) NET WELLS(2) WELLS(1) NET WELLS(2)
- ---------------------------------------------------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Louisiana....................................................... 5 0.88801130 -- --
Mississippi..................................................... 6 3.493795 1 0.03730014
New Mexico...................................................... 1 0.07500000 -- --
Texas........................................................... 11 6.2392779 1 0.50000000
--- ------------ --- ------------
Total......................................................... 23 10.6960842 2 0.53730014
--- ------------ --- ------------
--- ------------ --- ------------
</TABLE>
- ------------------------
(1) "Gross wells" means a well in which we own a working interest. The number of
gross wells is the total number of wells in which a working interest is
owned.
(2) "Net wells" means the sum of the fractional working interest owned in gross
wells expressed as whole numbers and fractions thereof.
30
<PAGE>
DRILLING ACTIVITY
During the first two quarters of 1999, we participated in one gross (.140600
net) productive exploratory well one gross (.556248 net) productive
developmental well and one gross (.1575 net) dry developmental well. We
participated in one gross (0.14 net) dry and three gross (1.8383 net) productive
exploratory wells and three Gross (0.25954 net) productive development wells
during the year ended December 31, 1998. For the four-month period ended
December 31, 1997, we drilled one gross (0.48500 net) productive exploratory
well, two gross (1.3575 net) dry exploratory wells and three gross (0.342202
net) productive development wells. For the ten months ended August 31, 1997, we
drilled one gross (0.14725 net) productive exploratory well and one gross
(0.20110 net) dry exploratory well. We are entitled to a working interest in
certain additional wells completed during these time periods when and if those
wells pay-out. Furthermore, the number of net wells was calculated based-on our
before pay-out working interest and in some cases we will have a greater working
interest or is entitled to a working interest in certain wells completed during
these time periods when and if these wells pay-out. In certain cases, we,
subsequent to completion, sold the prospect on which certain of these wells were
drilled. As such, while we did participate in the drilling, it does not
currently have an interest in all of the productive wells mentioned above.
On June 30, 1999, we were drilling one gross (0.704075 net) development well
and one gross (0.140000 net) exploratory well.
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
our sale of oil and gas for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS TWELVE FOUR MONTHS TEN MONTHS
ENDED MONTHS ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, AUGUST 31,
1999 1998 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net Production:
Oil (BBL).............................................. 40,976 40,662 4,506 9,281
Gas (MCF).............................................. 1,537,500 2,009,550 223,683 83,810
Gas equivalent (Mcfe).................................. 1,783,356 2,253,522 250,719 139,493
Average sales price:
Oil ($per Bbl)......................................... $ 12.56 $ 10.83 $ 18.54 $ 20.28
Gas ($per Mcf)......................................... $ 1.80 $ 2.24 $ 2.79 $ 3.05
Gas equivalent ($per Mcfe)............................. $ 1.84 $ 2.20 $ 2.82 $ 3.18
Average production expenses ($per Mcfe)(1)............... $ 0.25 $ 0.38 $ 0.17 $ 0.33
</TABLE>
- ------------------------
(1) Average production costs, excluding severance taxes.
CAEX AND 3-D SEISMIC TECHNOLOGY
We, either directly or through other prospect participants, use 3-D seismic
data and CAEX technology to collect and analyze geological, geophysical,
engineering, production and other data obtained about potential gas or oil
prospects. We use this technology to correlate density and sonic characteristics
of subsurface formations obtained from 2-D seismic surveys with like data from
similar properties, and use computer programs and modeling techniques to
determine the likely geological composition of a prospect and potential
locations of hydrocarbons.
31
<PAGE>
Once all available data have been analyzed to determine the areas with the
highest potential within a prospect area, we may conduct 3-D seismic surveys to
enhance and verify the geological interpretation of the structure, including our
location and potential size. The 3-D seismic process produces a three-
dimensional image based upon seismic data obtained from multiple horizontal and
vertical points within a geological formation. The calculations needed to
process these data are made possible by computer programs and advanced computer
hardware.
While large oil companies have used 3-D seismic data and CAEX technologies
for approximately 20 years, these methods were not affordable by smaller,
independent oil and gas companies until more recently, when improved data
acquisition equipment and techniques and computer technology became available at
reduced costs. We believe that our use of 3-D seismic data and CAEX technology
may provide us with certain advantages in the exploration process over those
companies that do not use these technologies. These advantages include better
delineation of the subsurface, which can reduce exploration risks and help
optimize well locations in productive reservoirs. We believe these advantages
can be readily validated based upon general industry experience. Because
computer modeling generally provides clearer and more accurate projected images
of geological formations, we believe it is better able to identify potential
locations of hydrocarbon accumulations and the desirable locations for
wellbores. However, we have not used the technology extensively enough to arrive
at any conclusion regarding our ability to interpret and use the information
developed from the technology.
CUSTOMERS
For the six months ended June 30, 1999, Coral Energy L.P., EOTT Energy
Operating Limited Partnership, and Tejas Gas Corporation accounted for
approximately 66%, 11% and 10%, respectively, of our total oil and gas revenue.
During the year ended December 31, 1998, H&N Gas Ltd. and Tejas Gas Marketing
Co. accounted for approximately 51% and 24%, respectively of our total revenue.
For the four-month period ended December 31, 1997, H&N Gas and KCS Resources,
Inc. accounted for 75% and 10%, respectively, of our total revenue. For the ten
months ended August 31, 1997, KCS, Samedan Oil Corporation and Energy Operating
Limited Partnership accounted for 50%, 30% and 15%, respectively, of our total
revenue. No other purchasers accounted for more than 10% of our total revenue in
the periods indicated above. We do not believe the loss of any existing
purchaser would have a material adverse effect on us.
MARKETING
We market our natural gas and oil through monthly spot sales. Because sales
made under spot sales contracts result in fluctuating revenues to us depending
upon the market price of oil and gas, we from time to time enter into various
forward contracts covering a portion of our production to minimize the
fluctuations and the effect of price declines.
COMPETITION
The oil and gas industry is highly competitive in all of its phases. We
encounter strong competition from other oil and gas companies in all areas of
our operations, including the acquisition of exploratory and producing
properties, the permitting and conducting of seismic surveys and the marketing
of oil and gas. Many of these competitors possess greater financial, technical
and other resources than us. Competition for the acquisition of producing
properties is affected by the amount of funds available to us, information about
producing properties available to us and any standards we establish from time to
time for the minimum projected return on investment. Competition also may be
presented by alternative fuel sources, including heating oil and other fossil
fuels. There has been increased competition for lower risk development
opportunities and for available sources of financing. In addition, the marketing
and sale of natural gas and processed gas are competitive. Because the primary
markets for natural gas liquids are
32
<PAGE>
refineries, petrochemical plants and fuel distributors, prices generally are set
by or in competition with the prices for refined products in the petrochemical,
fuel and motor gasoline markets.
REGULATION
GENERAL. The oil and gas industry is extensively regulated by federal,
state and local authorities. In particular, oil and gas production operations
and economics is affected by environmental protection statutes, tax statutes and
other laws, rules and regulations relating to the petroleum industry, as well as
changes in these laws, changing rules and regulations and the interpretations
and applications of these laws, rules and regulations. Oil and gas industry
legislation and agency regulation are under constant review for amendment and
expansion for a variety of political, economic and other reasons. Numerous
regulatory authorities, and federal, state and local governments issue rules and
regulations binding on the oil and gas industry, some of which carry substantial
penalties for failure to comply. The regulatory burden on the oil and gas
industry increases our cost of doing business and, consequently, affects our
profitability. We believe we are in compliance with all federal, state and local
laws, regulations and orders applicable to us and our properties and operations,
the violation of which would have a material adverse effect on us or our
financial condition.
SEISMIC PERMITS. Current law in Louisiana requires permits from owners of
at least an undivided 80% interest in each tract over which we intend to conduct
seismic surveys. As a result, we may not be able to conduct seismic surveys
covering our entire area of interest in that state. Moreover, 3-D seismic
surveys typically are conducted from various locations both inside and outside
the area of interest to obtain the most detailed data of the geological features
within the area. To the extent that we are unable to obtain permits to access
locations to conduct the seismic surveys, the data obtained may not be as
detailed as might otherwise be available. In addition, a recent decision of a
federal court in Louisiana casts doubt on traditional seismic permitting
practices. That decision, in some instances, could lead to the surface owner
claiming ownership of the seismic data.
EXPLORATION AND PRODUCTION. Our operations are subject to various
regulations at the federal, state and local levels. The effect of these
regulations is to limit the amount of oil and gas we can produce from our wells
and to limit the number of wells or the locations at which we can drill. Such
regulations include:
- requiring permits for the drilling of wells;
- maintaining bonding requirements to drill or operate wells; and
- regulating the location of wells, the method of drilling and casing wells,
the surface use and restoration of properties upon which wells are
drilled, the plugging and abandoning of wells and the disposal of fluids
used in connection with well operations.
Our operations also are subject to various conservation regulations. These
include:
- the regulation of the size of drilling and spacing units;
- the density of wells that may be drilled; and
- the use or pooling of oil and gas properties.
In addition, state conservation laws establish maximum rates of production
from oil and gas wells, generally prohibiting the venting or flaring of gas, and
impose certain requirements regarding the ratability of production.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal legislation
and regulatory controls in the United States have historically affected the
price of the natural gas we produce and the manner in which our production is
marketed. The transportation and resale of natural gas in interstate commerce
are regulated by the Federal Energy Regulatory Commission pursuant to the
Natural Gas Act and the Natural
33
<PAGE>
Gas Policy Act of 1978. Sales of our natural gas currently are made at market
prices and are not subject to federal or state price control.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which effect the marketing of natural gas we produce, as
well as the revenue we receive for sales of our natural gas. Since the latter
part of 1985, the FERC has endeavored to make interstate natural gas
transportation more accessible to gas buyers and sellers on an open and
nondiscriminatory basis. The FERC's efforts have significantly altered the
marketing and transportation of natural gas. Commencing in April 1992, the FERC
issued Order Nos. 636, 636-A, 636-B and 636-C (collectively, "Order No. 636"),
which, among other things, required interstate pipelines to "restructure" their
services to provide transportation separate or "unbundled" from the pipelines'
sales of gas. Also, Order No. 636 requires interstate pipelines to provide
open-access transportation on a nondiscriminatory basis that is equal for all
natural gas shippers.
Order No. 636 has been implemented through decisions and negotiated
settlements in individual pipeline services restructuring proceedings. In many
instances, the result of Order No. 636 and related initiatives has been to
substantially reduce or eliminate the interstate pipelines' traditional role as
wholesalers of natural gas, and has substantially increased competition and
volatility in natural gas markets. The FERC has issued final orders in virtually
all Order No. 636 pipeline restructuring proceedings. In July 1996, the United
States Court of Appeals for the District of Columbia Circuit largely upheld
Order No. 636 and remanded certain issues for further explanation or
clarification. Numerous petitions for review of the individual pipeline
restructuring orders are currently pending in that court. The issues remanded
for further action do not appear to materially affect us. Proceedings on the
remanded issues are currently ongoing before the FERC following its issuance of
Order No. 636-C in February 1997. Although it is difficult to predict when all
appeals of pipeline restructuring orders will be completed or their impact on
us, we do not believe that it will be affected by the restructuring rule and
orders any differently than other natural gas producers and marketers with which
we compete.
Although Order No. 636 does not regulate natural gas production operations,
the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on us and our natural gas marketing efforts. Although
Order No. 636 could provide us with additional market access and more fairly
applied transportation service rates, terms and conditions, it could also
subject us to more restrictive pipeline imbalance tolerances and greater
penalties for violation of those tolerances. We do not believe, however, that we
will be affected by any action taken with respect to Order No. 636 materially
differently than other natural gas producers and marketers with which we
compete.
The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including:
- the appropriate manner for setting rates for new interstate pipeline
construction;
- the manner in which interstate pipeline shippers may release interstate
pipeline capacity under Order No. 636 for resale in the secondary market;
- the price that shippers can charge for their released capacity; and
- the use of negotiated and market-based rates and terms and conditions for
interstate gas transmission.
Several pipelines have obtained FERC authorization to charge negotiated
rates as an alternative to traditional, cost-of-service rate making methodology.
In February 1997, the FERC announced a broad inquiry into issues facing the
natural gas industry to assist the FERC in establishing regulatory goals and
priorities in the post-Order No. 636 environment. In December 1997, the FERC
requested comments on the financial outlook of the natural gas pipeline
industry, including among other matters, whether the
34
<PAGE>
FERC's current rate making policies are suitable in the current industry
environment. In April 1998, the FERC issued a new rule to further standardize
pipeline transaction tariffs that, as the result of newly standardized
provisions regarding firm intra day transportation nominations, could adversely
affect the reliability of scheduled interruptible transportation service on some
pipelines. While any resulting FERC action would affect us only indirectly, any
new rules and policy statements may have the effect of enhancing competition in
natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by congress, the FERC and state
regulatory bodies. We cannot predict when or if any such proposals might become
effective, or their effect, if any, on our operations. The natural gas industry
historically has been very heavily regulated; therefore, there is no assurance
that the less stringent regulatory approach recently pursued by the FERC and
congress will continue indefinitely. The regulatory burden on the oil and
natural gas industry increases our cost of doing business and, consequently,
affects our profitability and cash flow. Since these laws and regulations are
frequently expanded, amended or reinterpreted, we are unable to predict the
future cost or impact of complying with these regulations.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a
site-specific trust account for the transferred oil field. If the site-specific
trust account is established in accordance with the requirements of the statute,
the party transferring the oil field site may not thereafter be held liable by
the state for any site restoration costs or actions associated with the
transferred oil field site. The parties to a transfer may elect not to establish
a site-specific trust account. However, in the absence of a site-specific trust
account, the transferring party will continue to have liability for the costs of
restoration of the site. If the parties to a transfer elect to establish a
site-specific trust account under the statute, the Louisiana Department of
Natural Resources requires an oil field site restoration assessment to be made
at the time of the transfer or within one year thereafter to determine the site
restoration requirements existing at the time of transfer. Based upon the site
restoration assessment, the parties to the transfer must propose to the DNR a
funding schedule for the site-specific trust account, providing for some
contribution to the account at the time of transfer and at least quarterly
payment after that time. If the DNR approves the establishment and funding of
the site-specific trust account, the purchaser will be the responsible party to
the state, except that the failure of a transferring party to make a good faith
disclosure of all oil field site conditions existing at the time of the transfer
will render that party liable for the costs of restoration of the undisclosed
conditions in excess of the balance of the site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates and
service conditions for interstate transportation of crude oil, liquids and
condensate, which can affect the amount we receive from the sale of these
products. Transportation rates are generally subject to an indexing system under
which rates may be increased as long as they do not exceed an index rate that is
tied to inflation. Over time, this indexing system could have the effect of
increasing the cost of transporting crude oil, liquids and condensate by
pipeline. Our sales of crude oil, condensate and gas liquids are not regulated
and are made at market prices. The prices we receive from the sale of these
products is affected by the cost of transporting the products to market.
ENVIRONMENTAL MATTERS. Our oil and natural gas exploration, development and
production operations are subject to stringent federal, state and local laws
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Numerous governmental agencies, like the
Environmental Protection Agency, issue regulations to implement and enforce
these laws, which often require difficult and costly compliance measures that
carry substantial civil and criminal penalties for failure to comply. These laws
and regulations may:
- require the acquisition of a permit before drilling commences;
35
<PAGE>
- restrict the types, quantities and concentrations of various substances
that can be released into the environment in connection with drilling and
production activities;
- limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands, ecologically sensitive and other protected areas;
- require some form of remedial action to prevent pollution from former
operations, such as plugging abandoning wells; and
- impose substantial liabilities for pollution resulting from our
operations.
In addition, these laws, rules and regulations may restrict the rate of oil
and natural gas production below the rate that would otherwise exist. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, disposal or cleanup requirements
could adversely affect our operations and financial position, as well as those
of the oil and gas industry in general. While management believes that we are in
substantial compliance with current applicable environmental laws and
regulations and we have not experienced any material adverse effect from
compliance with these environmental requirements, there is no assurance that
this will continue in the future.
The primary environmental statutory and regulatory programs that affect our
operations include the following:
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act, also known as "Superfund," imposes liability without regard
to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include:
- the current owner and operator of a facility from which hazardous
substances are released;
- owners and operators of the facility at the time the disposal of
hazardous substances took place,
- generators of hazardous substances who arranged for the disposal or
treatment at or transportation to such facility of hazardous
substances; and
- transporters of hazardous substances to disposal or treatment
facilities selected by them.
Under CERCLA, any of these persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have
been released into the environment, for damages to natural resources and for
the costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances or
other pollutants into the environment. Furthermore, although petroleum,
including crude oil and natural gas, is exempt from CERCLA, at least two
courts have ruled that certain wastes associated with the production of
crude oil may be classified as "hazardous substances" under CERCLA, and
these wastes may become subject to liability and regulation under CERCLA.
Regulatory programs aimed at remediation of environmental releases could
have a similar impact on us.
CLEAN WATER ACT. The Federal Water Pollution Control Act of 1972, also
known as the Clean Water Act, imposes restrictions and strict controls
regarding the discharge of pollutants, including produced waters and other
oil and gas wastes, into waters of the United States. The discharge of
pollutants into regulated waters is prohibited, except in accordance with
the terms of a permit issued by the EPA or the state. These proscriptions
also prohibit certain activities in wetlands unless authorized by a permit
issued by the U.S. Army Corps of Engineers. Sanctions for unauthorized
discharges include administrative, civil and criminal penalties, as well as
injunctive relief.
36
<PAGE>
OIL POLLUTION ACT. The Oil Pollution Act of 1990 amends certain
provisions of the CWA, and other statutes relating to the prevention of and
response to spills or discharges of hazardous substances or oil into
navigable waters. Under the OPA, a person owning or operating a facility or
equipment (including land drilling equipment) from which there is a
discharge or threat of a discharge of oil into or upon navigable waters or
adjoining shorelines is liable, regardless of fault, as a "responsible
party" for removal costs and damages. Federal laws impose strict, joint and
several liability on facility owners for containment and clean up costs and
certain other damages, including natural resource damages, arising from a
spill.
RCRA. The Resource Conservation and Recovery Act, generally does not
regulate most wastes generated by the exploration and production of oil and
gas. RCRA specifically excludes from the definition of hazardous waste
"drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by the EPA or
state agencies as solid waste. Pipelines used to transfer oil and gas may
also generate some hazardous wastes. Although the costs of managing solid
and hazardous waste may be significant, we do not expect to experience more
burdensome costs than similarly situated companies involved in oil and gas
exploration and production.
OTHER. The EPA is also authorized to seek preliminary and permanent
injunctive relief and, in certain cases, criminal penalties and fines. State
laws governing the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of releases of petroleum or
its derivatives into surface waters or into the ground. If a discharge
occurs at a well site at which we are conducting production operations, we
may be exposed to claims that it is liable under the OPA, the CWA or similar
state laws.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the oil and gas industry, liens for current taxes not
yet due and other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations, including a title opinion covering the drill site by local
counsel, generally are made before commencement of drilling operations. With
respect to acquisitions of producing properties, it is customary to review title
opinions, review engineering reserve reports and conduct environmental and
operational reviews before the closing of the purchase.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks, including:
- the risk of fire, explosions and blowouts;
- pipe failure;
- abnormally pressured formations; and
- environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases.
The occurrence of any of any of these events could result in substantial
losses to us due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and
suspension of operations.
We maintain an oil and gas lease operator insurance policy that insures us
against certain sudden and accidental risks associated with drilling, completing
and operating our wells. In addition, we require certain parties conducting
operations for us to maintain general comprehensive liability policies with
contractual
37
<PAGE>
coverage to support the contractors' obligations to indemnify and defend us in
certain circumstances. There can be no assurance that this insurance will be
adequate to cover any losses or exposure to liability. We also carry
comprehensive general liability policies and an umbrella policy. Although we
believe that the amount of coverage we maintain is customary in the industry, it
does not provide complete coverage against all operating risks. An uninsured or
partially insured claim, if successful and of sufficient magnitude, could have a
material adverse effect on us and our financial condition. If we experience
significant claims or losses, our insurance premiums could be increased, which
may adversely affect us and our financial condition, or limit the ability of us
to obtain coverage. Any difficulty in obtaining coverage may impair our ability
to engage in our business activities.
LEGAL PROCEEDINGS
We are involved in routine litigation arising in the ordinary course of
business. Management believes that the results of these proceedings,
individually and in the aggregate, will not have a material adverse effect on
our financial position or results of operations.
FACILITIES
We maintain approximately 25,100 square feet of office space in Houston,
Texas, which is leased at an annual rent of $396,187. The lease expires January
31, 2003. We believe we will be able to renew the lease on acceptable terms, and
we currently are offering up to half of the space for sublease.
EMPLOYEES
We had 21 full-time employees in our Houston, Texas office as of August 31,
1999. Their functions include management, production, engineering,
geoscientists, land, gas marketing, accounting, financial planning and
administration. Certain operations of our field activities are accomplished
through independent contractors who are supervised by us. We believe our
relations with our employees and contractors are good. None of our employees are
represented by a union.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our directors
and executive officers. Our officers are elected by the board of directors and
serve at the discretion of the board. All of the current directors will serve
until the next annual shareholders' meeting or until their successors have been
duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Prentis B. Tomlinson, Jr. .................. 56 Chairman of the board, president and chief
executive officer
Robert S. Herlin............................ 44 Director, senior vice president and chief
financial officer
Robert L. Zorich............................ 49 Director
Yale Fisher................................. 53 Director
David P. Quint.............................. 48 Director
Gary Petersen............................... 53 Director
Russell Cleveland........................... 60 Director
Todd E. Grabois............................. 40 Vice president, treasurer & secretary
</TABLE>
PRENTIS B. TOMLINSON, JR. has been involved in the oil and gas industry for
the past 30 years and has been a director and our chief executive officer since
our inception in October 1996. He was named our president in July of 1999. He
currently serves as a member of our executive committee. Mr. Tomlinson served as
chairman of Texstar North America, Inc. from 1984 to 1995, founded and served as
chairman of TGS Geophysical Company, Inc. from 1983 to 1993 and served as
chairman and president of Tomlinson Interests, Inc. from 1973 to 1983. Mr.
Tomlinson commenced his career in the oil and gas industry as a geophysicist
with Western Geophysical Inc. in 1969.
ROBERT S. HERLIN has been a director and our senior vice president and chief
financial officer since November 1997, when he joined us. He currently serves as
a member of our executive committee and audit committee. Mr. Herlin has 17 years
experience in finance, planning and corporate development in the oil and gas
industry with several companies, including his own management consulting firm.
Most recently, he was vice president of Enron Liquids Services, a subsidiary of
Enron Corporation, and manager of planning and investor relations for Kelley Oil
& Gas Corporation.
ROBERT L. ZORICH has been a director since November 1997. He currently
serves as a member of our executive committee. He is the managing director and
cofounder of EnCap, a Houston-based venture capital and mezzanine fund for the
energy industry. Before founding EnCap, Mr. Zorich was a senior officer in the
energy group of Republic Bank.
YALE FISHER has been a director since January 1997. He currently serves as a
member of our audit committee. He has been, an independent investment banker
based in California since July 1994. Before that he was head of trading at Bank
of America in Los Angeles and San Francisco, California and New York, New York.
DAVID P. QUINT was elected by our board to fill a vacancy on the board on
June 2, 1999. Mr. Quint has been a managing director of RP&C International,
Inc., an international investment banking firm based in London and Zurich, for
over five years.
GARY PETERSEN was elected by our board to fill a vacancy on the board on
June 2, 1999. Mr. Petersen has been a managing director of EnCap for the past
five years.
39
<PAGE>
RUSSELL CLEVELAND was elected by our board to fill a vacancy on the board on
June 2, 1999. Mr. Cleveland is the principal founder and the majority
shareholder of Renaissance Capital Group Inc., which provides capital to
emerging publicly owned companies. Mr. Cleveland currently serves as president
of the managing general partner of Renaissance Capital Partners, Limited.,
president and director of Renaissance Capital Growth & Income Fund III, Inc.
(which is traded on NASDAQ), and a director of Renaissance U.S. Growth and
Income Trust PLC, which is traded on the London Stock Exchange. Mr. Cleveland
also currently serves as a director of Danzer Corp. (formerly Global
Environmental Corp.), Feminique, Inc. (formerly Biopharmaceutics, Inc.), Tutogen
Medical, Inc., Bentley Pharmaceuticals, Inc., and Technology Research, Inc.
TODD E. GRABOIS has been our vice president, treasurer and secretary since
November 1997. Before that, Mr. Grabois served as our chief financial officer
from September 1997 until November 1997 and director from inception in October
1996 until November 1997. He has served in various other positions with us or
our predecessors since 1984.
AGREEMENT RELATING TO ELECTIONS OF DIRECTORS
Pursuant to an agreement dated December 16, 1998 between us, Mr. Tomlinson
and EnCap, we agreed to make certain changes in our bylaws limiting the number
of our directors to seven. In addition, RP&C International, the agent in our
recently completed exchange offer of 9% convertible debentures for class A,
series II convertible preferred stock, currently has the right to designate up
to two directors to serve on the board of directors for a two-year period. RP&C
has exercised its board representation right through the appointment of David P.
Quint and Russell Cleveland as directors effective June 2, 1999.
EXECUTIVE COMPENSATION
The following table sets forth the compensation, including bonuses, paid by
us during the years ended December 31, 1998, 1997 and 1996 to the chief
executive officer and to those executive officers whose aggregate cash
compensation exceeded $100,000 during the last fiscal year other than our chief
executive officer.
<TABLE>
<CAPTION>
ANNUAL NUMBER OF
COMPENSATION SECURITIES ALL
YEAR ENDED --------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY BONUS OPTIONS COMPENSATION
- --------------------------------------------------- --------------- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr. ......................... 1998 $ 243,750 -- -- $ 3,400
Chairman & Chief Executive Officer 1997 150,000 210,000 1,621,000 4,750
1996 25,000 -- -- --
Ernest J. LaFlure ................................. 1998 200,000 -- -- 2,500
Former Director, President and Chief Operating 1997 46,282 100,000 300,000 --
Officer 1996 -- -- -- --
Robert S. Herlin .................................. 1998 165,000 -- -- 5,250
Director, Senior Vice President and Chief 1997 14,884 110,000 300,000 --
Financial Officer 1996 -- -- -- --
Todd E. Grabois ................................... 1998 105,000 -- -- 4,865
Vice President, Treasurer and Secretary 1997 85,000 -- 140,000 4,750
1996 11,577 -- -- --
</TABLE>
"All Other Compensation" includes our contributions made to each person's
respective account under our 401(k) plan.
Total compensation to Messrs. Tomlinson and Grabois for the year ended
December 31, 1996 was $150,000 and $69,462, respectively, including amounts paid
before our inception.
40
<PAGE>
Salary for Messrs. LaFlure and Herlin during 1996 represent amounts paid
from their date of hire to the end of the year.
Mr. LaFlure resigned as our president and chief operating officer effective
February 15, 1999, and as director in April 1999.
Effective February 1, 1999, the salaries of Messrs. Tomlinson, Herlin and
Grabois were reduced to $184,248, $105,000 and $84,000, respectively. Effective
May 17, 1999, the salary of Mr. Grabois was reinstated.
DIRECTOR COMPENSATION
Certain non-employee directors are individually awarded stock options and
receive cash compensation at the Board's discretion.
EMPLOYMENT AND TERMINATION AGREEMENTS
We entered into a three-year employment agreement with Mr. LaFlure on
September 30, 1997 pursuant to which Mr. LaFlure served as our president and
chief operating officer. Under the employment agreement, Mr. LaFlure received a
monthly salary of $16,666.67 and an initial bonus of $100,000. Mr. LaFlure was
entitled to participate in all other employee compensation and welfare benefit
plans and programs available to our other employees and executive officers,
including, but not limited to, health, dental and 401(k) plans. If we terminated
the employment agreement other than for cause or for disability or death at any
time before the expiration date, we were obligated to pay Mr. LaFlure $1,500,000
minus the amount of monthly salary for each month Mr. LaFlure was paid; all cash
bonuses received by Mr. LaFlure before the termination; and the value of his
stock options.
We terminated Mr. LaFlure's employment without cause effective January 15,
1999 and requested Mr. LaFlure to resign all of his positions with us except his
position as our director. Mr. LaFlure resigned as a director in April of 1999.
Pursuant to a settlement agreement, Mr. LaFlure was entitled to receive
$1,150,000 payable as follows:
- Payments of $10,000 per month for 12 months commencing February 15, 1999;
- Payment of $400,000 on January 15, 2000;
- Payment of $200,000 on July 15, 2000; and
- Payment of the balance due under his agreement, as adjusted (as described
in the immediately following paragraphs), on January 15, 2001.
In addition, Mr. LaFlure was granted new stock options in lieu of the
previous options for 300,000 shares of common stock granted on December 18,
1997. The new stock option agreement, dated February 15, 1999, is for 500,000
shares of common stock at an exercise price of Cdn.$0.53 per share. The
remaining amounts due under the settlement agreement payable on January 15,
2001, will be reduced by the difference between the option price under the new
option agreement for 500,000 shares of common stock and the 500,000 option
shares as of the date the payment of the balance of the agreed amounts. All cash
payments payable to Mr. LaFlure will be reduced by applicable federal, state of
local withholding taxes. We also agreed that at our sole cost and expense to
continue current health insurance coverage for Mr. LaFlure as required by
applicable law until January 15, 2000.
We entered into a two-year employment agreement with Mr. Herlin on November
15, 1997. Under the agreement, Mr. Herlin received an initial monthly salary of
$11,250 and an initial bonus of $110,000. Mr. Herlin is entitled to participate
in all other employee compensation and welfare benefit plans and programs
available to our other employees and executive officers, including, but not
limited to, health, dental and 401(k) plans. If we terminate the employment
agreement other than for cause, disability or
41
<PAGE>
death at any time before the expiration date, then we must pay to Mr. Herlin the
remaining amount of salary accrued or otherwise to be paid throughout the
remainder of the term of the agreement; provided that the remaining amount may
be no less than 12 months of Mr. Herlin's salary. If such termination is due to
a change of control of us, the minimum remaining amount must be equal to 24
months of Mr. Herlin's salary. If we terminate Mr. Herlin for cause, his
employment agreement terminates immediately and our sole remaining obligation is
to pay any amounts accrued through the date of termination.
On December 16, 1998, we entered into an agreement with EnCap providing that
should Mr. Tomlinson's employment be terminated except for cause following
certain events, then EnCap will make a cash payment to Mr. Tomlinson of $1.0
million within 30 days of severance, enter into a consulting agreement with a
three-year term providing for payments of $185,000 per annum, and grant Mr.
Tomlinson a permanent overriding royalty interest in certain properties. These
payments are our obligations, but EnCap has agreed to provide financing to fund
our payment obligation.
OPTION REPRICING
On February 19, 1999, the board re-priced stock options previously awarded
to certain of our employees, including our executive officers, one of our
directors and one contract employee. Options were re-priced at CDN. $0.50, which
was the previous 10-day average closing price of our common stock as reported on
Canada Stockwatch. The re-pricing of options held by the executive officers and
the director is subject to shareholder and regulatory approval.
OPTION GRANTS
No options were granted to our executive officers in 1998.
OPTION EXERCISE AND YEAR-END VALUES
The following table provides information with respect to options to purchase
common stock exercised by our executive officers during 1998 and with respect to
the number and value of unexercised options held by the executive officers at
December 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
NUMBER UNDERLYING OPTIONS AT
OF SHARES UNEXERCISED OPTIONS AT DECEMBER 31, 1998
ACQUIRED VALUE DECEMBER 31, 1998 CDN
ON REALIZED -------------------------- --------------------------
EXERCISE CDN EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr. ........... -- -- 983,700 -- -- --
Ernest J. LaFlure.................... -- -- 300,000 -- -- --
Robert S. Herlin..................... -- -- 300,000 -- -- --
Todd E. Grabois...................... -- -- 140,000 -- -- --
</TABLE>
All options held by our employees as of February 19, 1999, were re-priced to
Cdn$0.50.
Subject to the terms of a settlement agreement relating to Mr. LaFlure's
employment contract, his original options were replaced with 500,000 options
with an exercise price of Cdn$0.53 and a term through January 15, 2001.
42
<PAGE>
CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
We have entered into several agreements with entities that are owned or
managed by certain of our directors, officers or other affiliates, or in which
certain of our directors, officers or affiliates have an interest. We also have
entered into agreements with certain of our former directors and officers.
Although some of these transactions were approved by our outside directors,
there can be no assurance that these transactions were negotiated at arms-length
or on terms that would have been negotiated with unaffiliated third parties. The
related entities with which we have entered into transactions include:
- EnCap Capital Fund III L.P., a partnership whose general partner is EnCap
Investments, L.C., which is managed by Robert L. Zorich and Gary Petersen,
two of our directors;
- Slattery Trust, a private trust of which Mr. Tomlinson is the beneficiary;
- Starbucks Trust, a private trust of which Heather Tomlinson is the
beneficiary;
- Calibre Energy, LLC, a limited liability company owned by Slattery Trust,
Starbucks Trust, Mr. Grabois and Robert Novak, and which is managed by
Heather Tomlinson;
- Lasco, an affiliate of EnCap;
- Texstar Holdings, L.L.C., a private limited liability company owned by
certain of our stockholders;
- Stanford Energy, Inc., a company affiliated with Donald W. Busby, the
former chairman of our board of directors; and
- RP&C International, of which David Quint is a director and shareholder.
ENCAP CREDIT FACILITY. In 1997, we entered into a $20.0 million credit
agreement with EnCap consisting of an original note for $12.0 million and a
supplemental note for $8.0 million. The original note bore interest at 10.0% per
annum, and was due, with accrued interest, in December 1998. The supplemental
note bore interest at 10.0% per annum until July 1, 1998 and at 18.0% per annum
thereafter. Under the terms of the supplemental note, EnCap was issued warrants
for the purchase of 1.5 million shares of our common stock at an exercise price
of $1.28 per share. The original note was secured by a first lien on the
properties acquired and a second lien on certain other properties. The original
note was guaranteed by Mr. Tomlinson, Calibre and certain of Calibre's
affiliates.
Under the original note, we agreed to convey to EnCap a 25.0% net profits
interest from the properties acquired with the proceeds of the borrowing. EnCap
also required Slattery Trust, Texstar Holdings and certain of our stockholders
to enter into a put/call agreement under which those stockholders, under certain
conditions, had the right to obtain or "call" the EnCap NPI in exchange for 1.5
million shares of our common stock. The put/call agreement also gave EnCap the
right, under certain conditions, to sell, or put, portions of the EnCap NPI to
those stockholders for $1.5 million or 3.5 million shares of our common stock as
of December 31, 1998 or March 31, 1999, respectively.
The EnCap credit facility has been repaid in full, and the stockholders'
rights and obligations under the put/call agreement have been transferred to us.
OTHER ENCAP TRANSACTIONS. In August 1999, we entered into a new $2.9
million credit facility with EnCap that bears interest at the rate of 10.0% per
annum and matures on December 31, 2000. In addition, we issued to $4.4 million
of redeemable class A, series I preferred stock to an entity affiliated with
EnCap. We paid the EnCap affiliate a placement fee of $100,000. The proceeds
from these transactions were used to make payments under the agreement with our
trade creditors and for general corporate purposes.
STANFORD ENERGY DEBENTURE. In August 1997, Stanford Energy issued us an
unsecured convertible debenture in the principal amount of Cdn.$200,000. The
debenture bore interest at a rate of 8.0% per annum, payable quarterly. The
debenture was repaid on August 6, 1997.
ADVANCES TO CALIBRE EQUADOR. In the Spring of 1997, we and Slattery Trust,
Starbucks Trust, Mr. Grabois, Mr. Novak and James Alexander formed Calibre
Ecuador, Inc. to develop certain oil and gas
43
<PAGE>
prospects in Ecuador. We owned 50% of the outstanding common stock of Calibre
Ecuador and the other parties collectively owned the other 50%. The development
of the prospects required enactment of certain enabling legislation that would
permit non-Ecuador citizens to own oil and gas properties in Ecuador. Pending
the enactment of the legislation, we advanced funds to Calibre Ecuador to
generate the prospects. The advances were non-interest bearing and due upon
demand. All rights to the prospects were contributed to Calibre Ecuador by the
parties other than us. As of December 31, 1997, we had written off advances
totaling $402,192 made to Calibre Ecuador. Calibre Ecuador had no means with
which to repay the advances. Due to the write-off, we obtained rights to
substantially all of Calibre Equador's common stock.
In November, 1998, we entered into a participation agreement with Burlington
Resources International Inc. to develop the prospects in Ecuador. We and
Burlington have participation interests of 25% and 75%, respectively. Burlington
has not renewed the agreement; however, we retained a 25% interest in any
project related to the subject area pursued by Burlington for one year.
CALIBRE TRANSACTIONS. In December 1997, we advanced funds to Calibre Oil &
Gas, Inc. Net advances to Calibre Oil & Gas, Inc. totaled $1,768,772 at December
31, 1997. The advances bore no interest and were due upon demand.
On April 22, 1998, in a single transaction, we acquired all of the
outstanding shares of Calibre Oil & Gas, Inc. from Calibre and certain oil and
gas properties owned by the Slattery Trust, the Starbucks Trust, Mr. Grabois,
Mr. Novak, Mr. Tomlinson and Calibre Oil & Gas, Inc. The shares of Calibre Oil &
Gas, Inc. were valued at $3,820,713 and were paid for through the issuance to
Calibre of 1,927,426 shares of our common stock valued at Cdn. $2.80 per share.
The total purchase price for the oil and gas properties acquired from the other
parties was $2,261,000, paid $261,000 in cash and $2,000,000 in promissory notes
issued by Texstar Petroleum Inc. in differing amounts to each party. These notes
were guaranteed by us, bore 10% annual interest and were to be repaid in two
equal installments due on April 1, 1998 and September 1, 1998. The purchase
price was to be adjusted by a credit for proceeds from production attributable
to each property through January 31, 1998.
In connection with the acquisition of the oil and gas properties and shares
of Calibre Oil & Gas, Inc., $1.45 million of the advances to Calibre Oil & Gas,
Inc. were reclassified as an assumption of payables and the remaining $318,772
was written off as a bad debt. Calibre Oil & Gas, Inc. was subsequently merged
into us and ceased to exist on January 7, 1999.
LASCO ACQUISITION. In January 1998, and effective on December 1, 1997, we
acquired proved reserves in Texas and Louisiana from Lasco for 2.57 million
shares of our common stock and 12.0 million shares of our series 1 preferred
stock. In December 1998, we reconveyed a portion of those interests to Lasco in
exchange for approximately 2.5 million shares of our series 1 preferred stock.
STARBUCKS NOTE. On January 1, 1998, we loaned Starbucks Trust $2.5 million
pursuant to a promissory note due December 31, 1998 that bears interest at 9.0%
per annum. Total advances and accrued interest under the note are $3.3 million
as of June 30, 1999. The loan was intended to:
- give us a greater return on investment than we were receiving at the time;
- acquire common stock that was reconveyed by Starbucks Trust to the holders
of our series 2 debentures in an effort to deliver to those debenture
holders freely tradeable common stock; and
- acquire shares of our common stock in the open market to support the
public trading price.
The entire principal interest outstanding under the note remains due and
payable and is carried on our books as an account receivable; however, Starbucks
Trust lost money on the securities transactions it made with the proceeds of the
loan and currently is unable to repay the loan.
Starbucks Trust has claimed and requested credits for expenses incurred on
behalf of us against the amounts owed under the note of Cdn. $740,240.
Separately, and pursuant to the terms of the Starbucks Trust acquisition
agreement, we owe the Starbucks Trust $1,283,462 inclusive of accrued interest
as of December 31, 1998. Pursuant to the Calibre acquisition agreement, as of
December 31, 1998, we further
44
<PAGE>
owe the Starbucks Trust $213,918 and Mr. Tomlinson $1,588,489 inclusive of
accrued interest. On December 28, 1998, as part of the Shell transaction, these
parties, Texstar Holdings, LLC and Security Oil, LLC signed a standstill
agreement under which all parties mutually deferred payments and further agreed
not to pursue collection of any amounts until the termination date of the Shell
transaction and to toll the applicable statutes of limitations related to claims
arising from any of these amounts until the earlier of the termination date or
December 31, 2003.
STARBUCKS ACQUISITION. In July 1998, we entered into the Starbucks
acquisition, pursuant to which we acquired certain proved non-producing oil and
gas properties in Mississippi, Texas and Louisiana from Starbucks Trust for
$2.33 million and 600,000 shares of our common stock. The purchase value is
guaranteed and secured by 2.1 million shares of our common stock owned by the
Starbucks Trust.
OTHER RELATED PARTY TRANSACTIONS. We had an agreement with DWB Management
Ltd. to provide management, professional and office services. DWB Management is
a private company owned by Donald W. Busby, our former chairman of the board.
Under the agreement, we paid DWB for services rendered a fee of Cdn.$8,000 per
month. The agreement with DWB Management was terminated in September 1997.
We entered into an agreement with Chase Management Ltd. to provide
management, professional and office services to us, including daily accounting
services as required, and general legal assistance for routine Canadian
securities filings. Chase Management is a private company owned by Nick DeMare,
one of our former officers and directors. The agreement was for one year
commencing on the first day of October 1997 through the last day of September
1998. Thereafter, the agreement continues in effect from year to year unless
terminated by either party upon 60 days' written notice. During our last fiscal
year, we paid Chase Management Cdn.$60,000 and for the remaining term of the
agreement, we will pay Chase Management Cdn.$5,000 per month for services
rendered.
SECURITIES SUBJECT TO POOLING AGREEMENTS
After we were formed through the reverse merger of Texstar Oil & Gas, Inc.
into Benz Equities Ltd. (our Canadian predecessor), we conducted a public
offering of equity securities in Canada. The underwriters in that public
offering required our controlling stockholders to enter into a pooling agreement
under which those stockholders deposited their Benz shares into a pooled account
to prevent sales of those shares into the Canadian public markets for a
specified time period. After the registration statement relating to that public
offering was filed with the Ontario Securities Commission, the OSC required the
stockholders to enter into an escrow agreement with respect to sales of the
securities subject to the pooling agreement and certain additional shares of our
common stock. Set forth below is a summary of the pooling and escrow
arrangements.
Under a pooling agreement dated April 18, 1997, as amended on September 11,
1997, between us, certain of our stockholders, including Mr. Tomlinson, and
other members of our senior management, and Montreal Trust, our registrar and
transfer agent, as well as the agent under the pooling agreement, a total of
10,342,497 shares of our common stock were deposited on a pooled basis. In
addition, a total of 2,000,000 shares of common stock to be issued on exercise
of outstanding share purchase warrants were, once exercised, to be deposited and
held by Montreal Trust pursuant to the terms and conditions of the pooling
agreement. All common stock subject to the pooling agreement will be released
over a period of three years ending August 31, 2000, subject to earlier release
from the pool in certain circumstances. As of August 30, 1999, a total of
313,000 shares of our common stock are held by Montreal Trust pursuant to the
terms and conditions of the pooling agreement.
Under an escrow agreement dated September 15, 1997, between us, certain of
our stockholders, Mr. Tomlinson, Mr. Busby and Montreal Trust, a total of
13,505,780 shares of our common stock were deposited with Montreal Trust to be
held in escrow pursuant to the escrow agreement. All common stock subject to the
escrow agreement will be released in accordance with the policies of the Ontario
Securities
45
<PAGE>
Commission. As of August 30, 1999, a total of 10,804,624 shares of our common
stock are held in escrow by Montreal Trust pursuant to the escrow agreement.
Under an option agreement between Boone Petroleum Inc., a corporation
controlled by Mr. Busby, and Texstar Petroleum, L.L.C., a company controlled by
Mr. Tomlinson, Boone Petroleum Inc. granted Texstar Petroleum, L.L.C. an option
to purchase 1,200,000 shares of our common stock from Boone Petroleum Inc. The
option was exercised and 1,100,000 shares of our common stock were transferred
within escrow on September, 1998 to Texstar Petroleum, L.L.C. As of the date of
this prospectus, the remaining 100,000 shares of common stock have not been
transferred within escrow.
Under an unsigned agreement dated October 9, 1997, between us, EnCap Energy,
Montreal Trust, Texstar Holdings, L.L.C., the Slattery Trust, Texstar Holdings,
L.L.C. and the Slattery Trust granted to EnCap Energy a security interest in
535,521 shares of our common stock owned by Texstar Holdings, L.L.C. and
5,525,000 shares of our common stock owned by the Slattery Trust subject to the
escrow agreement.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of August 31, 1999,
with respect to the common stock owned, directly or indirectly, by:
- each director;
- each of our executive officers;
- each person known by us to own beneficially more than 5% of our
outstanding common stock; and
- all our directors and executive officers as a group.
Unless otherwise noted, the persons named below have sole voting and
investment power with respect to their shares.
<TABLE>
<CAPTION>
CLASS A, SERIES
PREFERRED STOCK COMMON STOCK
-------------------------- ---------------------------
PERCENT OF PERCENT OF
NAME NUMBER(1) CLASS(2) NUMBER(3) CLASS(4)(5)
- --------------------------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr.(6)................................... -- * 15,881,910 8.7%
1000 Louisiana St.
15th Floor
Houston, Texas 77002
Ernest J. LaFlure(7)........................................... -- * 300,000 *
Robert S. Herlin(8)............................................ -- * 365,000 *
Todd E. Grabois(9)............................................. -- * 453,335 *
Yale E. Fisher(10)............................................. -- * 334,213 *
Robert L. Zorich(11)........................................... -- * 1,538,474 *
David P. Quint(12)............................................. 2,046 * 11,326,261 6.2%
1000 Louisiana St.
15th Floor
Houston, Texas 77002
Gary Petersen(11).............................................. -- * 1,538,474 *
Russell Cleveland(13).......................................... 16,300 6.8% 6,954,977 3.8%
Lasco Energy Partners(14)...................................... -- -- 3,228,269 1.8%
Heather Tomlinson(15).......................................... -- -- 2,966,496 1.6%
1000 Louisiana St.
15th Floor
Houston, Texas 77002
Apple Inc...................................................... 24,000 10.1% 10,153,371 5.6%
All Directors and executive officers as a group (9
persons)(16)................................................. 18,346 7.7% 37,087,600 20.4%
</TABLE>
- ------------------------
* Less than one percent
(1) Includes all shares of class A, series II convertible preferred stock owned
by each holder before this offering.
(2) Based on 239,701 shares of class A, series II convertible preferred stock
outstanding as of August 31, 1999.
(3) Includes all shares with respect to which each person, executive officer or
director who, directly or through any contract, arrangement, understanding,
relationship or otherwise, has or shares the power to vote or direct the
voting of the shares, to dispose or direct the disposition of the shares or
47
<PAGE>
that may be purchased upon the exercise of stock options or warrants
exercisable within 60 days. Assumes conversion of 100% of all class A,
series II convertible preferred stock or warrants held.
(4) Based on 39,870,617 shares of common stock outstanding or reserved for
issuance at August 31, 1999, plus for each executive officer or director
those number of shares underlying exercisable options held by the executive
officer or director or, in the case of holders of class A, series II
convertible preferred stock or warrants, the number of shares of common
stock underlying their class A, series II convertible preferred stock or
warrants.
(5) Assumes that 100% of all shares of class A, series II convertible preferred
stock have been converted into common stock.
(6) Includes the following:
- 983,700 shares of common stock issuable upon the exercise of stock
options;
- 5,525,000 shares of common stock in the name of Slattery Trust, a trust
of which Mr. Tomlinson is the beneficiary;
- 2,043,000 shares of common stock held in trusts of which Mr. Tomlinson
is the trustee and exercises voting and dispositive power over such
shares;
- 2,452,774 shares of common stock in the name of Texstar Holding LLC, a
private company controlled by Mr. Tomlinson;
- 1,927,426 shares of common stock issued to Calibre, which is controlled
by Mr. Tomlinson; and
- 2,950,000 shares of common stock beneficially owned by Mr. Tomlinson's
wife.
Mr. Tomlinson's percentage ownership of our common stock is % assuming
none of the class A, series II convertible preferred stock is converted
into common stock and none of our outstanding warrants are exercised.
(7) Includes 300,000 shares of common stock issuable upon the exercise of stock
options.
(8) Includes 300,000 shares of common stock issuable upon the exercise of stock
options.
(9) Includes 140,000 shares of common stock issuable upon the exercise of stock
options.
(10) Includes 150,000 shares of common stock issuable upon the exercise of
stock options.
(11) Includes 1,538,474 shares of common stock issuable upon the exercise of
warrants issued to EnCap.
(12) Includes 865,575 shares of common stock issuable upon the conversion of
class A, series II convertible preferred stock and 7,468,736 shares
issuable upon the exercise of warrants issued to RP&C International
(Guernsey) Limited, an investment company of which Mr. Quint is a managing
director. Mr. Quint's percentage ownership of our common stock is %
assuming none of the class A, series II preferred stock is converted into
common stock and none of our outstanding warrants are exercised.
(13) Includes 6,895,831 shares of common stock issuable upon the conversion of
class A, series II convertible preferred stock held through Renaissance
U.S. Capital Growth and Income Trust, PLC, an investment company of which
Mr. Cleveland is a director.
(14) Lasco's percentage ownership of our common stock is % assuming none of
the class A, series II convertible preferred stock is converted into
common stock and none of our outstanding warrants are exercised.
(15) Mrs. Tomlinson's percentage ownership of our common stock is % assuming
none of the class A, series II convertible preferred stock is converted
into common stock and none of our outstanding warrants are exercised.
(16) All officers and directors as a group own % of our common stock
assuming none of the class A, series II convertible preferred stock is
converted into common stock and none of our outstanding warrants are
exercised.
48
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth certain information with respect to our class
A, series II convertible preferred stock and common stock being offered for
resale by the selling securityholders listed below. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to their
securities. None of the selling securityholders listed below currently own any
shares of our common stock. The common stock beneficially owned by them is
solely by virtue of owning class A, series II convertible preferred stock or
currently exercisable warrants.
The beneficial ownership of the convertible preferred stock and the common
stock issuable upon conversion of the convertible preferred stock and exercise
of the warrants by the selling securityholders after this offering will depend
on the number of shares of convertible preferred stock or common stock sold by
each selling securityholder; however, the table assumes that all shares of
convertible preferred stock and common stock issued upon conversion of the
convertible preferred stock and exercise of the warrants by a selling
securityholder are offered and resold pursuant to this prospectus. Therefore, no
information is given with respect to the beneficial ownership of convertible
preferred stock or common stock following this offering.
<TABLE>
<CAPTION>
CLASS A, SERIES II
PREFERRED STOCK COMMON STOCK
-------------------------- ---------------------------
PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER NUMBER(1) CLASS(2) NUMBER(3) CLASS(4)(5)
- --------------------------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
David P. Quint................................................. 2,046 * 11,318,837 6.2%
Russell Cleveland.............................................. 16,300 6.8% 6,895,831 3.8%
ABN Amro Bank (Schweiz)........................................ 3,900 1.6% 1,649,923 *
Anarema Stiftung............................................... 6,000 2.5% 2,538,343 1.4%
Apple Inc...................................................... 24,000 10.1% 10,153,371 5.6%
Bank Leumi..................................................... 1,350 * 571,127 *
Banca del Gottardo............................................. 13,200 5.5% 5,584,354 3.1%
Bank Austria................................................... 5,400 2.3% 2,284,509 1.3%
Bank Austria Creditanstalt..................................... 5,500 2.3% 2,326,814 1.3%
Bank Julius Bar................................................ 2,070 * 875,728 *
Bank Leu....................................................... 8,910 3.7% 3,769,439 2.1%
Bank Von Ernst a/c Dr. Pollak.................................. 450 * 190,376 *
BSI Banca della Svizzera Italiana.............................. 675 * 285,564 *
Banque Edouard Constant........................................ 450 * 190,376 *
Clariden Bank.................................................. 540 * 228,451 *
Cook & Co...................................................... 900 * 380,751 *
Coutts & Co. AG, Zurich........................................ 17,640 7.4% 7,462,728 4.1%
Credit Suisse First Boston Zurich.............................. 11,385 4.8% 4,816,506 2.7%
Dalworth....................................................... 853 * 466,582 *
Deutsche Boerse/National Bank.................................. 650 * 274,987 *
Discount Bank and Trust Co., Geneva............................ 90 * 38,075 *
EFG Private Bank............................................... 7,825 3.3% 3,310,422 1.8%
Egger & Co..................................................... 900 * 380,751 *
Enerfin SA--Banque Paribas (London)............................ 900 * 380,751 *
Helaba (Schweiz)............................................... 1,550 * 655,739 *
James Ladner................................................... 853 * 466,582 *
Jyske Bank..................................................... 2,160 * 913,803 *
La Roche Banquiers AG.......................................... 90 * 38,075 *
Lewco Securities............................................... 225 * 95,188 *
Liechtensteinische Landesbank.................................. 650 * 274,987 *
Liverpool LP................................................... 17,650 7.4% 7,466,959 4.1%
Lombard Odier & Co............................................. 3,360 1.4% 1,421,472 *
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
CLASS A, SERIES II
PREFERRED STOCK COMMON STOCK
-------------------------- ---------------------------
PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER NUMBER(1) CLASS(2) NUMBER(3) CLASS(4)(5)
- --------------------------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Migros Bank.................................................... 450 * 190,376 *
MM Warburg Bank (Schweiz) AG................................... 900 * 380,751 *
NCL Investments Ltd............................................ 650 * 274,987 *
Perry Limited.................................................. 17,050 7.2% 9,327,410 5.1%
Ron Langden.................................................... 650 * 274,987 *
Rothschild Bank AG............................................. 450 * 190,376 *
Royal Bank of Scotland......................................... 900 * 380,751 *
Shell Capital Corporation...................................... 1,500 * 634,585 *
Sreedeswar, Inc................................................ 13,794 5.8% 7,231,145 4.0%
UBS............................................................ 9,335 3.9% 3,949,238 2.2%
UBS Merlo...................................................... 5,150 2.2% 2,178,744 1.2%
UBS Lottenbach................................................. 900 * 380,751 *
Union Bancaire Privee.......................................... 5,200 2.2% 2,199,897 1.2%
Westgate LP.................................................... 17,650 7.4% 7,466,959 4.1%
Xanthus Limited................................................ 6,000 2.5% 2,538,343 1.4%
ZKB Filiale Neumenster......................................... 650 * 274,987 *
Orbitex Natural Resources Fund................................. -- * 729,200 *
BlockIsland & Co............................................... -- * 405,000 *
Hammerhead & Co................................................ -- * 60,000 *
Pitt & Co...................................................... -- * 75,000 *
Tarp & Co...................................................... -- * 45,000 *
Kane & Co...................................................... -- * 240,000 *
San Juan Investments, Ltd...................................... -- * 45,000 *
</TABLE>
- ------------------------
* Less than one percent
(1) Includes all shares of class A, series II convertible preferred stock owned
by each holder before this offering.
(2) Based on 239,701 shares of class A, series II convertible preferred stock
outstanding as of August 31, 1999.
(3) Includes all shares with respect to which each person, executive officer or
director who, directly or through any contract, arrangement, understanding,
relationship or otherwise, has or shares the power to vote or direct the
voting of the shares, to dispose or direct the disposition of the shares or
that may be purchased upon the exercise of stock options or warrants
exercisable within 60 days. Assumes conversion of 100% of all class A,
series II convertible preferred stock and exercise of all warrants held.
(4) Based on 39,870,617 shares of common stock outstanding or reserved for
issuance at August 31, 1999, plus, in the case of holders of class A, series
II convertible preferred stock or warrants, the number of shares of common
stock underlying their class A, series II convertible preferred stock or
warrants.
(5) Assumes that 100% of all shares of class A, series II convertible preferred
stock have been converted into common stock and all warrants have been
exercised for common stock.
50
<PAGE>
PLAN OF DISTRIBUTION
This prospectus relates to the resale of:
- 239,701 shares of our convertible preferred stock;
- 101,407,269 shares of our common stock issuable upon conversion of the
convertible preferred stock;
- 3,974,923 shares of common stock issuable upon the exercise of outstanding
warrants to purchase our common stock; and
- 4,583,726 shares of our issued and outstanding common stock previously
issued to the selling securityholders;
This prospectus relates to the resale of common stock issued in connection
with the exercise of outstanding warrants, but does not relate to the invoice of
the common stock issued upon exercise of the warrants.
We will bear all costs, expenses and fees in connection with registration of
the securities covered by this prospectus. Brokerage commissions and similar
selling expenses, if any, attributable to the resale of the convertible
preferred stock or common stock issued upon the conversion of convertible
preferred stock or exercise of warrants will be borne by the selling
securityholders.
Sales of the securities covered by this prospectus may be effected by
selling securityholders from time to time in one or more types of transactions
(which may include block transactions) in the over-the-counter market, in
negotiated transactions, through put or call options transactions relating to
the securityholders, or a combination of these methods of sale, at market prices
prevailing at the time of sale, or at negotiated prices. These transactions may
or may not involve brokers or dealers. The selling securityholders have advised
us that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
warrants or common stock issued upon exercise of the warrants, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of warrants or common stock issued upon exercise of the warrants by the selling
securityholders.
The selling securityholders may effect these transactions by selling
convertible preferred stock or common stock issued upon conversion of
convertible preferred stock or exercise of the warrants directly to purchasers
or to or through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling securityholders or the purchasers of warrants
for whom the broker-dealers may act as agents or to whom they sell as principal,
or both, which compensation as to a particular broker-dealer might be in excess
of customary commissions.
The selling securityholders and any broker-dealers that act in connection
with the sale of convertible preferred stock might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by the broker-dealers and any profit on the resale of
the warrants or common stock issued upon exercise of the warrants sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The selling securityholders may agree to
indemnify any agent dealer or broker-dealer that participates in transactions
involving sales of the convertible preferred stock or common stock issued upon
conversion of convertible preferred stock or exercise of the warrants against
certain liabilities, including liabilities arising under the Securities Act.
Because selling securityholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling securityholders
may be subject to the prospectus delivery requirements of the Securities Act.
51
<PAGE>
Selling securityholders also may resell all or a portion of the convertible
preferred stock or common stock issued upon conversion of convertible preferred
stock or exercise of the warrants in open market transactions in reliance upon
Rule 144 under the Securities Act, provided they meet the criteria and conform
to the requirements of that rule.
After we are notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of
convertible preferred stock or common stock issued upon conversion of
convertible preferred stock or the exercise of warrants, a supplement to this
prospectus will be filed, if required, under Rule 424(b) under the Securities
Act, disclosing:
- the name of each selling securityholder and of the participating
broker-dealer(s);
- the type and number of securities involved;
- the price at which the securities were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer, where applicable;
- that the broker-dealer did not conduct any investigations to verify the
information set out by in this prospectus and;
- other facts material to the transaction.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation provides for authorized capital stock of
400,000,000 shares, consisting of 300,000,000 shares of common stock, par value
$0.01 per share and 100,000,000 shares of preferred stock, par value $1.00 per
share. As of August 31, 1999, 39,870,617 shares of common stock, 13,488,140
class A, series I preferred stock and 239,701 shares of class A, series II
convertible preferred stock were issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of common stock are not entitled to cumulative voting
rights. Therefore, holders of a majority of the shares voting for the election
of directors can elect all the directors. Subject to the terms of any
outstanding series of preferred stock, the holders of common stock are entitled
to dividends in the amounts and at the times as our board of directors may
declare out of funds legally available for the payment of dividends. Upon
liquidation or dissolution, holders of common stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payment of any liquidation preferences to holders of preferred stock. Holders of
common stock have no redemption, conversion or preemptive rights.
Our common stock is traded on the Vancouver Stock Exchange under the symbol
"BZG." We plan to post our common stock for trading on the Nasdaq Bulletin
Board. The transfer agent for our common stock is Montreal Trust.
PREFERRED STOCK
The board of directors has the authority to cause us to issue up to the
authorized number of shares of preferred stock in one or more series, to
designate the number of shares constituting any series, and to fix the
applicable rights, preferences, privileges and restrictions, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of any series, without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of the common stock.
SERIES II PREFERRED STOCK. Set forth below is a summary of the terms of our
outstanding Series II preferred stock.
DIVIDENDS. The shares of series II preferred stock are entitled to
dividends payable semiannually in arrears on March 31 and September 30 of
each year. The dividend rate from the date of issuance through March 31,
2003 is 8.0% per annum. After March 31, 2003, dividends will accrue at the
rate of 15.0% per annum. If dividends are not timely paid, annual dividends
will be increased by 3.0% until the past-due dividends have been paid.
Dividends are payable, at our option, in freely tradeable common stock
valued at the average of the market price of the common stock for the 20
consecutive trading days ending five trading days before the dividend
payment date. Market price is defined as the weighted average price of our
common stock on the principal stock exchange on which our common stock is
traded.
LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding
up, voluntary or involuntary, the shares of Series II preferred stock are
entitled to a liquidation preference to the common stock of a cash amount
equal to $105 per share.
OPTIONAL CONVERSION. Through March 31, 2000, the series II preferred
stock will be convertible at the option of the holder into common stock at
an initial conversion rate equal to CDN $0.35. If on March 31, 2000, the
average of the market price during the preceding 20 consecutive trading days
is lower than the preferred conversion price, then the conversion price will
be adjusted downward to that
53
<PAGE>
average price. If the series II preferred stock is not freely tradeable on
October 1, 1999, the preferred conversion price will be reduced thereafter
by 5.0% for each six-month period or portion thereof until the series II
preferred stock is freely tradeable.
MANDATORY REDEMPTION. We may cause all of the series II preferred stock
to be converted into common stock at the then preferred conversion price at
any time after March 31, 2000 if the market price for the 20 consecutive
trading days ending not more than five days before the giving of the notice
is equal to or in excess of 140% of the preferred conversion price then in
effect, and the common stock to be received in connection with the
conversion is freely tradeable. Upon any mandatory conversion of any series
II preferred stock, we will make payment of dividends accrued during the
period from the most recent dividend payment date to the conversion date.
REDEMPTION. The Series II preferred stock is redeemable in whole or in
part by us at any time on the giving of 30 days' written notice at 105% of
the nominal amount thereof together with any accrued but unpaid dividends,
payable in cash. Beginning April 1, 2003, at our option, the Series II
preferred stock also may be redeemed for freely tradeable common stock:
- at 115% of the redemption value if our market capitalization is $300
million or more on such date;
- or at 120% of the redemption value if our market capitalization is less
than $300 million on such date.
The common stock issued will be valued at the average market price for
the 20 trading days ending five trading days before the payment date.
RANKING. The series II preferred stock will rank PARI PASSU with the
series I preferred stock and any new issue of preferred stock that
stipulates a liquidation preference PARI PASSU with the series II preferred
stock and senior to our other equity. The series II preferred stock will be
subordinate to claims of creditors, including holders of our outstanding
debt instruments.
CERTAIN COVENANTS. During the period that any of the series II
preferred stock is outstanding, we must maintain tangible assets equal to or
greater than 100% (rising to 140% with respect to the years ending December
31, 2000 and after) of long-term debt (which includes the series II
preferred stock, the series I preferred stock, and any preferred stock
ranking PARI PASSU with either such series of preferred stock).
VOTING RIGHTS. The series II preferred stock has no voting rights
before conversion except as provided by law.
LISTING. The convertible preferred stock currently is not listed for
trading on any stock exchange. We plan to post the series II preferred stock
for trading on the Nasdaq Bulletin Board. The transfer agent for the
convertible preferred stock is American Stock Transfer Company.
PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND DELAWARE LAW
Our certificate of incorporation authorizes the board of directors, without
stockholder approval, to establish and to issue shares of one or more series of
preferred stock, with each series having the voting rights, dividend rates,
liquidation, redemption, conversion and other rights as may be fixed by the
board. Our bylaws direct that special meetings of the stockholders may only be
called by a majority of the members of the board of directors, the chairman of
the board of directors, the president or the holders of not less than 30% of the
total voting power of all shares of our capital stock entitled to vote in the
election of directors. The bylaws further provide that stockholders' nominations
to the board of directors and other stockholder business proposed to be
transaction at stockholder meetings must be timely received by us in a proper
written form which meets the prescribed content requirements.
54
<PAGE>
The above provisions may have the effect of deterring certain tender offers
or hostile takeovers or may delay or prevent changes in control of our
management.
LIMITATION OF DIRECTOR LIABILITY
Section 102(b)(7) of the Delaware General Corporation Law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although section 102(b) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. Our certificate of
incorporation limits the liability of our directors or our stockholders (in
their capacity as directors but not in their capacity as officers) to the
fullest extent permitted by section 102(b). Specifically, our directors will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional,
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in section 174 of the Delaware General Corporation
Law; or
- for any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION
To the maximum extent permitted by law, our certificate of incorporation and
bylaws provide for mandatory indemnification of directors, and permit
indemnification of our officers, employees and agents against all expense,
liability and loss to which they may become subject or which they may incur as a
result of being or having been a director, officer, employee or agent. In
addition, we must advance or reimburse directors, and may advance or reimburse
officers, employees and agents, for expenses incurred by them in connection with
indemnifiable claims.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law generally provides that
an "interested stockholder," which is a stockholder acquiring more than 15% of
the outstanding voting stock of a corporation subject to the statute but less
than 85% of that stock, may not engage in certain " business combinations" with
the corporation for a period of three years after the date on which the
stockholder became an interested stockholder unless:
- before such date, the corporation's board of directors approved either the
business combination or the transaction in which the stockholder became an
Interested Stockholder; or
- the business combination is approved by the corporation's board of
directors and authorized at a stockholders' meeting by a vote of at least
two-thirds of the corporation's outstanding voting stock not owned by the
interested stockholder.
Under section 203, these restrictions will not apply to certain business
combinations proposed by an Interested Stockholder following the earlier of the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who were not an interested stockholder
during the previous three years or who became an interested stockholder with the
approval of the corporation's board of directors, if the extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors before any person becoming an interested stockholder during the
previous three years or were recommended for election or elected to succeed such
directors by a majority of such directors.
55
<PAGE>
Section 203 defines the term "business combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the interested stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the interested
stockholder, transactions with the corporation that increase the proportionate
interest in the corporation directly or indirectly owned by the interested
stockholder, or transactions in which the interested stockholder receives
certain other benefits.
The provisions of section 203, together with the ability of our board of
directors to issue preferred stock without further stockholder action, could
delay or frustrate the removal of incumbent directors or a change in our
control. The provisions also could discourage, impede or prevent a merger,
tender offer or proxy contest, even if those events would be favorable to the
interests of stockholders. Our stockholders, by adopting an amendment to our
certificate of incorporation or bylaws, may elect not to be governed by section
203 effective 12 months after such adoption of the amendment. Neither our
certificate of incorporation nor bylaws currently exclude us from the
restrictions imposed by section 203.
LEGAL MATTERS
Certain legal matters in connection with the class A, series II convertible
preferred stock and common stock offered hereby are being passed upon for us by
Porter & Hedges, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements at December 31, 1997, August 31, 1997
and December 31, 1998, included in this registration statement have been audited
by Merdinger, Fruchtler, Rosen & Corso, P.C., independent auditors, as stated in
their report appearing elsewhere in this prospectus, and have been so included
in reliance upon that report given upon the authority of that firm as experts in
accounting and auditing.
Certain information set forth relating to our estimated proved oil and gas
reserves at January 1, 1999, the related calculations of future net revenues and
the related discounted future net income have been derived from independent
petroleum engineering reports prepared by R.A. Lenser and Associates, Inc.,
petroleum engineers. That information has been included herein in reliance on
such firm as an expert in petroleum engineering.
AVAILABLE INFORMATION
As a result of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, and in accordance therewith
will file reports and other information with the SEC. The reports and other
information filed by us with the SEC can be inspected and copies can be obtained
at the public reference facilities maintained by the SEC at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the SEC at 7 World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of these materials also can be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, the SEC maintains a site on the World Wide Web at
HTTP://WWW.SEC.GOV that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
This prospectus constitutes a part of a registration statement on form SB-2
filed by us with the SEC under the Securities Act. This prospectus omits certain
of the information contained in the registration statement, and reference is
hereby made to the registration statement for further information with respect
to us and the securities offered under this prospectus. Any statements contained
in this prospectus concerning the provisions of any document filed as an exhibit
to the registration statement or otherwise filed with the SEC is not necessarily
complete, and in each instance, reference is made to the copy of the documents
so filed. Each such statement is qualified in its entirety by such reference.
56
<PAGE>
The reports and other information we file with the Vancouver Stock Exchange
can be inspected and copies can be obtained by contacting Warren H. Funt, vice
president, corporate finance services, at P.O. Box 10999, 600 Cranville Street,
Vancouver, BC Canada V7Y 1H1 or by telephone at (888) 547-8873. In addition, the
Vancouver Stock Exchange maintains a site on the World Wide Web at
HTTP://WWW.VSE.CA that contains reports, proxy and information statements and
other information regarding registrants that file with the VSE.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion expressed by independent auditors and with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditor's Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... F-3
Audited Consolidated Statement of Operations for the year ended December 31, 1998, the four months ended
December 31, 1997 and the ten months ended August 31, 1997............................................... F-4
Audited Consolidated Statement of Comprehensive Income for the year ended December 31, 1998, the four
months ended December 31, 1997 and the ten months ended August 31, 1997.................................. F-5
Audited Consolidated Statement of Stockholders' Equity for the periods ended December 31, 1998 and December
31, 1997................................................................................................. F-6
Audited Consolidated Statement of Cash Flows for the year ended December 31, 1998, the four months ended
December 31, 1997 and the ten months ended August 31, 1997............................................... F-8
Notes to Audited Consolidated Financial Statements......................................................... F-9
Unaudited Consolidated Balance Sheets as of June 30, 1999 and 1998......................................... F-40
Unaudited Consolidated Statement of Operations for the six months ended June 30, 1999 and 1998............. F-42
Unaudited Consolidated Statement of Comprehensive Income for the six months ended June 30, 1999 and 1998... F-43
Unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998............. F-44
Notes to Unaudited Consolidated Financial Statements....................................................... F-45
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
BENZ ENERGY LTD.
We have audited the accompanying consolidated balance sheets of BENZ ENERGY LTD.
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, comprehensive income, stockholders' equity, and cash flows for the
year ended December 31, 1998 and for the periods from September 1, 1997 to
December 31, 1997 and from October 31, 1996 (inception) to August 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BENZ
ENERGY LTD. as of December 31, 1998 and 1997 and the consolidated results of its
operations and its consolidated cash flows for the year ended December 31, 1998,
the four month period ended December 31, 1997 and the ten month period ended
August 31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company has experienced significant delays in the
completion of certain wells and its limited capital resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 18. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 2, 1999, except for Notes 9 and 18
as to which the date is July 20, 1999
and Note 22 as to which the date is September 9, 1999
F-2
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents....................................................................... $ 2,319,302 $ 3,162,320
Receivables, net of allowance for doubtful accounts of $197,008 and $-0-, respectively.......... 5,461,565 4,552,053
Advances to related parties..................................................................... 538,336 --
Available for sale marketable securities........................................................ 195,671 1,289,781
Prepaid expenses................................................................................ 493,459 109,016
------------ ------------
Total Current Assets.......................................................................... 9,008,333 9,113,170
------------ ------------
OIL AND GAS PROPERTIES, USING FULL COST ACCOUNTING
Costs being amortized........................................................................... 48,409,232 13,341,497
Costs not being amortized....................................................................... 33,748,769 12,361,515
------------ ------------
82,158,001 25,703,012
Less: Accumulated amortization.................................................................. (3,840,604) (993,778)
------------ ------------
Net Oil and Gas Properties.................................................................... 78,317,397 24,709,234
------------ ------------
PROPERTY AND EQUIPMENT............................................................................ 1,572,342 782,356
Less: Accumulated depreciation.................................................................. (477,498) (171,819)
------------ ------------
Net Property and Equipment.................................................................... 1,094,844 610,537
------------ ------------
Debt issuance costs, net of accumulated amortization of $1,230,991 and $42,857, respectively...... 5,287,340 1,607,143
Due from related party............................................................................ 130,311 --
Available for sale marketable securities.......................................................... -- 22,872
Other assets...................................................................................... 1,402,022 153,173
------------ ------------
Total Other Assets.............................................................................. 6,819,673 1,783,188
------------ ------------
TOTAL ASSETS.................................................................................. $ 95,240,247 $ 36,216,129
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES
Accounts payable................................................................................ $ 14,320,846 $ 8,440,713
Revenue payable................................................................................. 444,826 399,352
Accrued interest................................................................................ 1,342,664 94,935
Accrued preferred dividends..................................................................... 239,568 --
Accrued loss on termination of employee......................................................... 1,000,425 --
Other accrued expenses.......................................................................... 1,763,331 2,376,982
Drilling advances............................................................................... 20,774 389,348
Notes payable................................................................................... 137,933 --
Current maturities of long-term debt, net of unamortized discount of $-0- and $2,042,555,
respectively.................................................................................. 17,228,912 12,702,246
------------ ------------
Total Current Liabilities..................................................................... 36,499,279 24,403,576
------------ ------------
LONG-TERM DEBT, net of unamortized discount of $1,000,000 and $-0-, respectively.................. 42,262,000 6,057
COMMITMENTS AND CONTINGENCIES..................................................................... -- --
REDEEMABLE PREFERRED STOCK, no par value; unlimited shares authorized; 9,488,140 and no shares
issued and outstanding, respectively; redemption value of $9,488,140............................ 9,488,140 --
STOCKHOLDERS' EQUITY:
Common Stock, no par value; unlimited shares authorized, 33,727,724 shares and 29,878,985 shares
issued and outstanding........................................................................ 20,424,996 16,222,198
Common Stock reserved for issuance; 1,927,436 and no shares reserved, respectively.............. 2,496,030 --
Additional paid-in capital...................................................................... 878,067 367,881
Accumulated deficit............................................................................. (16,571,654) (4,656,463)
Unrealized losses on available for sale marketable securities................................... (85,630) (90,048)
Cumulative foreign currency translation adjustment.............................................. (150,981) (37,072)
------------ ------------
Total Stockholders' Equity.................................................................... 6,990,828 11,806,496
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................... $ 95,240,247 $ 36,216,129
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-3
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIODS
<TABLE>
<CAPTION>
FOUR MONTHS TEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Oil and gas sales.............................................. $ 4,947,457 $ 707,987 $ 444,203
--------------- -------------- --------------
EXPENSES
Depreciation, depletion and amortization....................... 3,152,506 634,493 240,403
Lease operating................................................ 860,185 42,698 45,550
Production taxes............................................... 102,547 7,064 22,961
General and administrative..................................... 5,765,737 2,087,087 2,026,399
Interest expense............................................... 5,802,328 648,885 49,314
--------------- -------------- --------------
15,683,303 3,420,227 2,384,627
--------------- -------------- --------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) AND PROVISION
FOR INCOME TAXES............................................... (10,735,846) (2,712,240) (1,940,424)
--------------- -------------- --------------
Loss on termination of employee.................................. (1,000,425) -- --
Interest income.................................................. 573,609 23,825 59,200
Gain (loss) on sale of investments............................... 24,971 (50,907) (35,917)
--------------- -------------- --------------
Total Other Income (Expense)................................... (401,845) (27,082) 23,283
--------------- -------------- --------------
LOSS BEFORE PROVISION FOR INCOME TAXES........................... (11,137,691) (2,739,322) (1,917,141)
Provision for income taxes....................................... -- -- --
--------------- -------------- --------------
NET LOSS......................................................... (11,137,691) (2,739,322) (1,917,141)
Cumulative preferred stock dividends............................. (777,500) -- --
--------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS....................... $ (11,915,191) $ (2,739,322) $ (1,917,141)
--------------- -------------- --------------
--------------- -------------- --------------
BASIC LOSS PER SHARE............................................. $ (0.37) $ (0.10) $ (0.09)
--------------- -------------- --------------
--------------- -------------- --------------
DILUTED LOSS PER SHARE........................................... $ (0.37) $ (0.10) $ (0.09)
--------------- -------------- --------------
--------------- -------------- --------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE:
Basic Loss per Share........................................... 32,491,343 27,926,016 21,921,985
Diluted Loss per Share......................................... 32,491,343 27,926,016 21,921,985
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-4
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIODS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED TEN MONTHS ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
--------------- ------------------ -----------------
<S> <C> <C> <C>
Net loss................................................. $ (11,915,191) $ (2,739,322) $ (1,917,141)
Other comprehensive income, net of tax:
Foreign currency translation adjustment.................. (113,909) 25,359 (62,431)
Unrealized gains on marketable securities................ 4,418 (482,231) 392,183
--------------- ------------------ -----------------
Comprehensive loss....................................... $ (12,024,682) $ (3,196,194) $ (1,587,389)
--------------- ------------------ -----------------
--------------- ------------------ -----------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-5
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RESERVED
COMMON STOCK FOR ISSUANCE
----------------------- -----------------------
SHARES AMOUNT NUMBER AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997......... 29,878,985 $16,222,198 -- $ --
Exercise of warrants............... 94,900 84,146 -- --
Exercise of stock options.......... 87,000 16,152 -- --
Issued for properties.............. 2,542,372 3,000,000 -- --
Issued for properties.............. -- -- 1,927,436 2,496,030
Issued in legal settlement......... 200,000 70,000 -- --
Issued on conversion of
debentures....................... 238,570 250,000 -- --
Issued for interest and preferred
dividends........................ 685,897 782,500 -- --
Costs of issuances................. -- -- -- --
Foreign currency translation
adjustments...................... -- -- -- --
Unrealized gains................... -- -- -- --
Net loss........................... -- -- -- --
---------- ----------- ---------- -----------
Balance, December 31, 1998......... 33,727,724 $20,424,996 1,927,436 $ 2,496,030
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
<CAPTION>
UNREALIZED
ADDITIONAL GAIN (LOSS) TOTAL
PAID-IN ACCUMULATED ON TRANSLATION STOCKHOLDERS'
CAPITAL DEFICIT SECURITIES ADJUSTMENTS EQUITY
----------- -------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997......... $ 367,881 $ (4,656,463) $ (90,048) $ (37,072) $ 11,806,496
Exercise of warrants............... -- -- -- -- 84,146
Exercise of stock options.......... -- -- -- -- 16,152
Issued for properties.............. -- -- -- -- 3,000,000
Issued for properties.............. -- -- -- -- 2,496,030
Issued in legal settlement......... -- -- -- -- 70,000
Issued on conversion of
debentures....................... -- -- -- -- 250,000
Issued for interest and preferred
dividends........................ -- -- -- -- 782,500
Costs of issuances................. 510,186 -- -- -- 510,186
Foreign currency translation
adjustments...................... -- -- -- (113,909) (113,909)
Unrealized gains................... -- -- 4,418 -- 4,418
Net loss........................... -- (11,915,191) -- -- (11,915,191)
----------- -------------- ------------ ----------- ---------------
Balance, December 31, 1998......... $ 878,067 $ (16,571,654) $ (85,630) $(150,981) $ 6,990,828
----------- -------------- ------------ ----------- ---------------
----------- -------------- ------------ ----------- ---------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-6
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK SPECIAL WARRANTS
----------------------- -----------------------
SHARES AMOUNT NUMBER AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, August 31, 1997........... 22,714,821 $ 7,924,329 4,935,800 $ 7,753,008
Conversion of warrants............. 4,935,800 7,753,008 (4,935,800) (7,753,008)
Exercise of warrants............... 136,500 108,374 -- --
Exercise of warrants............... 2,000,000 415,205 -- --
Exercise of warrants............... 91,864 141,396 -- --
Costs of issuances................. -- (120,114) -- --
Issuance of warrants in connection
with debt........................ -- -- -- --
Foreign currency translation
adjustments...................... -- -- -- --
Unrealized losses.................. -- -- -- --
Net loss........................... -- -- -- --
---------- ----------- ---------- -----------
Balance, December 31, 1997......... 29,878,985 $16,222,198 -- $ --
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
<CAPTION>
COMMON STOCK SPECIAL WARRANTS
----------------------- -----------------------
SHARES AMOUNT NUMBER AMOUNT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, October 31, 1996,
adjustment to reflect outstanding
shares of legal parent at October
31, 1996 and net assets of parent
at fair values and Texstar at
historical cost.................. 20,201,858 $ 5,065,277 -- $ --
Issuance pursuant to private
placements....................... 910,800 881,296 -- --
Issued upon exercise of options.... 1,004,300 961,241 -- --
Issued for properties.............. 343,000 442,923 -- --
Issued for properties.............. 254,863 573,592 -- --
Sale of stock purchase warrants.... -- -- 4,885,800 8,750,447
Issuance of stock warrants for
services......................... -- -- 50,000 116,571
Costs of issuances................. -- -- -- (1,114,010)
Foreign currency translation
adjustments...................... -- -- -- --
Unrealized gains................... -- -- -- --
Net loss........................... -- -- -- --
---------- ----------- ---------- -----------
Balance, August 31, 1997........... 22,714,821 $ 7,924,329 4,935,800 $ 7,753,008
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
<CAPTION>
UNREALIZED
ADDITIONAL GAIN (LOSS) TOTAL
PAID-IN ACCUMULATED ON TRANSLATION STOCKHOLDERS'
CAPITAL DEFICIT SECURITIES ADJUSTMENTS EQUITY
------------ -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1997........... $ -- $ (1,917,141) $ 392,183 $ (62,431) $14,089,948
Conversion of warrants............. -- -- -- -- --
Exercise of warrants............... -- -- -- -- 108,374
Exercise of warrants............... -- -- -- -- 415,205
Exercise of warrants............... -- -- -- -- 141,396
Costs of issuances................. -- -- -- -- (120,114)
Issuance of warrants in connection
with debt........................ 367,881 -- -- -- 367,881
Foreign currency translation
adjustments...................... -- -- -- 25,359 25,359
Unrealized losses.................. -- -- (482,231) -- (482,231)
Net loss........................... -- (2,739,322) -- -- (2,739,322)
------------ -------------- ------------ ----------- -------------
Balance, December 31, 1997......... $ 367,881 $ (4,656,463) $ (90,048) $ (37,072) $11,806,496
------------ -------------- ------------ ----------- -------------
------------ -------------- ------------ ----------- -------------
UNREALIZED
GAIN (LOSS) TOTAL
ACCUMULATED ON TRANSLATION STOCKHOLDERS'
SUBSCRIPTIONS DEFICIT SECURITIES ADJUSTMENTS EQUITY
------------ -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996,
adjustment to reflect outstanding
shares of legal parent at October
31, 1996 and net assets of parent
at fair values and Texstar at
historical cost.................. $1,043,846 $ -- $ -- $ -- $ 6,109,123
Issuance pursuant to private
placements....................... (296,032) -- -- -- 585,264
Issued upon exercise of options.... -- -- -- -- 961,241
Issued for properties.............. -- -- -- -- 442,923
Issued for properties.............. -- -- -- -- 573,592
Sale of stock purchase warrants.... (747,814) -- -- -- 8,002,633
Issuance of stock warrants for
services......................... -- -- -- -- 116,571
Costs of issuances................. -- -- -- -- (1,114,010)
Foreign currency translation
adjustments...................... -- -- -- (62,431) (62,431)
Unrealized gains................... -- -- 392,183 -- 392,183
Net loss........................... -- (1,917,141) -- -- (1,917,141)
------------ -------------- ------------ ----------- -------------
Balance, August 31, 1997........... $ -- $ (1,917,141) $ 392,183 $ (62,431) $14,089,948
------------ -------------- ------------ ----------- -------------
------------ -------------- ------------ ----------- -------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-7
<PAGE>
BENZ ENERGY LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIODS
<TABLE>
<CAPTION>
FOUR MONTHS TEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $ (11,137,691) $ (2,739,322) $ (1,917,141)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization............................. 3,152,506 634,493 240,403
Amortization of deferred loan costs.................................. 2,926,482 470,363 --
(Gain) loss on sale of stock held for investment....................... (24,971) 50,907 35,917
Reserve for bad debt................................................... 197,008 -- --
Write-off of investment in Calibre Ecuador............................. 319,327 -- --
Changes in operating assets and liabilities:
Funds held in trust.................................................. -- 1,773,364 (1,819,637)
Increase in receivables.............................................. (1,056,658) (483,011) (3,606,624)
(Increase) decrease in prepaid expenses.............................. (384,443) 214,361 10,718
(Increase) decrease in amounts due from related parties.............. (4,627,308) 453,132 (453,132)
Decrease in advances to Stanford..................................... -- -- 311,699
Increase in other assets............................................. (430,600) (1,647,237) (360,933)
Increase in accounts payable and accrued expenses.................... 7,366,018 5,475,762 5,486,338
Increase (decrease) in drilling advances............................. (368,574) (421,990) 163,188
-------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................ (4,068,904) 3,780,822 (1,909,204)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures............................... (36,312,839) (16,226,706) (7,136,665)
Proceeds from sale of oil and gas properties........................... 1,059,083 408,931 416,060
Proceeds from sale of stock held for investment........................ 1,085,016 9,308 74,224
Other capital expenditures, net........................................ (745,419) (103,346) (375,680)
Other, net............................................................. (487,847) -- --
-------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (35,402,006) (15,911,813) (7,022,061)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings................................................... 10,057,225 14,115,000 375,500
Payments on long-term debt............................................. (9,759,225) (145,468) (80,128)
Proceeds from special financing........................................ 7,000,000 -- --
Net increase in short-term borrowings.................................. (19,946) -- --
Proceeds from issuance of convertible debentures and special notes..... 36,512,000 -- --
Proceeds from issuance of common stock and warrants.................... 170,298 664,975 9,665,709
Cost of debt and equity transactions................................... (4,774,260) (120,114) (1,114,010)
Payments on notes...................................................... (221,200) -- --
Other.................................................................. (286,644) -- --
-------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 38,678,248 14,514,393 8,847,071
-------------- ------------- -------------
Effect of change in translation.......................................... (50,356) 84,612 28,484
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... (843,018) 2,468,014 (55,710)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 3,162,320 694,306 750,016
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $ 2,319,302 $ 3,162,320 $ 694,306
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-8
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--Benz Energy Ltd. ("Benz" or the "Company") is an
independent energy company engaged primarily in the acquisition, development,
production, exploration for and the sale of oil, gas and natural gas liquids.
The Company's exploration and production activities are located primarily in the
Gulf Coast areas of Mississippi, Louisiana and Texas. Benz treats all operations
as one segment of business. The principal executive offices of the Company are
located at 1000 Louisiana, 15th Floor, Houston, Texas 77002. The Company's
registered and records office is located at 3081 Third Avenue, Whitehorse, Yukon
Y1A 4Z7 Canada.
The Company's future financial condition and results of operations will
depend upon prices received for its oil and natural gas and the costs of
finding, acquiring, developing and producing reserves. Prices for oil and
natural gas are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of other factors beyond the Company's control. These
factors include worldwide political instability (especially in the Middle East),
the foreign supply of oil and natural gas, the price of foreign imports, the
level of consumer product demand and the price and availability of alternative
fuels. With natural gas accounting for 89 percent of Benz's 1998 production on
an energy equivalent basis, the Company was affected more by fluctuations in
natural gas prices than in oil prices.
CHANGE IN ACCOUNTING PRINCIPLE--The Company changed its method of accounting
from the successful efforts method to the full cost method of accounting for oil
and gas properties during the period ended December 31, 1997. The Company
decided to make this change due to the fact that the majority of its peer group
uses full cost accounting and the change makes the Company more comparable to
its peer group for financial reporting purposes. The prior period presented has
been restated to reflect the change in accounting. If the Company had not
restated the financial statements for the period ended August 31, 1997, the loss
for that period would have been $4,995,260 and the loss per share would have
been $(0.23).
CHANGE IN FISCAL YEAR--The Company changed its fiscal year end to December
31 from August 31, effective with the four month period ended December 31, 1997.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of Benz Energy Ltd. and its wholly owned subsidiaries Texstar
Petroleum, Inc. ("Texstar") and Benz Properties Ltd. ("Benz Properties").
Accordingly, all references herein to Benz or the Company include the
consolidated results of its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION--Effective October 31, 1996, Benz acquired 100% of the
outstanding capital stock of Texstar (See Note 2). As a result, Texstar's former
shareholders obtained control of Benz. For accounting purposes, this acquisition
has been treated as a recapitalization of Texstar.
The financial statements presented include only the accounts of the Company
since Texstar's inception (October 31, 1996).
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates with regard to these financial statements include the estimate of
proved oil and gas reserve volumes and the related present value of estimated
future net revenues therefrom (see Note 24, "Supplemental Oil and Gas
Disclosures").
F-9
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--Cash and Cash Equivalents include cash in banks
and other cash equivalents that mature within three months of the date of
purchase.
OIL AND GAS PROPERTIES--The Company uses the full cost method of accounting
for its investment in oil and gas properties. Under this method, the Company
capitalizes all acquisition, exploration and development costs incurred for the
purpose of finding oil and gas reserves, including salaries, benefits and other
internal costs directly attributable to these activities. Capitalized internal
costs were as follows for the periods indicated:
<TABLE>
<S> <C>
Year ended December 31, 1998...................................... $ 829,835
Four months ended December 31, 1997............................... $ 335,626
Ten months ended August 31, 1997.................................. $ 412,752
</TABLE>
Interest costs related to unproved properties and properties under development
are also capitalized to oil and gas properties. Unless a significant portion of
the Company's reserve volumes are sold (generally greater than 25 percent),
proceeds from the sale of oil and gas properties are accounted for as reductions
to capitalized costs and gains or losses are not recognized.
Benz computes the provision for depreciation, depletion and amortization
(DD&A) of oil and gas properties on a quarterly basis using the
units-of-production method based upon production and estimates of proved reserve
quantities. Unevaluated costs and related capitalized internal and interest
costs are excluded from the amortization base until the properties associated
with these costs are evaluated. The amortizable base includes estimated
dismantlement, reclamation and abandonment costs net of equipment salvage
values. The engineering department of Benz generally estimates these future
costs.
Benz limits, by country, net capitalized costs of proved oil and gas
properties, less related deferred income taxes, to the sum of (1) future net
revenues (using prices and cost rates as of the balance sheet date) from proved
reserves and discounted at ten percent per annum, plus (2) costs not being
amortized, less (3) related income tax effects. Excess costs, if any, are
charged to proved property impairment expense.
The costs of certain unevaluated leasehold acreage and wells being drilled
are not being amortized. Costs not being amortized are periodically assessed for
impairments. Any impairment is added to the amortization base.
DEPRECIATION AND AMORTIZATION--Property and equipment are stated at cost and
are depreciated using the straight-line method over their estimated useful
lives. The costs of maintenance and repairs are charged to expense when
incurred; costs of renewals and betterments are capitalized. Upon the sales or
retirement of property and equipment, the cost and related accumulated
depreciation are eliminated from the respective accounts and the resulting gain
or loss is included in operations.
REVENUE RECOGNITION--Revenues from the sale of oil and gas production are
recognized when title passes, net of royalties. Natural gas revenues are
generally recognized under the entitlements method of accounting for gas
imbalances, i.e., monthly sales quantities that do not match the Company's
entitled share of joint production. Entitled quantities in excess of sales
quantities are recorded as a receivable from joint venture partners. The
receivable is carried at the lower of current market price or the market price
at the time the imbalance occurred. Sales quantities in excess of entitled
quantities are recorded as deferred revenue carried at the gas market price
received at the time the imbalance occurred.
F-10
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEDGING--The Company may enter into derivative contracts to hedge the risk
of future oil and gas price fluctuations. Such contracts may either fix or
support oil or gas prices or limit the impact of price fluctuations with respect
to the Company's sales of oil and gas. Gains and losses on such hedging
activities are recognized in oil and gas revenues when the hedged production is
sold. Hedged oil and gas prices, if any, used in computing the year-end
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves reflect the estimated effects of hedging contracts existing at
year end.
INVESTMENT IN EQUITY SECURITIES--The Company accounts for its investments in
equity securities under the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". This
standard provides that available-for-sale investments in securities that have
readily determinable fair values be measured at fair value in the balance sheet
and that unrealized holding gains and losses for these investments be reported
in a separate component of stockholders' equity until realized.
LONG-LIVED ASSETS--Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment losses on
assets to be held and used are recognized based on the fair value of the assets
and long-lived assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell.
INCOME TAXES--Provisions for income taxes are based on taxes payable or
refundable for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed SFAS No. 109, "Accounting for Income Taxes". As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
CONCENTRATION OF CREDIT RISK--The Company places its cash in what it
believes to be credit-worthy financial institutions. However, cash balances may
exceed FDIC insured levels at various times during the year.
STOCK BASED COMPENSATION--The Company uses the intrinsic value method of
accounting for stock-based compensation in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. See Note 14 for pro forma disclosure of net income and
earnings per share under the fair value method of accounting for stock-based
compensation as proscribed by SFAS No. 123, "Accounting for Stock-Based
Compensation".
TRANSLATION OF FOREIGN CURRENCY--The Company translates the foreign currency
financial statements of its foreign parent in accordance with the requirements
of SFAS No. 52, "Foreign Currency Translation". Assets and liabilities are
translated at current exchange rates, and related revenues and expenses are
translated at average exchange rates in effect during the period. Resulting
translation adjustments are recorded as a separate component in stockholders'
equity. Foreign currency transaction gains and losses are included in
determining net income.
PER SHARE OF COMMON STOCK--Per share amounts have been computed based on the
average number of common shares outstanding during the period.
F-11
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1997, the FASB issued a new statement titled "Earnings Per
Share" (SFAS No. 128). This statement is effective for both interim and annual
periods ending after December 15, 1997 and specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. All prior-period EPS
data presented has been restated to conform to the provisions of SFAS No. 128.
Potential common stock has been excluded from the computation of earnings
per share since the inclusion of options and warrants would be antidilutive.
NOTE 2. CORPORATE REORGANIZATION
(a) During the period ended August 31, 1997, Benz issued 8,500,000 common
shares to acquire all of the issued and outstanding shares of Texstar (the
"Texstar Acquisition").
As a result of this transaction the former shareholders of Texstar acquired
or exercised control over a majority of shares of Benz. Accordingly, the
transaction has been treated for accounting purposes as a recapitalization of
Texstar and, therefore, these financial statements represent a continuation of
the legal subsidiary, Texstar, not Benz, the legal parent. In accounting for
this transaction:
(i) Texstar is deemed to be the purchaser and parent company for
accounting purposes. Accordingly, its net assets are included in the
consolidated balance sheet at their historical book values;
(ii) Control of the net assets and business of Benz was acquired
effective October 31, 1996 (the "Effective Date"). This transaction has been
accounted for as a purchase of the assets and liabilities of Benz by Texstar
at the fair value of $5,342,158. The historical cost of the net assets
acquired was $4,712,162. A summary of the assigned values of the net assets
acquired is as follows:
<TABLE>
<S> <C>
Net working capital............................................................. $ 723,924
Advances to Texstar as at Effective date, eliminated in consolidation........... 256,123
Long term investments........................................................... 1,821,596
Petroleum interests............................................................. 2,540,515
-----------
Net assets acquired............................................................. $ 5,342,158
-----------
-----------
</TABLE>
(iii) The consolidated statements of operations and cash flows include
Texstar's results of operations and cash flows from October 31, 1996 (date
of inception) and Benz's results of operations from the Effective Date.
Prior to Benz acquiring Texstar, Texstar acquired certain assets and assumed
certain liabilities from Texstar Petroleum L.L.C. ("Texstar L.L.C."), a private
company of which certain of Texstar LLC's members, directors and officers are
also shareholders, directors and officers of the Company. As a result of the
Texstar Acquisition, Texstar LLC's members are also shareholders of the Company.
Due to the fact that Texstar and Texstar LLC were under common control, the
assets and liabilities assigned have been recorded at their historical costs.
(a) Prior to the Effective Date, Benz completed a number of agreements with
Texstar LLC whereby Benz acquired:
F-12
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. CORPORATE REORGANIZATION (CONTINUED)
(i) various working interests in five oil and gas prospects located in
Mississippi and Texas, paid through the issuance of 2,850,000 common shares
of Benz, at a deemed price of $1,935,800;
(ii) an exclusive right of first refusal, at a cost of $300,000, to
purchase 50% interests in new oil and gas properties located in the United
States Gulf Coast areas of Texas, Louisiana and Mississippi; and
(iii) a 32% working interest in the shallow rights and 40% working
interest in the deep rights in the Lahinch field (the "Lahinch Prospect"),
covering approximately 2,303 acres, located in Duval County, Texas, at a
price of $193,506.
NOTE 3. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On December 29, 1998, the Company acquired, for $2.0 million, all of Mobil's
right, title and interest in the deep rights below the existing production in
the Old Ocean Unit.
In July 1998, Benz acquired certain proved and unproved non-producing oil
and gas properties in Mississippi, Texas and Louisiana from Starbucks Trust for
$2.33 million and 600,000 shares of the Company's common stock. The purchase is
subject to certain post-closing adjustments relating to purchase value. The
value of the assets is secured through January 1, 2001, by 2.1 million shares of
the Company's common stock owned by Starbucks Trust. See Note 16, "Related Party
Transactions".
In May 1998, the Company entered into a property swap agreement with
Southern Gas Company ("Southern Gas"). The Company conveyed to Southern Gas the
Company's entire interest in White Castle Dome (5.5%) and $1.25 million in cash.
In exchange, Southern Gas conveyed to the Company Southern Gas's entire interest
in the Oakvale, Wausau and Moselle Dome properties and prospects.
In April 1998, the Company agreed to acquire certain petroleum interests and
assume certain liabilities from Calibre Energy, L.L.C. ("Calibre"). The Company
paid $261,000 in cash, forgave $1,450,000 in advances, assumed $450,000 in debt
and issued promissory notes totaling $2,000,000. In addition, the Company will
issue approximately 1,927,400 shares of common stock in 1999 at an ascribed
price of Cdn.$2.80 per share in connection with this transaction. These shares
have been reserved for issuance, subject to the finalization of the closing
documents.
In January 1998, Benz acquired certain producing properties from Lasco
Energy Partners ("Lasco") for a purchase price of $15.0 million. The Company
issued a note payable which, subsequent to shareholder approval, was converted
to $12.0 million in newly authorized preferred stock (priced at $1.00) and $3.0
million in common stock (priced at $1.185). In December 1998, the Lasco purchase
price was adjusted to $12,488,140. Included in this reduction were adjustments
for the change in interest and dividends resulting from the lower purchase
price. The difference of $2,511,860 reduced the principal amount of preferred
shares to $9,488,140.
The following unaudited pro forma financial information shows the effect on
the Company's consolidated results of operations as if the Lasco Acquisition
occurred on October 31, 1996 (Inception). The pro
F-13
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS AND DIVESTITURES (CONTINUED)
forma data is based on numerous assumptions and is not necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
FOUR MONTHS ENDED TEN MONTHS ENDED
DECEMBER 31, 1997 AUGUST 31, 1997
---------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues.............................................. $ 707,987 $ 1,529,043 $ 444,203 $ 2,914,227
Net loss.............................................. (2,739,322) (2,493,346) (1,917,141) (1,147,829)
Net loss per common share:
Basic............................................... $ (0.10) $ (0.08) $ (0.09) $ (0.05)
Diluted............................................. (0.10) (0.08) (0.09) (0.05)
</TABLE>
DIVESTITURES
In 1998, Benz received $1.1 million from the sale of non-strategic oil and
gas properties related to three separate transactions. During the periods ended
December 31, 1997 and August 31, 1997, the Company sold partial interests in
various unproved prospects for net proceeds of $408,931 and $416,060,
respectively. No gain has been recognized; capitalized oil and gas property
costs have been reduced by the amount of sales proceeds.
NOTE 4. RESTRICTED CASH
Included in cash and cash equivalents at December 31, 1998 and 1997 is
$1,006,807 and $721,304, respectively, which is restricted to expenditures on
certain petroleum interests.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
3-D Workstations................................................ $ 313,117 $ 313,117
Furniture and Fixtures.......................................... 374,861 180,139
Telephone and Computer Equipment................................ 448,732 274,133
Leasehold Improvements.......................................... 295,111 14,967
Software........................................................ 71,472 --
Other........................................................... 69,049 --
------------- ------------
1,572,342 782,356
Less: Accumulated Depreciation.................................. (477,498) (171,819)
------------- ------------
Net Property and Equipment...................................... $ 1,094,844 $ 610,537
------------- ------------
------------- ------------
</TABLE>
F-14
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROPERTY AND EQUIPMENT (CONTINUED)
The Company recorded the following depreciation expense related to property
and equipment in the Consolidated Statement of Operations for the periods
indicated:
<TABLE>
<S> <C>
Year ended December 31, 1998...................................... $ 305,679
Four months ended December 31, 1997............................... $ 53,625
Ten months ended August 31, 1997.................................. $ 91,254
</TABLE>
NOTE 6. INVESTMENTS IN EQUITY SECURITIES
At December 31, 1998 and 1997, marketable investments classified as
available for sale were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Common Stocks:
Market value................................................... $ 195,671 $1,312,653
Cost........................................................... 281,301 1,402,701
------------ ------------
Gross Unrealized Holding Losses.................................. $ (85,630) $ (90,048)
------------ ------------
------------ ------------
</TABLE>
The Company realized the following gross gains (losses) from the sale of
equity securities for the periods indicated:
<TABLE>
<S> <C>
Year ended December 31, 1998...................................... $ 24,971
Four months ended December 31, 1997............................... $ (50,907)
Ten months ended August 31, 1997.................................. $ (35,917)
</TABLE>
Benz utilizes the average cost method in computing realized gains and losses
which is included in other income (expense) in the accompanying Consolidated
Statement of Operations.
NOTE 7. PARTICIPATION AGREEMENT
In November 1998, the Company entered into a participation agreement with
Burlington Resources International Inc. ("Burlington") to pursue government
contracts to participate in the redevelopment of oil and gas fields in Ecuador.
The Company and Burlington have participation interests of 25% and 75%,
respectively. At December 31, 1998, the Company had invested $316,470 in the
venture. Subsequent to year-end, Burlington indicated it might not renew the
agreement at this time, and that action could have an impact on the Company's
ability to maintain an interest in this region. However, the Company would
retain a 25% interest in any project related to the subject area pursued by
Burlington for one year.
NOTE 8. DRILLING ADVANCES
As of December 31, 1998 and 1997, the Company has received drilling advances
from joint interest owners in the amounts of $20,774 and $389,348, respectively.
These advances will be applied toward the payment of drilling costs to be
incurred in the future.
F-15
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
EnCap Credit Agreement (Face Value of $12,000,000 and
$14,000,000, respectively)................................ $ 12,000,000 $ 11,957,445
BOCP Credit Facility........................................ 3,000,000 702,000
Shell Financing (Face Value of $7,000,000).................. 6,000,000 --
Mobil Financing............................................. 2,200,000 --
Cogniseis Development....................................... 28,912 48,858
Convertible Debentures...................................... 27,250,000 --
Special Notes............................................... 9,012,000 --
------------- -------------
Total..................................................... 59,490,912 12,708,303
Current Portion............................................. 17,228,912(1) 12,702,246
------------- -------------
Total Long-Term Debt...................................... $ 42,262,000 $ 6,057
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Excludes $1,946,667 related to the Shell financing which is considered
long-term until the related production is accrued.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
1999........................................................................... $ 19,175,579
2000........................................................................... 2,776,667
2001........................................................................... 1,276,666
2002........................................................................... --
2003........................................................................... 36,262,000
-------------
$ 59,490,912
-------------
-------------
</TABLE>
ENCAP CREDIT AGREEMENT. The Company entered into a $20 million credit
agreement (the "EnCap Credit Agreement") with EnCap Capital Fund III, L.P.
("EnCap") consisting of a promissory note for $12,000,000 (the "Original Note")
and a promissory note for $8,000,000 (the "Supplemental Note"; collectively, the
"Notes"). The Original Note bears interest at 10% per annum up to and until
December 31, 1998 and at 18% per annum thereafter. This note is due, with
accrued interest, on July 31, 1999. The Supplemental Note was repaid in full and
no advances are currently outstanding. Under the terms of the Debentures and
Special Notes described below, the Company has agreed to limit borrowings under
the EnCap Credit Agreement to $12,000,000, all of which is outstanding. The
proceeds from the facility were applied to the acquisition of Oakvale Dome
($8,000,000), and Old Ocean properties and the drilling and completion of
certain development wells ($4,000,000). A first lien on certain properties and a
second lien on certain other properties secure the Original Note. Prentis B.
Tomlinson, Chairman and CEO of the Company, Calibre, certain affiliates of
Calibre, Slattery Trust, a private trust of which Mr. Tomlison is the
beneficiary, and Texastar Holdings, L.L.C. ("Texstar Holdings"), a private
limited liability company owned by certain directors and officers of the
Company, guarantee the Original Note.
Under the terms of the Original Note, the Company agreed to convey to EnCap,
on January 1, 1999, a 25% net profit interest (the "EnCap NPI") from the
properties acquired with the proceeds of the
F-16
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LONG-TERM DEBT (CONTINUED)
borrowing. EnCap also required Slattery Trust and Texstar Holdings (collectively
the "Benz Shareholders"), to enter into a put/call agreement (the "Put/Call
Agreement"), pursuant to which the Benz Shareholders, under certain conditions,
have the right to obtain or "call" the EnCap NPI in exchange for 1.5 million
shares of Common Shares. The Put/Call agreement also gives EnCap the right,
under certain conditions, to sell, or put, portions of the EnCap NPI to the Benz
Shareholders for an aggregate of 1.5 million shares of Common Shares as of
December 31, 1998, increasing to 3.5 million shares after March 31, 1999. The
Benz Shareholders have transferred the rights and obligations of the Put/Call
Agreement to the Company. In connection with the original granting of the EnCap
NPI, the Company recorded a discount on the Original Note of $2,102,180 as of
December 31, 1997. The discount has been amortized over the term of the Original
Note. The carrying amount of the oil and gas interests has been reduced by the
same amount. Subsequent to the end of 1998, the EnCap NPI vested and the put
option expired. Encap thus retained the NPI.
Under the terms of the Supplemental Note, EnCap was issued warrants to
purchase up to 1.5 million shares of Common Shares at an exercise price of $1.28
per share. In connection with the issuance of these warrants, the Company
recorded a discount on the Supplemental Note of $367,881 as of December 31,
1997. This discount is being amortized over the term of the Supplemental Note
Facility. Pursuant to a financing agreement dated November 4, 1998 with EnCap
and as consideration for enabling additional funding through the Bank One Credit
Facility, the warrants were repriced to $0.46475 per share. The re-pricing did
not have material effect on the unamortized discount balance.
BOCP CREDIT FACILITY. In December 1998, the Company's loan agreement with
Bank One NA ("Bank One") was purchased by BOCP Energy Partners, L.P. ("BOCP").
Pursuant to an assignment of note and liens dated December 29, 1998, Bank One
assigned the original loan agreement, together with all loan documents referred
to therein, to BOCP. The principal amount then outstanding under Tranche A of
$2.9 million plus interest was repaid and, per amendments to the loan agreement,
no further advances will be requested or made under Tranche A. Interest accrued
on advances under Tranche A at prime plus 2.0%, payable monthly. The amendments
also modified the terms of Tranche B of the credit facility as follows:
(1) Maximum availability of $6,000,000.
(2) No advances on Tranche B will be requested or made on or after April
30, 1999.
(3) Maturity date of July 31, 1999.
(4) Interest rate of prime plus eight percent per annum through and
including December 31, 1998 and fifteen percent per annum from and after
January 1, 1999.
In December, the Company paid $1.5 million of the $4.5 million outstanding
principal balance under Tranche B but no interest thereon. The outstanding
balance of Tranche B as of the date of this report is $6.0 million. All interest
accrued on Tranche B remains unpaid and owing and is due on July 31, 1999. The
Company has reached a standstill agreement covering certain covenants of which
the Company is currently in violation. See Note 22, "Subsequent Events."
SHELL FINANCING. In December 1998, the Company entered into a financing
agreement with Shell Capital, Inc. ("Shell Capital") whereby the Company sold a
term production payment to Shell Capital for $7 million. The production payment
comprised a dedication of 42% of net revenues from the Wausau, Oak Hill, East
Morgantown properties, 23.1% of Oakvale Dome's Howell well, 12.2% of Oakvale
Dome's
F-17
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LONG-TERM DEBT (CONTINUED)
Fortenberry well and 38.5% of Oakvale Dome's Byrd well. Such interests are
subject to adjustment. The production payment is secured solely by the
properties. Following full pay-out ($7.0 million plus a 15% rate of return) of
the production payment, the dedicated revenue interest is returned to the
Company less a permanent royalty interest equal to 8.75% of the Company's net
revenue interest in Wausau, Oak Hill and East Morgantown, and 4.8% of the Howell
and Byrd wells and 2.5% of the Fortenberry well. The Company has the right to
buy back the production payment at a stated rate of return of 25% plus a payment
of $1.0 million. In connection with the right to buy back the permanent
overriding royalty interest conveyance, the Company recorded a discount on the
financing of $1.0 million. The carrying amount of the oil and gas interests has
been reduced by the same amount. Shell Capital further agreed to expand its term
production payment to $25 million provided that the Company sell certain
properties, enter into a payment schedule for amounts owed to an industry
partner, raise additional capital and obtain certain minimum results from
current development drilling activity. The Company is currently negotiating with
Shell Capital and other parties to complete the expansion of the term production
payment.
This financing has been classified as debt on the balance sheet and will be
reduced starting in 1999 as production is delivered to Shell under the terms of
the contract. Volumes delivered to Shell are reported as revenue at prices
received by Shell. Interest expense is recorded based on a rate of 15 percent.
MOBIL FINANCING. In December 1998, the Company obtained a short-term
advance of $2.2 million from certain investors for the purchase of Mobil's deep
rights in the Old Ocean Unit. The advances are due July 31, 1999 and bear
interest at a rate of 10% per annum.
In connection with the short-term advance, the Company agreed to pay RP&C
International, Inc. ("RP&C") and EnCap Investments L.C. ("EnCap L.C.")
arrangement fees in the amounts of $125,400 and $6,600 respectively. In
addition, the Company granted RP&C and EnCap L.C. warrants to purchase Benz
Common Stock in an aggregate amount equal to $220,000. Such warrants were
apportioned 95% to RP&C and 5% to EnCap L.C. The exercise price of the warrants
at issuance was Cdn.$0.46 per share with an exercise period of three years. In
lieu of issuing the warrants, the Company agreed to provide RP&C and EnCap L.C.
in substance with substantially the same economic rights or interests they would
have otherwise received had they been issued the warrants. The fair value of
such right at December 31, 1998 was determined to be approximately $171,217.
The Company also conveyed to each lender of the Mobil financing such
lender's percentage share of an overriding royalty interest equal to 50% of the
Mobil interest purchased in and to the Old Ocean Unit leases and the AMI leases.
If the Company pays in full all of the notes on or before the original maturity
date of April 30, 1999, or as extended, the lenders will re-convey the
overriding royalty interest back to the Company. The lenders have exended such
date to July 31, 1999. The Lender will retain the right to receive such lender's
percentage share of 7.75% of the net profits, if any, realized from the
production of oil, gas and other minerals from the subject interest in
connection with such re-conveyance.
CONVERTIBLE DEBENTURES AND SPECIAL NOTES. In March and April of 1998, the
Company completed the private placements of $27.5 million in 9% Convertible
Debentures, Series 1 general obligation notes and $10 million of 9% Special
Notes, Series A and Series B exercisable into $10 million principal amount of 9%
Convertible Debentures, Series 2 and Series 3.
The Series 1 debentures bear interest at a rate of 9% per year payable in
arrears in equal semi-annual installments on March 31st and September 30th of
each year. The debentures have a maturity date of March 31, 2003. The debentures
are convertible at the option of the holder into the Company's Common
F-18
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LONG-TERM DEBT (CONTINUED)
Stock prior to March 27, 2003 at a conversion price of Cdn.$1.70 per share,
subject to adjustment in certain circumstances. The debentures are redeemable in
whole or in part by the Company at any time after March 31, 2002 at the
principal amount thereof, together with any accrued but unpaid interest. The
Company may, at any time after September 30, 1999 and prior to the Maturity Date
require that all outstanding convertible debentures be converted subject to
achieving a stock price of Cdn.$2.38 per share.
The Special Notes, Series A and Series B entitle the holder to acquire the
same principal amount of 9% convertible debentures Series 2 and Series 3, at no
additional cost, at any time on or before the earlier of (i) the fifth business
day after a final prospectus qualifying the convertible debentures to be issued
upon the exercise of the Special Notes and (ii) the date 18 months after the
closing of the Special Notes Series A and 6 months after the closing of the
Special Notes Series B. The trustee of the Special Notes will exercise any
Special Notes not exercised prior to the above date and the convertible
debentures will be issued to the noteholders without any further action on the
part of the holder. See Note 22, "Subsequent Events".
The convertible debentures, Series 2 and Series 3, bear interest at a rate
of 9% per annum payable in arrears in equal semi-annual installments on March
31st and September 30th of each year. The debentures have a maturity date of
August 31, 2003. The debentures will be convertible at the option of the holder
into common shares at a conversion price of Cdn.$1.70 per common share, subject
to adjustment in certain circumstances. If the holder elects to convert the
debentures prior to the date of the third semi-annual coupon, the holder will
receive a 5% premium on the number of common shares issued upon conversion. The
debentures are redeemable in whole or in part by the Company at any time after
August 31, 2002 at the principal amount thereof, together with any accrued but
unpaid interest. The Company may, at any time after August 31, 2001 and prior to
the Maturity Date require that all outstanding convertible debentures be
converted subject to achieving a stock price of Cdn.$2.13 per share.
The Company did not receive clearance of the Special Notes in certain
Canadian jurisdictions by August 9, 1998 nor in the U.S. by September 21, 1998
and, therefore, holders of Series A Special Notes had the right to elect
retraction of up to $1.056 million in funds held in escrow pending regulatory
approval. Certain holders elected to retract a total of $988,000 plus accrued
interest. The balance was released from escrow. In addition, holders of both
Series A and Series B notes received the right to receive 10% more common shares
issued upon conversion due to not receiving clearance.
In connection with the issuance of the Convertible Debentures, Series 1 the
Company granted the agent 2,109,974 compensation options that entitle the holder
to receive cash payment from the Company equal to the difference between the
closing market price of a common share of the Company on the trading day
immediately preceding the exercise date and Cdn.$1.70 per share, subject to
adjustment in certain circumstances. The options expire on March 25, 2000.
Pursuant to an agreement dated December 31, 1998, the options were repriced to
Cdn.$0.46 per common share. The fair value of such options was determined to be
approximately $358,577 and is being amortized over the two-year life of the
options. At December 31, 1998, $209,170 remained unamortized.
In connection with the issuance of the Special Notes, Series A and Series B,
the Company granted the agent 737,903 special compensation warrants that entitle
the holder to acquire the same number of compensation options. The options each
entitle the holder to acquire, subject to adjustment, one common share of the
Company for Cdn.$1.70 per share at any time on or prior to April 8, 2000.
COGNISEIS DEVELOPMENT. On May 1, 1996, Texstar LLC purchased equipment and
financed the purchase through the vendor. The amount financed was $110,365. As
of October 31, 1996, $100,395 was
F-19
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LONG-TERM DEBT (CONTINUED)
assigned to the Company and was outstanding. The equipment has also been
assigned to the Company. The amount financed is collaterized by the equipment.
Under the terms, monthly payments of principal and interest are due. The
interest rate is 15% per annum. At December 31, 1998, $28,912 remained
outstanding.
NOTE 10. INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
Current Tax Expense
U.S. Federal................................................. $ -- $ -- $ --
State and Local.............................................. -- -- --
------------ ------------ -----------
Total Current.............................................. -- -- --
------------ ------------ -----------
Deferred Tax Expense
U.S. Federal................................................. -- -- --
State and Local.............................................. -- -- --
------------ ------------ -----------
Total Deferred............................................. -- -- --
------------ ------------ -----------
Total Tax Provision from Continuing Operations............... $ -- $ -- $ --
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
Federal Income Tax Rate........................................ (34.0)% (34.0)% (34.0)%
Deferred Tax Charge (Credit)................................... -- -- --
Effect of Valuation Allowance.................................. 34.0% 34.0% 34.0%
State Income Tax, Net of Federal Benefit....................... -- -- --
------------ ------------ -----------
Effective Income Tax Rate 0.0% 0.0% 0.0%
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
At December 31, 1998 and 1997 and August 31, 1997 the Company had net
carryforward losses of approximately $43,029,000, $11,029,000 and $4,535,000,
respectively. A valuation allowance equal to the tax benefit for deferred taxes
has been established due to the uncertainty of realizing the benefit of the tax
carryforward.
F-20
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
-------------- ------------- ------------
<S> <C> <C> <C>
Non-Current Deferred Tax Assets (Liabilities):
Exploration and development costs capitalized for financial
purposes, expensed for tax purposes.............................. $ (11,380,539) $ (2,472,913) $ (968,546)
Depreciation Expense............................................... 495,664 35,949 (43,341)
Loss Carry-forwards................................................ 14,629,860 3,749,860 1,541,900
-------------- ------------- ------------
3,744,985 1,312,896 530,013
Less: Valuation Allowance........................................ (3,744,985) (1,312,896) (530,013)
-------------- ------------- ------------
Net Deferred Tax Assets (Liabilities)................................ $ -- $ -- $ --
-------------- ------------- ------------
-------------- ------------- ------------
</TABLE>
Net operating loss carryforwards expire as follows:
<TABLE>
<S> <C>
2011........................................................... $4,535,000
2012........................................................... $6,494,000
2013........................................................... $32,000,000
</TABLE>
NOTE 11. SEGMENTED INFORMATION
The Company's principal activity is the exploration and development of
petroleum properties in the United States. The principal assets in Canada
consist primarily of cash, funds held in trust, amounts receivable, prepaid
expenses and investments. The allocation of the total assets of the Company
between the two segments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, AUGUST 31,
1998 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
Canada.................................................... $ 4,784,298 $ 1,582,629 $ 3,345,347
United States............................................. 90,455,949 34,633,500 18,175,533
------------- ------------- -------------
Total identifiable assets............................... $ 95,240,247 $ 36,216,129 $ 21,520,880
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE 12. REDEEMABLE PREFERRED STOCK
The Company authorized a new issue of Class A Preferred Shares Series 1.
Dividends are payable at 10% per annum of the amount paid or deemed to have been
paid for the shares, payable quarterly. Dividends are cumulative. For the first
eight quarterly dividends, the Company may elect to pay the dividends in common
shares, at a price based on the trailing average price of the Company's common
shares as at the end of the applicable quarter. The Company has the option to
redeem the Preferred Shares at any time. If a qualified public offering of the
Company's common stock is not consummated within the three year period
commencing January 23, 1998, the holders of a majority of the Preferred Shares
may elect to cause the Company to redeem all of the Preferred Shares. On the
fifth anniversary of the sale of the Preferred Shares, the Company is required
to redeem all of the Preferred Shares. The
F-21
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. REDEEMABLE PREFERRED STOCK (CONTINUED)
Preferred Shares are redeemable at an amount equal to the purchase price plus
any dividends cumulated but not paid. At December 31, 1998, 9,488,140 Preferred
Shares were outstanding with a redemption value of $9,488,140.
The Class A Preferred Shares Series 1 will rank equally with all other
series of Class A Preferred shares then outstanding. The Class A Preferred
shares are entitled to priority over the common shares of the Company and over
any other shares of the Company ranking junior to the Class A Preferred shares
with respect to priority in the payment of dividends and the distribution of
assets in the event of the liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, or any other distribution of the
assets of the Company among its shareholders for the purpose of winding-up its
affairs.
NOTE 13. WARRANTS
During the period ended December 31, 1997, the Company issued 4,885,800
common shares on the exercise of the following special warrants:
(i) CLASS A SPECIAL WARRANTS
556,000 common shares and 139,000 non-transferable share purchase
warrants (the "Class A Warrants") on the exercise of 556,000 Class A Special
Warrants. Each Class A Warrant entitles the holder to purchase an additional
common share at Cdn.$1.80 per share on or before February 11, 1998 and at
Cdn.$2.07 on or before February 11, 1999. The Class A Warrants remained
unexercised at December 31, 1998 and expired unexercised in the first
quarter of 1999.
(ii) CLASS B SPECIAL WARRANTS
1,540,000 common shares and 1,540,000 non-transferable share purchase
warrants (the "Class B Warrants") on the exercise of 1,400,000 Class B
Special Warrants. Two Class B Warrants entitle the holder to purchase an
additional common share at Cdn.$2.15 per share on or before March 17, 1998
and at Cdn.$2.47 per share on or before March 17, 1999. The Company has also
granted the agent special options to acquire, without additional
consideration, 400,000 Class B Warrants. During the period ended December
31, 1997, an additional 91,864 common shares were issued for proceeds of
$141,396 on the exercise of 183,728 Class B Warrants. Of the Class B
warrants, 1,756,272 warrants remained unexercised at December 31, 1998 and
expired unexercised in the first quarter of 1999.
(i) CLASS C SPECIAL WARRANTS
432,300 common shares and 216,000 non-transferable share purchase
warrants (the "Class C Warrants") on the exercise of 393,000 Class C Special
Warrants. Each Class C Warrant entitles the holder to purchase an additional
common share at Cdn.$2.55 per share on or before April 13, 1998 and at
Cdn.$2.95 per share on or before April 12, 1999. The Company has also
granted the agent special options to acquire, without additional
consideration, 40,000 Class C Warrants. As at December 31, 1998, 256,000
Class C Warrants remained unexercised and expired unexercised in 1999.
(ii) FIRST TRANCHE CLASS D SPECIAL WARRANTS
2,101,000 common shares and 1,050,000 non-transferable share purchase
warrants (the "First Tranche Class D Warrants") on the exercise of 1,910,000
First Tranche Class D Special Warrants. Each
F-22
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. WARRANTS (CONTINUED)
First Tranche Class D Warrant entitles the holder to purchase an additional
common share at a price of Cdn.$3.50 per share on or before April 18, 1998
and at Cdn.$4.25 per share on or before October 18, 1998. The Company has
issued 50,000 common shares, at an ascribed price of $116,571 to the agents
and has also granted the agents 191,000 share purchase warrants (the
"Agents' First Tranche Warrants"). Each Agents' First Tranche Warrant is
exercisable to purchase one common share at a price of Cdn.$3.25 per share
on or before April 18, 1998 and at Cdn.$3.75 per share thereafter until
October 18, 1998, subject to certain exercise restrictions. The First
Tranche Class D Warrants and the Agents' First Tranche Warrants expired
unexercised in 1998; and
(iii) SECOND TRANCHE CLASS D SPECIAL WARRANTS
256,500 common shares and 128,250 non-transferable share purchase
warrants (the "Second Tranche Class D Warrants") on the exercise of 256,500
Second Tranche Class D Special Warrants. Each Second Tranche Class D Warrant
entitles the holder to purchase an additional common share at a price of
Cdn.$3.50 per share on or before June 26, 1998 and at Cdn.$4.25 per share on
or before December 28, 1998. The Company has also granted the agents 25,650
share purchase warrants (the "Agents' Second Tranche Warrants"). Each
Agent's Second Tranche Warrant is exercisable to purchase one common share
at Cdn.$3.25 per share until June 26, 1998 and at Cdn.$3.75 per share
thereafter until December 28, 1998, subject to certain exercise
restrictions. The Second Tranche Class D Warrants and the Agents' Second
Tranche Warrants expired unexercised in 1998.
Proceeds from the issuance of the special warrants totaling $8,750,447 were
received during the period ended August 31, 1997. No additional consideration
was received on the exercise of the special warrants. For the periods ended
December 31, 1997 and August 31, 1997, the Company incurred a total of $120,114
and $1,114,010, respectively, for commissions and issue and prospectus costs
related to the special warrant offerings.
The following additional warrants that were outstanding at December 31, 1997
were exercised or expired unexercised in 1998:
(i) of the warrants to purchase common shares at Cdn.$1.30 per share on
or before December 5, 1998: 5,000 were exercised in April for proceeds of
$4,561, 89,900 were exercised in June for proceeds of $79,585 and the
remaining 393,600 expired unexercised in December;
(ii) 142,900 warrants to purchase common shares at Cdn.$2.05 per share
on or before December 15, 1998 expired unexercised.
F-23
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCK OPTIONS
Stock options activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING
AND
OUTSTANDING AND EXERCISABLE
PER EXERCISABLE AT OPTIONS AT
FISCAL YEAR SHARE DECEMBER 31, OPTIONS EXERCISED* DECEMBER 31, DATE OF
GRANTED $ CDN 1997 GRANTED OR CANCELLED 1998 EXPIRATION
- -------------------------------- ----------- --------------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995............................ 0.21 45,000 -- (45,000)* -- 1/30/98
1996............................ 0.33 42,000 -- (42,000)* -- 7/17/99
1997............................ 2.30 40,000 -- (40,000) -- 11/21/98
1997............................ 2.60 298,700 -- 298,700 1/16/00
1997............................ 3.45 550,000 -- 550,000 4/25/00
1997............................ 1.95 1,738,764 -- (207,225) 1,531,539 12/19/02
1997............................ 2.98 300,000 -- 300,000 10/17/00
1998............................ 1.83 -- 25,000 25,000 5/06/03
1998............................ 1.61 -- 75,000 75,000 1/15/03
1998............................ 1.69 -- 20,000 20,000 3/01/03
1998............................ 1.68 -- 45,000 45,000 3/15/03
1998............................ 1.89 -- 25,000 25,000 4/01/03
1998............................ 1.96 -- 10,000 10,000 4/15/03
1998............................ 1.60 -- 10,000 10,000 6/16/03
--------------- ---------- -------------
3,014,464 210,000 (334,225) 2,890,239
--------------- ---------- ------------ -------------
--------------- ---------- ------------ -------------
<CAPTION>
OUTSTANDING
AND
OUTSTANDING AND EXERCISABLE
PER EXERCISABLE AT OPTIONS AT
FISCAL YEAR SHARE AUGUST 31, OPTIONS EXERCISED DECEMBER 31, DATE OF
GRANTED $ CDN 1997 GRANTED OR CANCELLED 1998 EXPIRATION
- -------------------------------- ----------- --------------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995............................ 0.21 45,000 -- -- 45,000 1/30/98
1996............................ 0.33 42,000 -- -- 42,000 7/17/99
1997............................ 2.30 40,000 -- -- 40,000 11/21/98
1997............................ 2.60 298,700 -- -- 298,700 1/16/00
1997............................ 3.45 750,000 -- (200,000) 550,000 4/25/00
1997............................ 1.95 -- 1,738,764 -- 1,738,764 12/19/02
1997............................ 2.98 -- 300,000 -- 300,000 10/17/00
--------------- ---------- ------------ -------------
1,175,700 2,038,764 (200,000) 3,014,464
--------------- ---------- ------------ -------------
--------------- ---------- ------------ -------------
</TABLE>
F-24
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING
AND
OUTSTANDING AND EXERCISABLE
PER EXERCISABLE AT OPTIONS AT
FISCAL YEAR SHARE DECEMBER 31, OPTIONS EXERCISED OCTOBER 31, DATE OF
GRANTED $ CDN 1997 GRANTED OR CANCELLED 1998 EXPIRATION
- -------------------------------- ----------- --------------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995............................ 0.21 85,000 -- (40,000) 45,000 1/30/98
1996............................ 0.33 527,000 -- (485,000) 42,000 7/17/99
1996............................ 0.50 42,000 -- (42,000) -- --
1997............................ 2.30 -- 80,000 (40,000) 40,000 11/21/98
1997............................ 2.60 -- 736,000 (437,300) 298,700 1/16/00
1997............................ 3.45 -- 750,000 -- 750,000 4/25/00
--------------- ---------- ------------ -------------
654,000 1,566,000 (1,044,300) 1,175,700
--------------- ---------- ------------ -------------
--------------- ---------- ------------ -------------
</TABLE>
STOCK OPTION PLAN--In 1997, the Company instituted a stock option plan (the
"Plan") covering eligible directors and employees, as defined in the Plan. The
Company may issue up to 3,020,988 shares of Common Stock under the Plan, of
which options to acquire 130,749 shares of Common Stock remained available for
grant at December 31, 1998. Such maximum includes options issued to certain
officers, directors and key employees at the discretion of the Board prior to
the adoption of the Plan. Under the Plan, the exercise price of each option
equals the market price of Benz's Common Stock on the date of grant. Options
become exercisable immediately and expire within a period determined at grant,
not to exceed ten years.
At the February 19, 1999 meeting of the Board of Directors, 2,102,319
options held by certain employees, officers and directors of the Company were
cancelled. The Board reissued 2,112,349 options to these certain employees,
officers and directors at an exercise price of Cdn.$0.50 per share. In addition,
300,000 options held by a former officer of the Company were cancelled and
500,000 options were reissued at an exercise price of Cdn.$0.53 per share as per
his termination agreement. See Note 19, "Commitments and Contingencies" for a
discussion of the termination agreement.
The repricing of the options is subject to VSE approval. Of the options
above, 2,023,700 options are held by executive officers and directors of the
Company and repricing of such options requires shareholder approval in addition
to VSE approval.
The Company accounts for its stock option transactions under the provisions
of APB No. 25. The following pro forma information is based on estimating the
fair value of grants based upon the provisions of SFAS No. 123. The fair value
of each option granted during the periods indicated has been estimated as of the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED TEN MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Risk Free Interest Rate............. 4.59% 5.57% 5.57%
Life of the Options................. 2 years 2-3 years 2-3 years
Expected Dividend Yield............. 0% 0% 0%
Expected Volatility................. 138% 30% 30%
Weighted Average Fair Value of
Options Granted................... $0.14 $0.40 $0.60
</TABLE>
F-25
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCK OPTIONS (CONTINUED)
Accordingly, the Company's pro forma net loss and net loss per share
assuming compensation cost was determined under SFAS No. 123 would have been the
following:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED TEN MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Loss............................... $ (12,550,062) $ (2,864,698) $ (2,059,798)
Net Loss Per Basic Share............... (0.39) (0.10) (0.09)
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted Average Option Price Per Share
(Cdn$):
Granted.............................. $1.71 $2.10 $2.99
Exercised............................ 0.27 -- 1.32
Cancelled............................ 2.01 3.45 2.30
Outstanding at End of Period......... 2.39 2.35 2.96
Exercisable at End of Period......... 2.39 2.35 2.96
Weighted Average Remaining Life of
Options Outstanding.................. 36 months 32 months 29 months
</TABLE>
NOTE 15. RETIREMENT PLAN
The Company sponsors a 401(k) Profit Sharing Plan (the "401(k) Plan") under
Section 401(k) of the Internal Revenue Code. This plan covers all eligible
employees of the Company. The Company matches $.50 for each $1.00 of employee
deferral, subject to limitations imposed by the Internal Revenue Service.
Company contributions to the 401(k) Plan during the periods ended December 31,
1998, December 31, 1997 and August 31, 1997 totaled $75,416, $12,024 and
$23,452, respectively.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company executed a secured short-term interest-bearing note with
Starbucks Trust ("Starbucks"), a trust controlled by the wife of the Chairman &
CEO, in the amount of up to $2.5 million. The Chairman & CEO disclaims
beneficial ownership or control of the trust. Starbucks invested the funds with
brokerage accounts that used a portion of the funds to purchase the Company's
stock. Interest accrues at a rate of 9% per annum on outstanding advances. All
outstanding advances and accrued interest were due on December 31, 1998. Due to
a standstill agreement described below, at December 31, 1998 advances totaling
$2.9 million plus accrued interest remained outstanding.
In July 1998, the Company entered into a purchase and sale agreement with
Starbucks to acquire all of Starbucks' interest in certain oil and gas leases
and properties, along with other associated assets. The purchase price was
$2,332,537 in cash and 600,000 common shares of the Company valued at $696,661,
such price subject to post-closing adjustments. Starbucks has guaranteed that
the assets acquired, on January 1, 2000 or such earlier date as Starbucks may
request, will have a value of not less than $3,032,537, such valuation defined
in the agreement. In the event the valuation is less than the amount guaranteed,
Starbucks is required to pay the difference to the Company. During 1998, the
Company paid approximately $1.1 million of the principal amount due to Starbucks
plus accrued interest. At December 31, 1998, $1.2 million remained outstanding
and is currently subject to a standstill agreement described below. The
F-26
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. RELATED PARTY TRANSACTIONS (CONTINUED)
Company is accruing interest on the unpaid balance due Starbucks at a rate of 9%
per annum. The Starbucks transaction was reviewed and approved by a committee of
outside directors and received approval from the Vancouver Stock Exchange.
During 1998, the Company sold certain shares of Stanford Energy stock for
proceeds of Cdn. $1,183,735 and transferred such proceeds to Slattery Trust, a
trust controlled by Prentis B. Tomlinson. In addition, the Company transferred
certain shares of Stanford Energy stock to the account of Slattery Trust. Such
stock was subsequently sold. Proceeds from the above transactions were used by
Slattery Trust to purchase Benz Energy Ltd. common stock on the open market on
behalf of the Company. The 600,000 shares of Benz Energy common stock purchased
was then transferred to Starbucks Trust in satisfaction of the terms of the
Starbucks acquisition discussed above.
In April 1998, the Company agreed to acquire certain petroleum interests and
assume certain liabilities from Calibre, a private limited liability company
owned by certain directors and officers of the Company, and to acquire certain
petroleum interests owned by certain directors and officers of the Company. The
Company paid $261,000 in cash, forgave $1,450,000 of Calibre accounts payable to
the Company, assumed $450,000 in debt, issued promissory notes totaling
$2,000,000 and will issue 1,927,426 shares of the Company at an ascribed price
of Cdn.$2.80 per share in 1999. The promissory notes bear interest at 10% per
annum and were due, with accrued interest, half on April 1, 1998 and the balance
on September 1, 1998. Payments of $215,000 were made during 1998 and at December
31, 1998, $1,785,000 principal amount remained outstanding plus accrued
interest. Of this amount, $1,485,000 and $200,000, due respectively to Prentis
B. Tomlinson Jr. and Starbucks Trust, are subject to a standstill agreement
described below. In addition, Mr. Tomlinson has agreed to allow amounts owed to
him under such promissory notes to be offset against the Starbucks note
receivable described above. The Caliber transaction was reviewed and approved by
a committee of outside directors and received approval from the Vancouver Stock
Exchange.
In December 1998, as part of certain transactions by and between the Company
and Shell Capital, Inc., the Company was required to deliver an agreement
whereby Starbucks and Mr. Tomlinson each agreed to a deferment of payments of
any amounts owing to them from Benz, Texstar or any affiliate (the "Benz
Entities") until the termination date as defined in the Shell financing
arrangement. The parties agreed further not to pursue collection of any such
amounts from Benz Entities during such deferment period. Mr. Tomlinson and
Starbucks entered into such agreement in consideration of a mutual deferment by
the Benz Entities to collect or risk payments of amounts owed to them by
Tomlinson, Starbucks, Texstar Holdings L.L.C. and Security Oil, L.L.C. (See Note
9, "Long-term Debt" for a description of the Shell financing).
Certain debt, as described in Note 9, "Long-term Debt" is guaranteed by Mr.
Tomlinson, Slattery Trust, whose beneficiary is Mr. Tomlinson, Calibre, certain
affiliates of Calibre, and Texstar Holdings.
At August 31, 1997, the Company had advanced funds to Calibre ($453,132) and
Calibre Ecuador, Inc. ($213,187). Calibre is owned by Benz' controlling
shareholders and Calibre Ecuador, Inc. is owned 50% by Benz. The advances to
Calibre Ecuador in the amount of $213,187 have been written off as of August 31,
1997, as Calibre Ecuador has no assets or other means with which to repay the
advances. The Calibre advances bear no interest and are due upon demand.
Included in this amount is an overhead reimbursement charge to Calibre of
$66,276. This amount has been reflected in the financial statements as a
reduction of general and administrative expense.
F-27
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. RELATED PARTY TRANSACTIONS (CONTINUED)
During the four-month period ended December 31, 1997, the Company made
additional advances to Calibre Ecuador of $189,005. These advances were written
off as of December 31, 1997. During the year ended December 31, 1998, the
Company made advances to Calibre Ecuador of $319,327. These advances were
written off during the year.
Additionally, during the four-month period ended December 31, 1997, the
Company's net advances to Calibre increased to $1,768,772. At December 31, 1997,
$1,450,000 of this amount was reclassified as a prepayment relating to the
acquisition of properties from Calibre. The balance of $318,772 was written off
as a bad debt.
The Company participates in various oil and gas activities with related
parties. All transactions related to such activities are in the normal course of
business. As of December 31, 1998 and 1997, balances with related parties were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Joint Interest Billing Receivable................ $ 898,459(1) $ 418,679
Other Receivables................................ 145,000 95,000
Drilling Advances Payable........................ -- 214,776
</TABLE>
- ------------------------
(1) Includes amount currently involved in litigation. See Note 19, "Commitments
and Contingencies".
During the periods ended December 31, 1998, December 31, 1997 and August 31,
1997, the Company was charged $40,445, $14,250 and $106,113, respectively for
management, professional and office services provided by companies under
significant influence of former directors of the Company.
During the period ended August 31, 1997, the Company acquired Cdn.$200,000
unsecured convertible debenture (the "Stanford Debenture") issued by Stanford.
The Stanford Debenture bore interest at a rate of 8% per annum, payable
quarterly, maturing in April 2000, and was convertible, at the option of the
Company, into 340,000 common shares of Stanford and 170,000 non-transferable
share purchase warrants. Each warrant entitled the Company to purchase an
additional flow-through common share of Stanford at Cdn.$0.60 per share,
expiring one year after issue. On August 6, 1997, the Stanford Debenture was
retired and the Company was repaid Cdn.$222,937.
During the period ended August 31, 1997, the Company completed certain
agreements with Calibre whereby the Company:
(i) acquired 20% working interests in each of four oil and gas prospects
located in Mississippi, paid through the issuance of 254,863 common shares
of the Company at a deemed price of $573,592. In addition, the Company
reimbursed Calibre $80,000 for data costs, and
(ii) acquired a 5.5% working interest in and to lease options, seismic
permits and contracts relating to the White Castle field located in
Iberville Parish, Louisiana through the issuance of 343,000 common shares of
the Company, at a deemed price of $442,925, plus $425,000 cash, for a total
of $867,925.
F-28
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per share
because their effect would have been antidilutive are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Warrants............................ 4,389,175 3,407,572 9,896,350
Options............................. 2,890,239 3,014,464 1,175,700
----------------- ----------------- -----------------
Total Shares...................... 7,279,414 6,422,036 11,072,050
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
NOTE 18. GOING CONCERN ISSUE
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant delays in the completion of certain wells that are a key
component of obtaining new financing for the Company. These delays have created
a significant working capital deficit and depleted cash reserves. As a result,
the Company has secured standstill agreements on certain financial debt
covenants of which it is currently in violation. In addition, the Company was
able to extend the maturity dates of currently due debt to July 31, 1999 in
anticipation of completing a major well. In the event that the well is not
completed timely and the Company is not able to refinance the current debt by
the extended due dates, the debt may ultimately be called. The Company may not
be able to meet such demands.
The Company anticipates the completion of the major well that is necessary
to obtain additional financing. The Company also is currently in negotiations
with several institutions to obtain production financing to repay currently due
debt. The Company also anticipates obtaining significant additional equity in
the near term through a private placement. In addition, the Company has closed
the sale of one non-core property for approximately $507,500 and is negotiating
the sale of an interest in another property for over $4.0 million of proceeds.
One additional property is currently the subject of negotiations for sale with
proceeds expected to exceed $1.0 million.
NOTE 19. COMMITMENTS AND CONTINGENCIES
LITIGATION--The Company is involved in litigation and is subject to
governmental and regulatory controls arising in the ordinary course of business.
It is the opinion of the Company's management that all claims and litigation
involving the Company are not likely to have a material adverse effect on its
financial position or results of operations.
The Company has filed suit against STB Energy Inc., Hilton Petroleum, Inc.,
Trimark Resources, Inc., Westport Petroleum, Inc. and Bradley M. Colby alleging
breach or participation and operating agreements, suit on a sworn account,
fraudulent inducement to contract, fraud, constructive fraud, breach of
fiduciary duty and conspiracy, and seeks a declaratory judgement on corporate
veil and alter ego theories. The suit is pending and trial date has been set.
The Company has filed suit against Rainbow Oil and Gas, Inc. ("Rainbow")
alleging breaches of participation, operating and letter agreements covering
certain prospects in Texas, Louisiana, and Mississippi. Rainbow counter-claimed
and seeks relief in the form of damages for breach of contract, fraud and
punitive damages plus attorneys' fees and interest. The lawsuit is presently in
the initial stages of discovery.
F-29
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Although the outcome of this lawsuit can not be predicted with certainty,
management will vigorously defend the counterclaims and believes that such
counterclaims will not have a material adverse effect on the financial position
or results of operations of the Company.
ENVIRONMENTAL--Benz, as owner and operator of oil and gas properties, is
subject to various federal, state, and local laws and regulations relating to
discharge of materials into, and protection of, the environment. These laws and
regulations may, among other things, impose liability on the lessee under and
oil and gas lease for the cost of pollution clean-up resulting from operations,
subject the lessee to liability for pollution damages and impose restrictions on
the injection of liquids into subsurface strata. Benz maintains insurance
coverage that it believes is customary in the industry, although it is not fully
insured against all environmental risks.
The Company is not aware of any environmental claims existing as of December
31, 1998, that would have a material impact on its financial position or results
of operations. There can be no assurance, however, that current regulatory
requirements will not change, or past non-compliance with environmental laws
will not be discovered on the Company's properties.
TERMINATION AGREEMENTS--The Company terminated a key officer's employment
without cause and requested such officer to resign all of his positions with the
Company except his position as a Director of the Company. As defined in his
employment contract with the Company, such officer was entitled to certain
liquidated damages, and not as a penalty, in the amount of $1,150,000 payable as
follows:
- Payments of $10,000 per month for 12 months commencing February 15, 1999;
- Payment of $400,000 on January 15, 2000;
- Payment of $200,000 on July 15, 2000; and
- Payment of the balance due under his agreement, as adjusted, on January
15, 2001.
In addition, the officer was granted new stock options in lieu of the
300,000 shares granted December 18, 1997. The new stock option agreement dated
February 15, 1999 is for 500,000 shares of Common Shares $0.01 par value. The
remaining agreed liquidated damages due on January 25, 2001 shall be reduced by
the difference between the option price under the new option agreement for
500,000 shares of Common Shares and the 500,000 option shares as of the date the
payment of the balance of the agreed liquidated damages. All cash payments
payable to the officer shall be reduced by applicable federal, state and local
withholding taxes. As a Director to the Company, he will be provided the same
Director's Liability Insurance provided to other Directors. The Company also
agreed that at its sole cost and expense to continue current health insurance
coverage as required by applicable law until January 5, 2000; however, he
notified the Company that he would forfeit such coverage as of April 15, 1999
and resigned as a director of the Company.
On December 16, 1998, the Company entered into an agreement with EnCap that,
should Mr. Tomlinson's employment be terminated, except for cause, following
certain events, then EnCap on behalf of the Company will make a cash payment to
Mr. Tomlinson of $1.0 million within 30 days of severance, and the Company will
enter into a consulting agreement with a three-year term providing for payments
of $185,000 per annum, and grant Mr. Tomlinson a permanent overriding royalty
interest in certain properties. These payments are obligations of the Company
and EnCap has agreed to provide financing to fund such payment obligations.
F-30
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS--The Company has entered into a certain noncancelable
operating lease agreement for office space in Houston, Texas. The lease term
expires on January 31, 2003. The lease terms are subject to certain operating
expense escalations.
Rent expense recorded in the statement of operations is $381,084, $49,977
and $105,158 for the periods ended December 31, 1998, December 31, 1997 and
August 31, 1997, respectively.
Future minimum lease payments under the lease agreement for each of the
years ended December 31, are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 396,187
2000.............................................. 396,187
2001.............................................. 396,187
2002.............................................. 396,187
2003.............................................. 33,016
-----------
$ 1,617,764
-----------
-----------
</TABLE>
NOTE 20. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES
A summary of non-cash investing and financing activities is presented below:
In December 1998, the Company acquired all of Mobil's right, title and
interest in the deep rights below the existing production in the Old Ocean Unit
with $2.0 million in proceeds from the issuance of promissory notes to certain
investors.
In October 1998, $250,000 principal amount of debentures was converted into
238,570 common shares.
In July 1998, the Company acquired certain proved and unproved non-producing
oil and gas properties from Starbucks Trust for cash and 600,000 shares of Benz
common stock valued at $696,661.
In May 1998, the Company entered into a property swap agreement with
Southern Gas.
In April 1998, the Company acquired certain petroleum interest from Calibre
for cash, the assumption of liabilities, the forgiveness of advances, the
issuance of promissory notes and the issuance of 1,927,400 shares of Benz common
stock valued at approximately $2,296,000.
In January 1998, the Company acquired certain oil and gas interests from
Lasco for a note payable that was subsequently converted to 2,542,372 shares of
Benz common stock valued at $3.0 million and 9,488,140 shares of redeemable
preferred stock, as adjusted for reduction in purchase price, valued at $1 per
share. In addition, the Company paid interest on the Lasco Acquisition note and
dividends on the preferred shares into which the note was converted with common
shares of the company valued at $782,500.
F-31
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES (CONTINUED)
At October 31, 1996, the following assets and liabilities were assigned to
Texstar in exchange for the issuance of 100% of Texstar's common stock.
<TABLE>
<S> <C>
Cash.............................................. $ 559,386
Receivables....................................... 94,914
Prepaid Expenses.................................. 321,542
Oil and Gas Properties, Net....................... 1,225,909
Property and Equipment, Net....................... 276,390
Organization Costs, Net........................... 8,447
Other Assets...................................... 6,025
-------------
Total Assets Assigned............................. $ 2,492,613
-------------
-------------
Accounts Payable and Accrued Expenses............. $ 335,421
Drilling Advances................................. 648,150
Debt.............................................. 485,954
Due to Related Parties............................ 256,123
-------------
Total Liabilities Assigned........................ $ 1,725,648
-------------
-------------
Net Assets Assigned............................... $ 766,965
-------------
-------------
</TABLE>
During the initial period ended August 31, 1997, the Company acquired
properties in exchange for stock valued at $1,016,516 and issued options to
acquire common stock, for no additional consideration, for services valued at
$116,571.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE FOUR FOR THE TEN MONTHS
FOR THE YEAR ENDED MONTHS ENDED ENDED AUGUST 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest, net of amounts capitalized...... $2,316,257 $84,752 $41,200
Income and other taxes, net of refunds.... -- -- --
</TABLE>
NOTE 21. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term debt. The carrying amounts of cash, accounts
receivable and accounts payable approximate fair value due to the highly liquid
nature of these short-term instruments. The long-term debt, excluding the
convertible debentures and special notes, approximates fair value due to the
revision of terms at year-end of the bank indebtedness and the EnCap facility
and the closing at year end of the Mobil promissory notes and the Shell
production payment, all at current terms available to the Company. The
convertible debentures and special notes approximate fair value based on the
fact that holders elected to maintain the current terms when offered the ability
to modify such terms.
F-32
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22. SUBSEQUENT EVENTS
The following events took place subsequent to December 31, 1998:
- The Company executed the Sixth through Ninth Amendments to the BOCP Credit
Facility wherein the maturity of such facility was changed to July 31,
1999. The Company has been advanced $3,000,000 from this facility under
these amendments.
- Certain holders of the convertible debentures ($7,050,000) elected to be
paid for the six-month period ending March 31, 1999 with 1,057,500 shares
of common stock in lieu of $315,000 of interest. The stock price used in
the swap was based on the 10 day trailing closing average through March 26
1999.
- Effective March 31, 1999, a certain debenture holder has agreed to
exchange $250,000 of debentures for 541,700 common shares.
- Pursuant to the terms of the Series B Special Notes, the Company issued
Series 3 Debentures in exchange for similar amounts of the Series B
Special Notes.
- The Company and Series 1 debenture holders have agreed to lower the
conversion price of the debentures from Cdn.$1.70 per common share to
Cdn.$1.40 per common share in exchange for certain changes in the
indenture agreement. The Company intends to approach the Series 3
debenture holders and Series B Special Note holders for the same changes.
The Company has approached the Series 1 debenture holders to exchange
their debentures for non-redeemable convertible preferred stock in
exchange for new equity to be placed into the Company. The Company intends
to similarly approach the Series 3 Debenture holders. The early redemption
provision of the redeemable preferred stock decribed in Note 12 relating
to a qualified public offering of the Company's common stock was waived by
the holder in May 1999 subject to the completion of the exchange offer.
- The Company is in negotiations with Pioneer Natural Resources to structure
a plan to pay the balance owing Pioneer (approximately $4 million).
Discussions have included one or all of the following; issuing stock,
issuing a promissory note for payment over an extended period, paying a
portion in cash or trading prospects for some or all of the amounts due.
- The first payment to Western under the Western Geophysical contract
(estimated $3.35 million) in Old Ocean has been deferred by Western to
approximately June 10, 1999. The Company paid $700,000 on June 18, 1999
and $2.6 million on July 9, 1999. The Company has reached an oral
agreement to pay the remaining balance of approximately $3.4 million by
July 31, 1999.
- The Company sold its Lisbon properties for proceeds of $507,500 in April
1998.
- On May 18, 1999, the Company migrated from the Yukon Territory, Canada and
became a Delaware corporation, changing its name to Benz Energy Inc.
Authorized capital stock will be 300,000,000 shares of common stock and
100,000,000 shares of preferred stock.
- Certain vendors have initiated suits against the Company for non-payment
of amounts due them. These amounts are reflected in the Company's accounts
payable.
- In August 1999, the Company sold 37.5% of its interest in the Old Ocean
Prospect for approximately $5.5 million. The purchaser has the option to
purchase an additional 12.5% of the Company's interest for approximately
$2 million. Additionally, the purchase agreement contains
F-33
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22. SUBSEQUENT EVENTS (CONTINUED)
provisions relating to the overriding royalty interests in the prospect and
the marketing of 3-D seismic geophysical data covering the prospect.
- In July, 1999, the Company issued 34,596 shares of class A, series II
convertible preferred stock and warrants to purchase 3,974,923 shares of
common stock in connection with the retirement of 95.45% of the Mobil
financing described in Note 9 and the re-conveyance of the applicable net
profits interest. The balance of the financing and re-conveyance was
settled through a cash payment.
- On July 9, 1999, the Company consummated an offering pursuant to which it
offered to exchange up to 354,250 shares of its class A, series II
preferred stock for any and all of its outstanding 9% convertible
debentures series I, due March 31, 2003 and an offering to sell up to
121,000 shares of class A, series II convertible preferred stock. At the
closing, the Company exchanged $15,145,000 principal amount of the 9%
convertible debentures and issued an aggregate of 238,201 shares of class
A, series II preferred stock, which included 44,600 shares issued under
the primary offering and the remainder of which were issued pursuant to
the exchange offer. The proceeds from the exchange offer and offering of
convertible preferred stock were used to retire a portion of the Mobil
financing, to repurchase a portion of the Old Ocean net profits interest,
to pay a portion of the seismic costs relating to the Old Ocean Prospect
and to pay fees and expenses of the transactions.
- In August 1999, the Company completed a new, long-term production
financing in the amount of $26.2 million. This amount may be increased to
$27.7 million, based on certain short-term production results and possibly
up to $32.6 million based on . This facility also provides for
the lender to fund additional drilling in the Oakvale Dome field to a
maximum of $3.8 million. The new production financing is secured by the
Company's proven oil and gas properties and is scheduled to be repaid
through a dedicated portion of property income. Terms of the financing
include a 12% interest rate and an assignment of 1/16th interest in the
Company's proven properties, following full repayment. Proceeds from the
financing were used to retire existing debt and accrued interest.
- In August 1999, the Company completed a private placement of $4 million in
new equity through this issuance of $4.4 million of redeemable class A
preferred stock, series I to investment entities affiliated with and
managed by EnCap L.C. A placement fee of $100,000 was paid to EnCap L.C.
Proceeds were used to fund arrangements under the credit agreement
described below and for other general corporate purposes.
- The Company conducted a meeting with its trade creditors to outline a
proposed repayment plan for past due amounts. The plan includes proposed
discounts, payment over an extended time with interest and other options.
As of September 8, 1999, creditors electing to participate in the
repayment plan represented approximately 93% of past due amounts for an
aggregate of approximately $11.3 million.
- The Company entered into a new promissory note with EnCap in the amount of
approximately $2.9 million. The note matures on December 31, 2000 and
accrues interest at a rate of 10% per year.
F-34
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. CUSTOMER INFORMATION
MAJOR PURCHASERS--During the year ended December 31, 1998, H&N Gas Ltd. "H&N
Gas" and Tejas Gas Marketing Co. accounted for approximately 51% and 24%,
respectively, of the Company's total oil and gas revenue. For the four-month
period ended December 31, 1997, H&N Gas and KCS Resources ("KCS") accounted for
75% and 10%, respectively, of the Company's total oil and gas revenue. For the
ten months ended August 31, 1997, KCS, Samaden Oil Corporation and Energy
Operating Limited Partnership accounted for 50%, 30% and 18%, respectively, of
the Company's total oil and gas revenue. No other purchasers accounted for more
than 10% of the Company's total oil and gas revenue in the periods indicated
above. The Company does not believe the loss of any existing purchaser would
have a material adverse effect on the Company.
CONCENTRATION OF CREDIT RISK--The Company's revenues are derived principally
from uncollateralized sales to customers in the oil and gas industry; therefore,
customers may be similarly affected by changes in economic and other conditions
within the industry. Benz has not experienced significant credit losses on such
sales.
NOTE 24. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
The following supplemental unaudited information regarding the Company's oil
and gas activities is presented pursuant to the disclosure requirements of SFAS
No. 69.
AMORTIZATION RATE--All of the Company's oil and gas properties are located
in the United States. The amortization rate per Mcfe was as follows for the
periods indicated:
<TABLE>
<S> <C>
Year ended December 31, 1998......................................... $ 1.26
Four months ended December 31, 1997.................................. $ 2.32
Ten months ended August 31, 1997..................................... $ 1.07
</TABLE>
Amortization per Mcfe reflects depreciation, depletion and amortization of
only capitalized costs of proved oil and gas properties.
COSTS NOT BEING AMORTIZED--The following table sets forth a summary of oil
and gas property costs not being amortized at dates indicated:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 1997
----------------- ----------------- --------------
<S> <C> <C> <C>
Property acquisition costs................................. $ 29,239,755 $ 9,389,316 $ 4,514,379
Exploration and development................................ 4,509,014 2,972,199 1,209,092
----------------- ----------------- --------------
Total.................................................... $ 33,748,769 $ 12,361,515 $5,723,471
----------------- ----------------- --------------
----------------- ----------------- --------------
</TABLE>
F-35
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED) (CONTINUED)
CAPITALIZED COSTS INCURRED--The following table sets forth the capitalized
costs incurred in oil and gas producing activities for the periods indicated:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEAR ENDED FOUR MONTHS ENDED AUGUST 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 1997
----------------- ----------------- --------------
<S> <C> <C> <C>
Acquisition of proved properties........................... $ 18,801,669 $ 3,193,197 $ 1,533,047
Acquisition of unproved properties......................... 20,312,972 4,874,937 3,852,226
Exploration costs.......................................... 10,875,957 1,680,446 2,311,404
Development costs.......................................... 5,668,168 4,485,586 2,020,403
Capitalized interest....................................... 1,855,306 108,224 --
Property sales............................................. (1,059,083) (408,931) (416,060)
----------------- ----------------- --------------
Total.................................................... $ 56,454,989 $ 13,933,459 $ 9,301,020
----------------- ----------------- --------------
----------------- ----------------- --------------
</TABLE>
CAPITALIZED COSTS--The following table sets forth the capitalized costs and
associated accumulated depreciation, depletion and amortization, including
impairments, relating to the Company's oil and gas production, exploration and
development activities:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Proved properties...................................... $ 48,409,232 $ 13,341,497
Unproved properties.................................... 33,748,769 12,361,515
----------------- -----------------
82,158,001 25,703,012
Less: Accumulated DD&A................................. (3,840,604) (993,778)
----------------- -----------------
Total................................................ $ 78,317,397 $ 24,709,234
----------------- -----------------
----------------- -----------------
</TABLE>
OIL AND GAS RESERVE INFORMATION--Proved oil and gas reserve quantities are
based on estimates prepared by the Company's engineers in accordance with
guidelines established by the Securities and Exchange Commission (SEC). The
Company's estimates of proved reserve quantities are subject to review by R. A.
Lenser and Associates, independent petroleum engineers.
F-36
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED) (CONTINUED)
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projection future rates of production and timing of development
expenditures. The following reserve data represents estimates only and should
not be construed as being exact.
<TABLE>
<CAPTION>
CRUDE OIL,
CONDENSATE AND
NATURAL GAS LIQUIDS NATURAL GAS
(BARRELS) (MCF)
------------------- ------------
<S> <C> <C>
Total proved reserves:
Balance October 31, 1996................................... 229,185 10,953,770
Extensions, discoveries and other additions.............. 6,287 1,492,867
Purchases of minerals in place........................... -- --
Revisions of previous estimates.......................... 244,749 (9,122,960)
Production............................................... (9,281) (83,810)
-------- ------------
Balance August 31, 1997.................................... 470,940 3,239,867
Extensions, discoveries and other additions.............. -- --
Purchases of minerals in place........................... 18,500 4,536,528
Revisions of previous estimates.......................... (226,887) 60,966
Production............................................... (4,506) (223,683)
-------- ------------
Balance December 31, 1997.................................. 258,047 7,613,678
Extensions, discoveries and other additions.............. 364,761 26,191,550
Purchases of minerals in place........................... 207,281 6,645,322
Revisions of previous estimates.......................... (205,074) (2,036,000)
Production............................................... (40,662) (2,009,550)
-------- ------------
Balance December 31, 1998.................................. 584,353 36,405,000
-------- ------------
-------- ------------
Proved developed reserves:
October 31, 1996......................................... 34,372 857,772
August 31, 1997.......................................... 157,240 2,462,000
December 31, 1997........................................ 141,940 3,922,000
December 31, 1998........................................ 409,790 20,209,000
</TABLE>
FUTURE NET CASH FLOWS--Future cash inflows are based on year-end prices
except in those instances where the sale of natural gas or oil is covered by
physical or derivative contract terms providing for higher or lower amounts.
Operating costs, production and ad valorem taxes and future development costs
are based on current costs with no escalation.
The following table sets forth unaudited information concerning future net
cash flows for oil and gas reserves, net of income tax expense. Income tax
expense has been computed using expected future tax rates and giving effect to
tax deductions and credits available, under current laws, and that relate to oil
and gas producing activities. This information does not purport to present the
fair market value of the
F-37
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED) (CONTINUED)
Company's oil and gas assets, but does present a standardized disclosure
concerning possible future net cash flows that would result under the
assumptions used.
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 1997
----------------- ----------------- --------------
<S> <C> <C> <C>
Future cash inflows........................................ $ 83,053,800 $ 22,670,400 $ 16,197,000
Future production costs.................................... (13,885,600) (3,282,800) (2,749,000)
Future development costs................................... (5,846,000) (2,520,100) (2,003,000)
Future income tax expense.................................. (21,529,500) (5,735,000) (3,891,300)
----------------- ----------------- --------------
Future net cash flows.................................... 41,792,700 11,132,500 7,553,700
10% annual discount for estimated timing of cash flows..... (11,648,800) (3,224,700) (2,393,160)
----------------- ----------------- --------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves (1)............ $ 30,143,900 $ 7,907,800 $ 5,160,540
----------------- ----------------- --------------
----------------- ----------------- --------------
</TABLE>
- ------------------------
(1) Estimated future net cash flows before income tax expense, discounted at 10
percent per annum, totaled approximately $45.6 million, $12.0 million and
$7.8 million as of December 31, 1998, December 31, 1997 and August 31, 1997,
respectively.
The following table sets forth the principal sources of change in the
discounted future net cash flows:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED
YEAR ENDED FOUR MONTHS ENDED AUGUST 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 1997
----------------- ----------------- --------------
<S> <C> <C> <C>
Beginning of Period........................................ $ 7,907,800 $ 5,160,540 $ 9,092,160
----------------- ----------------- --------------
Increase (decrease) due to:
Sales, net of production costs........................... (3,984,700) (658,000) (376,000)
Net change in prices and production costs................ (605,200) (717,000) (36,000)
Extensions, discoveries and improved recovery, net of
related costs.......................................... 34,438,200 -- 1,979,000
Net change in estimated future development
costs.................................................. 91,000 (680,000) (741,000)
Revision of previous quantity estimates.................. (4,055,800) (1,523,000) (8,532,000)
Purchases................................................ 5,801,600 6,676,000 --
Accretion of discount.................................... 1,198,100 782,000 1,378,000
Change in income taxes................................... (11,455,000) (1,415,250) 2,025,380
Other.................................................... 807,900 282,510 371,000
----------------- ----------------- --------------
Net increase (decrease).................................... 22,236,100 2,747,260 (3,931,620)
----------------- ----------------- --------------
End of Period.............................................. $ 30,143,900 $ 7,907,800 $ 5,160,540
----------------- ----------------- --------------
----------------- ----------------- --------------
</TABLE>
IMPACT OF PRICING--The estimates of cash flows and reserve quantities shown
above are based on year-end oil and gas prices, except in those cases where
future gas sales are covered by contracts at specified prices. Estimates of
future liabilities and receivables applicable to oil and gas commodity hedges
are reflected in future cash flows from proved reserves with such estimates
based on prices in effect as of the
F-38
<PAGE>
BENZ ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED) (CONTINUED)
date of the reserve report. Fluctuations are largely due to supply and demand
perceptions for natural gas and volatility in oil prices.
Under SEC rules, companies that follow full cost accounting methods are
required to make quarterly "ceiling test" calculations. Under this test,
capitalized costs of oil and gas properties may not exceed the present value of
estimated future net revenues from proved reserves, discounted at 10 percent,
plus the lower of cost or market value of unproved properties, as adjusted for
related tax effects and deferred income taxes. Application of these rules
generally requires future production to be priced at the unescalated oil and gas
prices in effect at the end of each fiscal quarter and requires a write-down if
the "ceiling" is exceeded, even if prices declined for only a short period of
time.
F-39
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
Benz Energy Inc.
We have reviewed the accompanying consolidated balance sheets of Benz Energy
Inc. as of March 31, 1999 and 1998 and the related consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
three-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has experienced significant delays in the
completion of certain wells and its limited capital resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 17. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 4, 1999 except for Notes 8, 17
and 21, as to which the date is July 20, 1999
F-40
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 29,068 $ 10,975,497
Receivables, net of allowance for doubtful accounts of $257,009 and $-0-,
respectively................................................................ 4,809,667 6,048,460
Advances to related parties................................................... 589,895 4,191,545
Available for sale marketable securities...................................... -- 162,442
Prepaid expenses.............................................................. 446,221 426,722
------------- -------------
Total Current Assets........................................................ 5,874,851 21,804,666
------------- -------------
OIL AND GAS PROPERTIES, USING FULL COST ACCOUNTING
Costs being amortized......................................................... 51,470,412 36,139,514
Costs not being amortized..................................................... 44,061,263 27,470,419
------------- -------------
95,531,675 63,609,933
Less: Accumulated amortization................................................ (5,803,910) (1,953,494)
------------- -------------
Net Oil and Gas Properties.................................................. 89,727,765 61,656,439
------------- -------------
PROPERTY AND EQUIPMENT.......................................................... 1,253,428 1,456,649
Less: Accumulated depreciation................................................ (493,524) (302,559)
------------- -------------
Net Property and Equipment.................................................. 759,904 1,154,090
------------- -------------
Debt issuance costs, net of accumulated amortization of $2,247,550 and $527,952,
respectively.................................................................. 4,847,869 4,497,007
Available for sale marketable securities........................................ -- 56,729
Due from related parties........................................................ 122,203 --
Other assets.................................................................... 1,034,556 327,519
------------- -------------
Total Other Assets............................................................ 6,004,628 4,881,255
------------- -------------
TOTAL ASSETS................................................................ $ 102,367,148 $ 89,496,450
------------- -------------
------------- -------------
</TABLE>
F-41
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft................................................................ $ 196,454 $ --
Accounts payable.............................................................. 20,196,140 5,994,095
Revenue payable............................................................... 623,981 361,545
Accrued interest.............................................................. 3,067,962 1,393,930
Accrued preferred dividends................................................... 716,882 385,845
Accrued loss on termination of employee....................................... 954,957 --
Other accrued expenses........................................................ 1,027,224 2,638,162
Drilling advances............................................................. 17,661 984,033
Notes payable................................................................. 111,926 1,785,000
Current maturities of long-term debt, net of unamortized discount of $-0- and
$1,171,024, respectively.................................................... 20,200,000 14,069,292
------------- -------------
Total Current Liabilities................................................... 47,113,187 27,611,901
------------- -------------
LONG-TERM DEBT, net of unamortized discount of $875,000 and $-0-,
respectively.................................................................. 42,933,474 37,500,000
OTHER LONG-TERM LIABILITIES..................................................... -- --
COMMITMENTS AND CONTINGENCIES................................................... -- --
REDEEMABLE PREFERRED STOCK, no par value; 100,000,000 shares authorized;
9,488,140 and 12,000,000 shares issued and outstanding, respectively;
redemption value of $9,488,140 and $12,000,000, respectivley.................. 9,488,140 12,000,000
STOCKHOLDERS' EQUITY:
Common Stock, no par value; 300,000,000 shares authorized; 34,784,224 and
32,803,257 shares issued and outstanding, respectively...................... 20,742,246 19,392,381
Common Stock reserved for issuance; 1,927,436 and no shares reserved,
respectively................................................................ 2,496,030 2,496,030
Additional paid-in capital.................................................... 878,067 878,067
Accumulated deficit........................................................... (21,144,491) (10,060,541)
Unrealized losses on available for sale marketable securities................. -- (237,417)
Cumulative foreign currency translation adjustment............................ (139,505) (83,971)
------------- -------------
Total Stockholders' Equity.................................................. 2,832,347 12,384,549
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $ 102,367,148 $ 89,496,450
------------- -------------
------------- -------------
</TABLE>
F-42
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Oil and gas sales............................................................. $ 3,278,328 $ 2,040,405
------------- -------------
EXPENSES
Depreciation, depletion and amortization...................................... 2,152,698 1,090,456
Lease operating............................................................... 441,557 298,476
Production taxes.............................................................. 41,015 48,112
General and administrative.................................................... 1,664,268 3,164,250
Interest expense.............................................................. 1,901,182 2,274,572
Debt issuance costs........................................................... 1,014,201 485,095
------------- -------------
7,214,921 7,360,961
------------- -------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES) AND PROVISION FOR INCOME
TAXES......................................................................... (3,936,593) (5,320,556)
------------- -------------
Interest income............................................................... 163,294 319,361
Loss on sale of assets........................................................ (330,402) (17,039)
------------- -------------
Total Other Income (Expense)................................................ (167,108) 302,322
------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES.......................................... (4,103,701) (5,018,234)
Provision for income taxes...................................................... -- --
------------- -------------
NET LOSS........................................................................ (4,057,304) (5,018,234)
Cumulative preferred stock dividends............................................ (469,136) (385,845)
------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS...................................... $ (4,572,837) $ (5,404,079)
------------- -------------
------------- -------------
BASIC LOSS PER SHARE............................................................ $ (0.13) $ (0.17)
------------- -------------
------------- -------------
DILUTED LOSS PER SHARE.......................................................... $ (0.13) $ (0.17)
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES USED TO COMPUTE:
Basic Loss per Share.......................................................... 33,926,370 31,688,218
Diluted Loss per Share........................................................ 33,926,370 31,688,218
</TABLE>
F-43
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Net loss applicable to common stockholders...................................... $ (4,572,837) $ (5,404,079)
Other comprehensive income, net of tax:
Foreign currency translation adjustment....................................... 11,475 (46,899)
Unrealized gains on marketable securities..................................... 85,630 (147,369)
------------- -------------
Comprehensive loss.............................................................. $ (4,475,732) $ (5,598,347)
------------- -------------
------------- -------------
</TABLE>
F-44
<PAGE>
BENZ ENERGY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (4,103,701) $ (5,018,234)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation, depletion and amortization.................................... 2,152,698 1,090,456
Amortization of deferred loan costs and discount............................ 1,169,857 1,356,625
Loss on sale of stock held for investment..................................... 148,091 17,136
Reserve for bad debt.......................................................... 68,328 --
Write-off of investment in equipment.......................................... 182,310 --
Changes in operating assets and liabilities:
(Increase) decrease in receivables.......................................... 583,570 (1,446,256)
(Increase) decrease in prepaid expenses..................................... 48,386 (317,706)
Increase in amounts due from related parties................................ (41,252) (4,191,545)
(Increase) decrease in other assets......................................... 425,000 (11,230)
Increase (decrease) in accounts payable and accrued expenses................ 3,350,235 (924,315)
Increase (decrease) in drilling advances.................................... (3,113) 594,685
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................... 3,980,490 (8,850,384)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures...................................... (9,970,236) (18,060,408)
Proceeds from sale of oil and gas properties.................................. 534,730 600,000
Proceeds from sale of stock held for investment............................... 160,515 970,940
Other capital expenditures, net............................................... (65,675) (629,726)
Other, net.................................................................... 69,483 214,587
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES..................................... (9,271,183) (16,904,607)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings.......................................................... 3,000,000 3,000,000
Payments on long-term debt.................................................... (550,161) (5,000,000)
Net increase in short-term borrowings......................................... 1,096,635 2,489,459
Proceeds from issuance of convertible debentures and special notes............ -- 37,500,000
Proceeds from issuance of common stock and warrants........................... -- 170,298
Cost of debt and equity transactions.......................................... (605,389) (4,314,888)
Payment on notes.............................................................. -- (215,000)
Cash overdraft position....................................................... 196,454 --
Other......................................................................... (125,132) (14,899)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................. 3,012,407 33,614,970
------------- -------------
Effect of change in translation................................................. (11,867) (46,802)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (2,290,234) 7,813,177
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 2,319,302 3,162,320
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 29,068 $ 10,975,497
------------- -------------
------------- -------------
</TABLE>
F-45
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These financial statements have been prepared by Benz Energy without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission,
and reflect all adjustments that are, in the opinion of management, necessary
for a fair statement of the results for the interim periods, on a basis
consistent with the annual audited financial statements. All such adjustments
are of a normal recurring nature. Certain information, accounting policies, and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosure are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and the summary of significant accounting policies and notes thereto included
elsewhere in this Prospectus.
1. DEBT
At June 30, 1999, the Company had outstanding debt of $63.1 million
comprised of the following:
- $36.3 million principal amount of convertible debentures of which
approximately $15.1 million was converted into Class A Series II preferred
stock in July 1999;
- $12.0 million principal amount outstanding under the EnCap Credit Facility
due, by amendment, on July 31, 1999;
- $6.0 million principal amount outstanding under the BOCP Credit Facility
due, by amendment, on July 31, 1999;
- $2.2 million principal amount outstanding under the Old Ocean loan.
Repayment of the outstanding balance was made through the issuance of
Class A Series II preferred stock in July 1999;
- $5.5 million, net of discount, due Shell Capital, Inc.; and
- $1.1 million advanced by certain lenders who invested additional capital
in the Company through the exchange offering in July 1999.
The Company repaid the EnCap Credit Facility and the BOCP Credit Facility
with funds obtained in connection with the Aquila production payment financing
discussed below and a new note with EnCap in the amount of $2.5 million. Such
note matures December 31, 2000 and accrues interest at a rate of 10% per annum.
2. ACQUISITIONS AND DIVESTITURES
In January 1999, the Company acquired on behalf of the Company and its
partner in the Wausau prospect, a gas pipeline in Mississippi for approximately
$425,000 to provide access for gas sales. Included in the purchase were a 100%
and a 93.75% BPO working interest in two producing wells. The Company does not
anticipate these wells reaching payout. The Company owns a 53.8% interest in the
pipeline and the Fairchild #1 well and a 50.5% interest in the A. Foote Estate
#1 well. Gas reserves net to the Company are estimated to be in excess of 150
MMCFG and net production of over 150 MCFGPD.
In May 1999, the Company sold its interest in the Lisbon Field, comprising
essentially all of its proven reserves in Louisiana, for $507,500 in gross
proceeds to an unrelated party.
F-46
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVESTMENT IN EQUITY SECURITIES
At June 30, 1999 and 1998, marketable investments classified as available
for sale were comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
Common Stocks:
Market value........................................................... $ -- $ 219,171
Cost................................................................... -- 456,588
Gross Unrealized Holding Losses........................................ $ -- $ (237,417)
</TABLE>
The Company realized the following gross losses from the sale of equity
securities for the periods indicated:
<TABLE>
<S> <C>
Six months ended June 30, 1999........................... $(148,091)
Six months ended June 30, 1998........................... $ (17,039)
</TABLE>
Benz utilizes the average cost method in computing realized gains and losses
which is included in other income (expense) in the accompanying Consolidated
Statement of Operations.
4. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments are carried at cost, which approximates market.
Certain holders of the convertible debentures ($7,050,000 principal amount)
elected to be paid for the six-month period ending March 31, 1999 with 1,057,500
shares of common stock in lieu of $317,250 of interest. The stock price used in
the swap was based on the 10 day trailing closing average through March 26,
1999.
The following table provides additional disclosure of cash payments:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------
1999 1998
------------ ----------
<S> <C> <C>
Cash paid during the period for:
Interest (net of amounts capitalized)............................. $ 1,809,444 $ 807,725
Income taxes (net of refunds)..................................... -- --
</TABLE>
5. STOCK OPTIONS
The Company accounts for its stock option transactions under the provisions
of APB No. 25. The following pro forma information is based on estimating the
fair value of grants based upon the provisions
F-47
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. STOCK OPTIONS (CONTINUED)
of SFAS No. 123. The fair value of each option granted during the periods
indicated has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED TEN MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Risk Free Interest Rate................................. 4.59% 5.57% 5.57%
Life of the Options..................................... 2 years 2-3 years 2-3 years
Expected Dividend Yield................................. 0% 0% 0%
Expected Volatility..................................... 138% 30% 30%
Weighted Average Fair value of Options Granted.......... $0.14 $0.40 $0.60
</TABLE>
No options were granted in the first half of 1999. The Company's pro forma
net loss and net loss per share assuming compensation cost was determined under
SFAS No. 123 would have been the following:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net Loss........................................................ $ (5,671,987) $ (5,679,952)
Net Loss Per Basic Share........................................ $ (0.17) $ (0.18)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Weighted Average Option Price Per Share (Cdn.$):
Granted........................................................... $ -- $1.71
Exercised......................................................... -- 0.27
Cancelled......................................................... 1.94 --
Outstanding at End of Period...................................... 2.10 2.34
Exercisable at End of Period...................................... 2.10 2.34
Weighted Average Remaining Life of Options Outstanding............ 29 months 30 months
</TABLE>
6. EARNINGS PER SHARE
Securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of dilute earnings per share
because their effect would have been antidilutive are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Warrants............................................................ 6,212,826 5,543,241
Options............................................................. 2,837,349 3,127,464
---------- ----------
Total shares........................................................ 9,050,175 8,670,705
---------- ----------
---------- ----------
</TABLE>
F-48
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SUBSEQUENT EVENTS
On July 9, 1999, the Company consummated an offering pursuant to which it
offered to exchange up to 354,250 shares of its class A, series II preferred
stock for any and all of its outstanding 9% convertible debentures series I, due
March 31, 2003 and an offering to sell up to 121,000 shares of class A, series
II convertible preferred stock. At the closing, the Company exchanged
$15,145,000 principal amount of the 9% convertible debentures for 159,201 shares
of class A, series II preferred stock and issued 44,600 shares under the primary
offering. In addition the Company issued 34,596 shares of class A, series II
convertible preferred stock and warrants to purchase 3,974,923 shares of common
stock in connection with the retirement of 95.45% of the Old Ocean loan and the
re-conveyance of the applicable net profits interest. The balance of the Old
Ocean financing and re-conveyance was settled through a cash payment. The
remaining proceeds from the exchange offer and the offering of convertible
preferred stock were used to pay a portion of the seismic costs relating to the
old Ocean Prospect and to pay fees and expenses of the transactions. The
preferred stock issued has a dividend rate of 8% payable semi-annually on
September 30th and March 31st in cash or common stock at the election of the
Company. The conversion price is Cdn. $0.35 per share. The Company has the right
to redeem the preferred stock in cash at any time upon thirty days notice at
105% of the principal amount.
On July 12, 1999 the Company conducted a meeting with its trade creditors to
outline a proposed repayment plan for past due amounts. Such plan included
proposed discounts, payment over an extended time and other payment terms. As of
August 23, 1999, creditors approached regarding these arrangements elected to
participate in the repayment plan representing 90% of past due amounts for an
aggregate of $11.2 million in past due amounts.
In August, the Company sold a 37.5% interest in its Old Ocean prospect to
Prime Natural Resources, Inc. Prime paid $3.5 million at closing and will pay an
additional $1,978,098 on or before September 15 in consideration of the interest
purchased. The Company reserved an overriding royalty interest in all leases and
contractual rights to volumes of production and all similar interests, whether
currently owned or acquired later, within the established area of mutual
interest for the project. Prime has an option for a six months period to
purchase an additional 12.5% of the Company's interest in the Old Ocean
prospect, subject to the overriding royalty reservations set forth above, at a
purchase priced of $1,826,033, plus $214,276 at the end of the six month period.
The Company has agreed to enter into an agreement under which Prime or one of
its affiliates will have the right to market the 3-D seismic geophysical data
covering the Old Ocean prospect for a ten year period following a 120 day
exclusivity period that the Company retained. Prime will be entitled to the
Company's share of the proceeds from the sale of the date, which share may be no
less than 66 2/3%, subject to applicable sales commissions. In addition, Prime
or its affiliate must grant the Company a license to other geophysical data
outside the Old Ocean prospect owned by Prime or its affiliate. The Company may
select the outside data of its choice covering up to 102 square miles.
Also in August 1999, the Company closed a new long-term production financing
facility with Aquila Energy Capital Corporation in the initial amount of $26.2
million. The facility may be extended by up to $1.5 million based on results of
well stimulation work in the Fortenberry well. The proceeds were used to retire
existing senior secured debt and accrued interest including the Shell production
financing, the EnCap Credit Facility and the BOCP Credit facility. In addition,
the Company has a firm commitment from Aquila for an additional $3.8 million of
funding for development drilling at its Oakvale Dome Field.
F-49
<PAGE>
BENZ ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SUBSEQUENT EVENTS (CONTINUED)
The new production financing is secured by the Company's proven oil and gas
properties and is repaid through a dedicated portion of the property income.
Terms of the financing include a 12% interest rate and assignment of 1/16th of
the Company's interest in the proven properties following full repayment of the
production financing.
The Company also closed a private placement in August 1999 of $4 million in
new equity through the issuance of $4.4 million of redeemable Class A Preferred
Stock, Series I to investment entities affiliated with and managed by EnCap
Investments, L.C. The Company paid a placement fee of $100,000 to EnCap
Investments, L.C. Proceeds were used to fund arrangements per the creditor
agreement and for other general corporate purposes.
F-50
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "DGCL") grants every corporation
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise. The
indemnity may include expenses (including attorneys' fees) judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The DGCL also grants every corporation the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnification for such expenses which the
court shall deem proper.
The DGCL provides that to the extent that a present or former director or
officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in the statute, or in the
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
The Registrant's Certificate of Incorporation contains provisions which
indemnify and exculpate the directors and officers of the Registrant from and
against certain liabilities. The Registrant's Certificate of Incorporation
provides that each person who at any time is or was a director or officer of the
Registrant, and is threatened to be or is made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, by reason of the fact that such
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant as a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise, whether the basis of the proceeding is an alleged action in such
person's official capacity or in another capacity while holding such office,
shall be indemnified and held harmless by the Registrant to the fullest extent
authorized by the DGCL, except that such person shall not be indemnified if he
is convicted of a crime in a criminal proceeding. The Registrant's Certificate
of Incorporation provides that a director of the Registrant shall have no
personal liability to the Registrant or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability (a) for any
breach of the director's duty of loyalty to the Registrant or its shareholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) for acts or omissions specified in
Section 174 of the DGCL
II-1
<PAGE>
regarding the unlawful payment of dividends and the unlawful purchase or
redemption of the Registrant's stock, and (d) for any transaction from which the
director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND REGISTRATION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All expenses of
registration of the Shares will be borne by us. All of the amounts shown are
estimates except the registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 6,618
Legal fees and expenses........................................... 175,000
Accounting fees and expenses...................................... 20,000
Printing expenses................................................. 25,000
Blue sky fees and expenses........................................ 2,000
Miscellaneous..................................................... 1,382
---------
Total Expenses................................................ $ 230,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
AMOUNT OF
DATE OF SECURITIES DESCRIPTION OF
TRANSACTION TYPE OF SECURITIES SOLD THE TRANSACTION
- ------------------ ---------------------------- -------------- ----------------------------------------------
<S> <C> <C> <C>
November 1996 Common Stock 40,000 Exercise of Options
December 1996 Common Stock 150,000 Exercise of Options
December 1996 Common Stock 625,000 Private Placement
December 1996 Common Stock 285,800 Private Placement
February 1997 Common Stock 343,000 Private Placement
February 1997 Common Stock 3,000 Exercise of Options
February 1997 Common Stock 372,000 Exercise of Options
February 1997 Common Stock 254,863 New
March 1997 Class B Special Warrants 1,400,000 Private Placement
April 1997 Class C Special Warrants 393,000 Private Placement
April 1997 Class D Special Warrants 1,910,000 Private Placement
June 1997 Class D Special Warrants 256,500 Private Placement
June 1997 Common Stock 2,000 Options
June 1997 Common Stock 437,300 Options
September 1997 Common Stock 2,357,500 Exercise of Special Warrants
September 1997 Common Stock 432,300 Exercise of Special Warrants
September 1997 Common Stock 1,540,000 Exercise of Special Warrants
September 1997 Common Stock 556,000 Exercise of Special Warrants
September 1997 Common Stock 50,000 Agent's Special Warrants
September 1997 Common Stock 125,000 Exercise of Warrants
October 1997 Common Stock 1,100,000 Exercise of Warrants
October 1997 Common Stock 59,681 Exercise of Warrants
October 1997 Common Stock 12,500 Exercise of Warrants
November 1997 Common Stock 775,000 Exercise of Warrants
November 1997 Common Stock 25,583 Exercise of Warrants
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF
DATE OF SECURITIES DESCRIPTION OF
TRANSACTION TYPE OF SECURITIES SOLD THE TRANSACTION
- ------------------ ---------------------------- -------------- ----------------------------------------------
<S> <C> <C> <C>
November 1997 Common Stock 7,000 Exercise of Warrants
December 1997 Common Stock 110,000 Exercise of Warrants
December 1997 Common Stock 7,000 Exercise of Warrants
December 1997 Common Stock 6,600 Exercise of Warrants
January 1998 Common Stock 40,000 Exercise of Options
January 1998 Common Stock 2,000 Exercise of Options
January 1998 Common Stock 30,000 Exercise of Options
January 1998 Common Stock 15,000 Exercise of Options
March 1998 Common Stock 2,542,372 New
March 1998 Preferred Shares, Series I 9,488,140 New
April 1998 Common Stock 5,000 Exercise of Warrants
April 1998 Common Stock 200,000 Exercise of Warrants
June 1998 Common Stock 89,900 Exercise of Warrants
September 1998 Common Stock 685,897 New
October 1998 Common Stock 238,570 Debenture Conversion
May 1999 Common Stock 1,057,500 New
March 1998 Convertible Debentures $10.0 million Private Placement
March 1998 Convertible Debentures $27.5 million Private Placement
July 1999 Preferred Stock, Series II 203,605 Exchange Offer
July 1999 Preferred Stock, Series II 34,596 Old Ocean Loan Repayment
August 1999 Preferred Stock, Series II 1,500 Shell Financing Repayment
July 1999 Common Stock 2,561,669 Commissions
July 1999 Common Stock 422,857 Corporate Financing Fees
July 1999 Common Stock 541,700 Exchange for Debentures
July 1999 Warrants 3,974,923 Commissions for Exchange Offer
December 1997 Options 1,739,000 Employees
October 1997 Options 300,000 Employees
April 1997 Options 750,000 Employees
January 1997 Options 736,000 Employees
April 1998 Options 10,000 Incentive
March 1998 Options 45,000 Incentive
June 1998 Options 10,000 Incentive
January 1998 Options 75,000 Incentive
May 1998 Options 25,000 Incentive
April 1998 Options 25,000 Incentive
March 1998 Options 20,000 Incentive
November 1996 Options 40,000 Employee
</TABLE>
II-3
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
2.1 Share Purchase Agreement Between Slattery Trust, Ruston Trust, Houston Trust, Starbucks Trust,
Todd Grabois, Robert Novak and Benz Equities Ltd.
3.1 Certificate of Incorporation.
3.2 By-Laws.
+3.3 Certificate of Designations, Preferences, Rights and Limitations of Class A Preferred Stock of
Benz Energy Inc.
*3.4 Certificate of Designations, Preferences, Rights and Limitations of Class A, Series II Convertible
Preferred Stock of Benz Energy Inc.
+3.5 Trust Indenture between Benz Energy Ltd. and Montreal Trust Company of Canada, Trustee, dated as
of March 25, 1998
+3.6 Second Supplemental Trust Indenture between Benz Energy Ltd. and Montreal Trust Company of Canada
dated as of April 20, 1999
+3.7 Note Indenture between Benz Ltd. and Montreal Trust Company of Canada, Trustee, dated as of April
8, 1998
+3.8 First Supplemental Note Indenture between Benz Energy Ltd. and Montreal Trust Company of Canada,
Trustee, dated as of April 20, 1999
+5.1 Opinion of Porter & Hedges, L.L.P.
**10.1 The Stock Option Plan
**10.2 Employment Agreement with Prentis B. Tomlinson, Jr. dated December 15, 1998
**10.3 Employment Agreement with Robert S. Herlin dated November 15, 1997
**10.4 Termination Agreement Ernest J. LaFlure dated February 11, 1999
**10.5 Purchase and Sale Agreement between Texstar Petroleum, Inc. and Shell Capital Inc. dated December
23, 1998
**10.6 First Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas, N.A.
dated October 10, 1997
**10.7 Second Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas,
N.A. dated November 18, 1997
**10.8 Third Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas, N.A.
dated November 4, 1998
**10.9 Fourth Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas,
N.A. dated December 16, 1998
**10.10 Participation Agreement between Bank One, Texas, N.A., BOCP Energy Partners, L.P. and Texstar
Petroleum, Inc. dated November 4, 1998
**10.11 Letter Agreement between Texstar Petroleum, Inc. and BOCP Energy Partners, L.P. dated November 4,
1998
**10.12 First Amendment to Participation Agreement between Bank One, Texas, N.A., BOCP Energy Partners,
L.P. and Texstar Petroleum, Inc. dated December 16, 1998
**10.13 Assignment of Oil, Gas and Mineral Leases and Bill of Sale from Texstar Petroleum, Inc. to
Faulconer Resources 1999 Limited Partnership
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
**10.14 Letter Loan Agreement between Texstar Petroleum, Inc. and lenders dated December 31, 1998
**10.15 Letter Agreement between Benz Energy Ltd. and Mobil Exploration and Production U.S. Inc. regarding
the Assignment of Contract Rights and Term Assignment of Oil and Gas Lease, Old Ocean Area,
Brazoria and Matagorda Counties, Texas
**10.16 Purchase Agreement between Texstar Petroleum, Inc. and Southern Gas Co. of Delaware, Inc. dated
May 19, 1998
**10.17 Purchase and Sale Agreement between Starbucks Trust, Benz Energy Ltd. and Texstar Petroleum, Inc.
dated June 30, 1998
*10.18 Letter Agreement between Texstar Petroleum, Inc., Benz Energy Ltd., Calibre Energy, L.L.C., BOCP
Energy Partners, L.P., EnCap Energy Capital Fund III, L.P., Lasco Energy Partners, L.P. and
EnCap Investments L.C. dated December 16, 1998
*10.19 Promissory Note between Texstar Petroleum, Inc. and Bank One, Texas, N.A. dated July 17, 1997
*10.20 Escrow Agreement among Texstar Petroleum, L.L.C., Slattery Trust, Ruston Trust, Houston Trust,
Starbucks Trust, Boon Petroleum, Inc., C'est La Vie Enterprises, Montreal Trust Company of
Canada and Benz Energy Ltd. dated September 15, 1997
*10.21 Voluntary Pooling Agreement among Benz Equities Ltd, C.M. Oliver & Company Limited, the Pooled
Security holders and Montreal Trust Company of Canada dated April 18, 1997
*10.22 Amendment to Voluntary Pooling Agreement dated September 11, 1997
+10.23 Management Agreement between DWB Management Ltd. and Benz Energy Ltd. dated
*10.24 Management Agreement between Chase Management Ltd. and Benz Energy Ltd. dated September 26, 1997
*10.25 Standstill Agreement among Benz Energy Ltd., Texstar Petroleum, Inc., Prentis B. Tomlinson, Jr.,
Starbucks Trust, Texstar Holdings, L.L.C. and Security Oil, L.L.C. dated November 17, 1998
*10.26 Office Lease Agreement with Amendments
*10.27 Offer to Exchange Class A, Series II Convertible Preferred Stock for any and all 9% Convertible
Debentures, Series I due March 31, 2003 dated June 15, 1999
*10.28 Credit Agreement between Texstar Petroleum, Inc., Benz Energy Ltd., Calibre Energy, L.L.C. and
EnCap Energy Capital Fund III, L.P. dated October 9, 1997
*10.29 Letter Agreement between Benz Energy Ltd. and Mobil Exploration and Production U.S. Inc. dated
November 10, 1998
*10.30 Purchase and Sale Agreement between Lasco Energy Partners, L.P. and Benz Energy Ltd. dated January
23, 1998
*10.31 December 1998 Agreement in Respect of Purchase and Sale Agreement between Lasco Energy Partners,
L.P., Texstar Petroleum, Inc. and Benz Energy Ltd.
*10.32 Purchase and Sale Agreement among Slattery Trust, Starbucks Trust, Todd Grabois, Robert Novak,
Prentis B. Tomlinson, Jr., Calibre Oil & Gas, Inc., Calibre Energy, L.L.C. and Benz Energy Ltd.
dated April 22, 1998
*10.33 Purchase and Sale Agreement between Texstar Petroleum, Inc., Benz Energy Inc. and Prime Natural
Resources, Inc. dated August 25, 1999
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
*10.34 Letter Agreement between TransTexas Gas Corporation and Texstar Petroleum, Inc. dated December 15,
1998
*10.35 Debt Restructure Agreement
*10.36 Purchase and Sale Agreement between Benz Energy Inc., EnCap 1996 Limited Partnership and Energy
Capital Investment Company PLC dated August 19, 1999
*10.37 Credit Agreement between Texstar Petroleum, Inc. and Aquila Energy Capital Corporation dated
August 19, 1999
**21.1 Schedule of Subsidiaries
+23.1 Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1)
**23.2 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
**23.3 Consent of Price Waterhouse Coopers
*23.4 Consent of R. A. Lenser and Associates, Inc.
**24.1 Power of Attorney (included herein at page II-4)
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
+ To be filed by amendment
ITEM 28. UNDERTAKINGS
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement; provided, however, that subparagraphs (i) and (ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in the periodic reports
filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934 that are incorporated by reference
in this registration statement.
(2) That for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered herein, and the
offering of such Securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the Securities being registered which remain unsold at the termination of
the offering.
II-6
<PAGE>
The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the provisions described under Item 24 of this
registration statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the Securities being registered, the Registrant will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has duly caused this Amendment No. 1
to the Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, thereon duly authorized in the City of Houston, State of Texas on
September 10, 1999.
<TABLE>
<S> <C> <C>
BENZ ENERGY INC.
By:
-----------------------------------------
Prentis B. Tomlinson, Jr.
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement on Form SB-2 has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the board,
- ------------------------------ president and chief September 10, 1999
Prentis B. Tomlinson, Jr. executive officer
Director, senior vice
- ------------------------------ president and chief September 10, 1999
Robert S. Herlin financial officer
*
- ------------------------------ Controller (principal September 10, 1999
Kirsten A. Hink financial officer)
*
- ------------------------------ Director September 10, 1999
Robert L. Zorich
*
- ------------------------------ Director September 10, 1999
Yale Fisher
*
- ------------------------------ Director September 10, 1999
David P. Quint
*
- ------------------------------ Director September 10, 1999
Gary Petersen
*
- ------------------------------ Director September 10, 1999
Russell Cleveland
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: -------------------------
Robert S. Herlin September 10, 1999
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Share Purchase Agreement Between Slattery Trust, Ruston Trust, Houston Trust, Starbucks Trust, Todd
Grabois, Robert Novak and Benz Equities Ltd.
3.1 Certificate of Incorporation.
3.2 By-Laws.
+3.3 Certificate of Designations, Preferences, Rights and Limitations of Class A Preferred Stock of Benz
Energy Inc.
*3.4 Certificate of Designations, Preferences, Rights and Limitations of Class A, Series II Convertible
Preferred Stock of Benz Energy Inc.
+3.5 Trust Indenture between Benz Energy Ltd. and Montreal Trust Company of Canada, Trustee, dated as of
March 25, 1998
+3.6 Second Supplemental Trust Indenture between Benz Energy Ltd. and Montreal Trust Company of Canada dated
as of April 20, 1999
+3.7 Note Indenture between Benz Ltd. and Montreal Trust Company of Canada, Trustee, dated as of April 8,
1998
+3.8 First Supplemental Note Indenture between Benz Energy Ltd. and Montreal Trust Company of Canada,
Trustee, dated as of April 20, 1999
+5.1 Opinion of Porter & Hedges, L.L.P.
10.1 The Stock Option Plan
10.2 Employment Agreement with Prentis B. Tomlinson, Jr. dated December 15, 1998
10.3 Employment Agreement with Robert S. Herlin dated November 15, 1997
10.4 Termination Agreement Ernest J. LaFlure dated February 11, 1999
10.5 Purchase and Sale Agreement between Texstar Petroleum, Inc. and Shell Capital Inc. dated December 23,
1998
10.6 First Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas, N.A.
dated October 10, 1997
10.7 Second Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas, N.A.
dated November 18, 1997
10.8 Third Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas, N.A.
dated November 4, 1998
10.9 Fourth Amendment to Letter Loan Agreement between Texstar Petroleum, Inc. and Bank One, Texas, N.A.
dated December 16, 1998
10.10 Participation Agreement between Bank One, Texas, N.A., BOCP Energy Partners, L.P. and Texstar
Petroleum, Inc. dated November 4, 1998
10.11 Letter Agreement between Texstar Petroleum, Inc. and BOCP Energy Partners, L.P. dated November 4, 1998
10.12 First Amendment to Participation Agreement between Bank One, Texas, N.A., BOCP Energy Partners, L.P.
and Texstar Petroleum, Inc. dated December 16, 1998
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.13 Assignment of Oil, Gas and Mineral Leases and Bill of Sale from Texstar Petroleum, Inc. to Faulconer
Resources 1999 Limited Partnership
10.14 Letter Loan Agreement between Texstar Petroleum, Inc. and lenders dated December 31, 1998
10.15 Letter Agreement between Benz Energy Ltd. and Mobil Exploration and Production U.S. Inc. regarding the
Assignment of Contract Rights and Term Assignment of Oil and Gas Lease, Old Ocean Area, Brazoria and
Matagorda Counties, Texas
10.16 Purchase Agreement between Texstar Petroleum, Inc. and Southern Gas Co. of Delaware, Inc. dated May 19,
1998
10.17 Purchase and Sale Agreement between Starbucks Trust, Benz Energy Ltd. and Texstar Petroleum, Inc. dated
June 30, 1998
*10.18 Letter Agreement between Texstar Petroleum, Inc., Benz Energy Ltd., Calibre Energy, L.L.C., BOCP Energy
Partners, L.P., EnCap Energy Capital Fund III, L.P., Lasco Energy Partners, L.P. and EnCap
Investments L.C. dated December 16, 1998
*10.19 Promissory Note between Texstar Petroleum, Inc. and Bank One, Texas, N.A. dated July 17, 1997
*10.20 Escrow Agreement among Texstar Petroleum, L.L.C., Slattery Trust, Ruston Trust, Houston Trust,
Starbucks Trust, Boon Petroleum, Inc., C'est La Vie Enterprises, Montreal Trust Company of Canada and
Benz Energy Ltd. dated September 15, 1997
*10.21 Voluntary Pooling Agreement among Benz Equities Ltd, C.M. Oliver & Company Limited, the Pooled Security
holders and Montreal Trust Company of Canada dated April 18, 1997
*10.22 Amendment to Voluntary Pooling Agreement dated September 11, 1997
*10.23 Management Agreement between Chase Management Ltd. and Benz Energy Ltd. dated September 26, 1997
*10.24 Standstill Agreement among Benz Energy Ltd., Texstar Petroleum, Inc., Prentis B. Tomlinson, Jr.,
Starbucks Trust, Texstar Holdings, L.L.C. and Security Oil, L.L.C. dated November 17, 1998
*10.25 Office Lease Agreement with Amendments
*10.26 Offer to Exchange Class A, Series II Convertible Preferred Stock for any and all 9% Convertible
Debentures, Series I due March 31, 2003 dated June 15, 1999
*10.27 Credit Agreement between Texstar Petroleum, Inc., Benz Energy Ltd., Calibre Energy, L.L.C. and EnCap
Energy Capital Fund III, L.P. dated October 9, 1997
*10.28 Letter Agreement between Benz Energy Ltd. and Mobil Exploration and Production U.S. Inc. dated November
10, 1998
*10.29 Purchase and Sale Agreement between Lasco Energy Partners, L.P. and Benz Energy Ltd. dated January 23,
1998
*10.30 December 1998 Agreement in Respect of Purchase and Sale Agreement between Lasco Energy Partners, L.P.,
Texstar Petroleum, Inc. and Benz Energy Ltd.
*10.31 Purchase and Sale Agreement among Slattery Trust, Starbucks Trust, Todd Grabois, Robert Novak, Prentis
B. Tomlinson, Jr., Calibre Oil & Gas, Inc., Calibre Energy, L.L.C. and Benz Energy Ltd. dated April
22, 1998
*10.32 Purchase and Sale Agreement between Texstar Petroleum, Inc., Benz Energy Inc. and Prime Natural
Resources, Inc. dated August 25, 1999
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
*10.33 Letter Agreement between TransTexas Gas Corporation and Texstar Petroleum, Inc. dated December 15, 1998
*10.34 Debt Restructure Agreement
*10.35 Purchase and Sale Agreement between Benz Energy Inc., EnCap 1996 Limited Partnership and Energy Capital
Investment Company PLC dated August 19, 1999
*10.36 Credit Agreement between Texstar Petroleum, Inc. and Aquila Energy Capital Corporation dated August 19,
1999
**21.1 Schedule of Subsidiaries
+23.1 Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1)
**23.2 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
**23.3 Consent of Price Waterhouse Coopers
*23.4 Consent of R. A. Lenser and Associates, Inc.
**24.1 Power of Attorney (included herein at page II-4)
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
** Previously filed
+ To be filed by amendment
II-11
<PAGE>
Exhibit 3.4
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS OF
CLASS A, SERIES II CONVERTIBLE PREFERRED STOCK
OF
BENZ ENERGY INC.
WHEREAS, Benz Energy Inc., a corporation (the "CORPORATION"), organized
and existing under the General Corporation Law of the State of Delaware (the
"DGCL"), was formerly a corporation governed under the laws of the Business
Corporation Act (Yukon)(the "YUKON ACT") and operating as Benz Energy Ltd.;
WHEREAS, on the 20th day of May, 1999, pursuant to Section 388 of the
DGCL, Benz Energy Ltd. filed a Certificate of Domestication and Certificate
of Incorporation with the Secretary of State of the State of Delaware and now
operates as "Benz Energy Inc."
WHEREAS, upon domestication in Delaware, the Corporation had 100,000,000
shares of Class A Preferred Stock authorized, of which 9,488,140 have been
issued as Class A Preferred Stock, Series I;
WHEREAS, the Board of Directors of Benz Energy Inc., at a meeting held
on June 2, 1999, duly adopted resolutions providing for the designation of
Class A, Series II Convertible Preferred Stock, par value $1.00 per share,
which resolutions are and read as follows:
RESOLVED, that the Class A, Series II Convertible Preferred Stock
(the "SERIES II PREFERRED STOCK") have the rights, preferences,
limitations and restrictions as set forth in the Series II Designation;
and
RESOLVED FURTHER, that any one or more of the Proper Officers be
and he hereby is authorized, empowered and directed, for, in the name and
on behalf of the Corporation, to execute and cause to be filed with the
Delaware Secretary of State the Series II Designation.
NOW THEREFORE, BENZ ENERGY INC. DOES HEREBY CERTIFY that pursuant to the
authority conferred upon the Board of Directors by the Certificate of
Incorporation, as amended, and pursuant to Section 151, of the DGCL, that the
Series II Preferred Stock, as a series, shall have the powers and
preferences, and the relative, participating, optional and other rights, and
the qualifications, limitations and restrictions thereon set forth below:
<PAGE>
Section I. DEFINITIONS
As used in this Certificate of Designation, the following terms shall have the
following meanings:
"ALTERNATIVE STOCK EXCHANGE" means any national or regional stock exchange,
or if not available, a United States national or regional stock quotation
service such as the Nasdaq National Market System or the quotation service
maintained by the National Quotation Bureau (the pink sheets) or any
successor thereto, which in any such case is reasonably acceptable to RP&C
International Inc. ("RP&C"). RP&C acknowledges that the bulletin board
trading system operated by Nasdaq is acceptable and constitutes an
"Alternative Stock Exchange".
"BUSINESS DAY" means a day, other than a Saturday or a Sunday, on which
commercial banks are open for business with the public in Houston, Texas.
"COMMON STOCK" means the Corporation's Common Stock, U.S.$0.01 par value.
"CONSOLIDATED" shall refer to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References to a
Person's Consolidated financial statements financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements
financial position, financial condition, liabilities etc. of such person and
its properly consolidated subsidiaries.
"CORPORATION" means Benz Energy Inc., a Delaware corporation.
"DEBT" of any Person means and includes all present and future obligations of
such Person, which shall include all obligations (i) which in accordance with
GAAP shall be classified upon a balance sheet of such person as liabilities of
such Person, (ii) secured by any lien or encumbrance existing on property
owned by such Person, even though such Person has not assumed or become liable
for the payment of such obligations, (iii) created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person, notwithstanding the fact that the rights and
remedies of the seller, lender or lessor under such agreement in the event of
default are limited to repossession or sale of such property, (iv) which are
capitalized lease obligations, (v) for all guaranties, whether or not
reflected in the balance sheet of such Person and (vi) all reimbursement and
other payment obligations (whether contingent, matured or otherwise) of such
Person in respect of any acceptance or documentary credit. Notwithstanding
the foregoing, Debt shall not include (a) Debt incidental to the operation of
the business of the Person in the ordinary course and in the aggregate not
material to the business and operations of the Person, and (b) Debt
represented by purchase, rental or lease obligations not to exceed
$1,000,000 in any period of 12 months for any Person and its Subsidiaries;
"DESIGNATED RATE" means U.S.$8 per share from March 31, 1999 through March
31, 2003 and after March 31,2003, the term "Designated Rate" shall mean
U.S.$15 per share. Notwithstanding the foregoing, if the Corporation fails
to pay a dividend within five (5) Business Days of the required
-2-
<PAGE>
Dividend Payment Date, then from such Dividend Payment Date until such
dividend is paid, the term "Designated Rate" shall be increased by U.S. $3
per share, which increase shall be effective for the period subsequent to
such initial missed Dividend Payment Date.
"DIVIDEND MARKET PRICE" means a price equal to the average of the Market
Price for the Common Stock for the twenty (20) consecutive Stock Exchange
Business Days ending five (5) Stock Exchange Business Days prior to the
Dividend Payment Date. If required, the Dividend Market Price shall be
converted into U.S. dollars as provided for in Section 11 below.
"FINANCIAL STATEMENTS" shall mean the audited annual Consolidated financial
statements of the Corporation, dated as of December 31, 1998.
"FREELY TRADABLE" means with respect to any Series II Preferred Stock and
Common Stock, that such stock (i) has been registered pursuant to a
registration statement that has been declared effective pursuant to the
Securities Act of 1933, as amended (the "Securities Act") or that such stock
can be resold without restrictions under an exemption from registration under
the Securities Act applicable to all holders of such Series II Preferred
Stock or Common Stock, (ii) is listed on the VSE or an Alternative Stock
Exchange and (iii) is tradable on such exchange without restriction.
"GAAP" shall mean those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board in the United States (or any generally recognized successor) and which,
in the case of the Corporation and its Consolidated subsidiaries, are applied
for all periods after January 23, 1998 in a manner consistent with the manner
in which such principles and practices were applied to the audited Financial
Statements.
"JUNIOR STOCK" means any class of Common Stock and any other class of
preferred stock hereafter established by the Board of Directors of the
Corporation, the terms of which expressly provide that it ranks junior to the
Series II Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution of the Corporation.
"LAW" means any statute, law, regulation, ordinance, rule, treaty, judgement,
order, decree, permit, concession, franchise, license, agreement or other
governmental restriction of the United States or any state or political
subdivision thereof.
"LONG TERM DEBT" means (i) amounts classified as long term debt as specified
in the Corporation's and its Subsidiaries' audited financial statements or
their audited Consolidated financial statements, as the case may be, prepared
in accordance with GAAP and shall include any amounts outstanding under the
BOCP Facility and the EnCap Credit Facility (as such terms are defined in the
Trust Indenture), plus (ii) the nominal value of the Series II Preferred
Stock, plus (iii) the liquidation value of any other preferred stock
heretofore or hereafter issued by the Corporation and its Subsidiaries that
is not Junior Stock. For purposes of this Certificate of Designation, the
definition of "Long Term Debt" shall not include obligations related solely
to the sale, purchase or delivery of
-3-
<PAGE>
hydrocarbons in respect of production payments (whether volumetric or dollar
denominated) or net profits interests conveyed in transfers to third parties.
"MARKET PRICE" means the weighted average price of the Common Stock on the
principal exchange on which the Common Stock is traded or if not available,
then on any Alternative Stock Exchange on any Stock Exchange Business Day.
"MATERIAL SUBSIDIARY" shall mean (i) Texstar Petroleum, Inc. and (ii) any
other Subsidiary of the Corporation which has assets the value of which
constitutes in excess of 25% of the value of the Consolidated assets of the
Corporation as determined in accordance with GAAP.
"PAYMENT IN KIND" has the meaning defined in Section 2.
"PERSON" shall mean an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee
thereof, estate or executor thereof, unincorporated organization or joint
venture, or any other legally recognizable entity.
"SERIES II PREFERRED STOCK" means the Corporation's Class A Preferred shares,
Series II, U.S.$1.00 par value with a nominal value of U.S.$100 and a
liquidation value of U.S.$105.
"STOCK EXCHANGE BUSINESS DAY" means any day (other than a Saturday or Sunday)
on which the principal exchange on which the Common Stock is traded or the
Alternative Stock Exchange, as the case may be, is open for business.
"SUBSIDIARY" of any Person means any corporation or other legal entity of
which at least a majority of the shares of stock or other equity interests of
such entity having by the terms thereof ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of
whether or not at the time stock of any other class of such corporation shall
have voting power by reason of the happening of any contingency) is directly
or indirectly owned or controlled by any one of or any combinations of the
Corporation or one or more of its Subsidiaries.
"TANGIBLE ASSETS" means at any time the aggregate of: (i) the present value
of the estimated future net revenue (discounted at 10% per annum) of crude
oil, natural gas and natural gas liquids, which geological and engineering
data demonstrate according to engineering standards to be recoverable in
future years from known reservoirs under existing or anticipated economic and
operating conditions in the United States or in territories or regions
controlled by the United States, including any United States territorial
waters, all as set forth in any Independent Reserve Report (as such term is
defined in the Trust Indenture); (ii) cash held by the Corporation or its
Subsidiaries; (iii) the fair market value of Marketable Securities (as
defined in the Trust Indenture) held by the Corporation or its Subsidiaries;
and (iv) the net book value of Oil and Gas Properties (as defined in the Trust
Indenture) that do not constitute Proved Reserves (as defined in the Trust
Indenture), other assets, and equipment of the Corporation and its
Subsidiaries as if the Corporation were following the full cost method of
property accounting beginning January 1997. For purposes of the calculation
-4-
<PAGE>
provided for in Section 9(f), the definition "Tangible Assets" shall not
include the value of any hydrocarbons which have been conveyed as part of a
production payment or net profits interest that is excluded from the
definition of Long Term Debt.
"TRUST INDENTURE" means that certain Trust Indenture dated as of March 25,
1998 between the Corporation and Montreal Trust Company of Canada, as amended
by the First Supplemental Trust Indenture and the Second Supplemental Trust
Indenture, but without giving effect hereunder to any subsequent amendments to
the Trust Indenture.
"VSE" means the Vancouver Stock Exchange.
Section 2. DIVIDENDS
The holders of the Series II Preferred Stock will be entitled to
receive dividends at the Designated Rate. Such dividends will be prior and in
preference to any declaration or payment of any dividends paid on Junior
Stock. Dividends on the Series II Preferred Stock will be cumulative and will
accrue whether or not declared and whether or not there will be funds legally
available for the payment thereof. The dividends shall be payable
semi-annually in arrears on March 31 and September 30 of each year (the
"Dividend Payment Date") commencing on September 30, 1999, except that if any
such date is not a Business Day, then such dividend shall be payable on the
first Business Day immediately thereafter to holders of records as they
appear on the stock register of the Corporation on the applicable record
date, which shall be September 15 or March 15, as the case may be,
immediately preceding the relevant Dividend Payment Date. The dividend shall
be payable in cash (U.S. Dollars), except as otherwise provided in the next
paragraph. Dividends payable on the Series II Preferred Stock for each full
semi-annual dividend period shall be computed by dividing the annual payment
by two. Dividends payable on the Series II Preferred Stock for any period
that is shorter or longer than full semi-annual dividend period shall be
computed on the basis of a 360-day year of two 180 day semi-annual periods.
The Board of Directors of the Corporation may, at least 30 days
prior to the subject Dividend Payment Date, elect to pay the cash dividend in
Common Stock (a "Payment in Kind") provided that the Common Stock received is
Freely Tradable upon receipt by the recipients of such shares. If such an
election is properly made, the Corporation shall at least 30 days prior to
payment notify the holders of record of the Series II Preferred Stock
entitled to such dividend of the election to make a Payment in Kind in lieu
of a payment in cash for the subject Dividend Payment Date. An election for
any particular Dividend Payment Date shall operate only for such Dividend
Payment Date. Each Payment in Kind shall be payable as of the Dividend
Payment Date for which the election to make such Payment in Kind was made,
except that if such Dividend Payment Date is not a Business Day, then such
Payment in Kind shall be on the first Business Day immediately thereafter to
holders of record as they appear on the stock register on the applicable
record date. Each Payment in Kind shall be equal to that number of shares of
Common Stock that is equal in number to the aggregate cash dividend payable
on the subject Dividend Payment Date (disregarding deductions for withholding
-5-
<PAGE>
taxes, if any, under all applicable Laws (including applicable income tax
treaties)) divided by the Dividend Market Price.
Common Stock issuable on payment of any Payment in Kind shall be
delivered to each holder entitled to such Payment in Kind or to their order
within 10 days following the Dividend Payment Date for which such Payment in
Kind is elected to be made hereunder.
All dividends payable on the Series II Preferred Stock shall be paid
net of withholding tax, if any, under all applicable Laws (including
applicable income tax treaties). The Corporation will, subject to certain
exceptions and limitations set forth below, pay, as additional dividends,
such additional amounts (the "Additional Amounts") to the holder of any
Series II Preferred Stock as may be necessary in order that every net payment
of the principal or dividends on such Series II Preferred Stock, after
withholding for or on account of any present or future tax, duty, assessment
or governmental charge imposed or levied upon or as a result of such payment
by or on behalf of the United States (or any political subdivision, authority
or agency thereof or therein having the power to tax) (collectively, "Taxes"),
will not be less than the amount such holder would have received if such Taxes
had not been withheld, provided that no Additional Amounts will be payable
with respect to a payment which is subject to such Taxes by reason of such
holder being connected with the United States (or any political subdivision
thereof) otherwise than by the mere holding of the Series II Preferred Stock
or the receipt of payments made under or with respect to the Series II
Preferred Stock. In addition, the Corporation will indemnify and hold
harmless each holder of the Series II Preferred Stock (subject to the
exclusion set forth above) and will, upon written request of each holder
(subject to the exclusion set forth above), and provided that reasonable
supporting documentation is provided, reimburse each other holder for the
amount of any Taxes levied or imposed by the United States and paid by or on
behalf of the holder as a result of payments made under or with respect to
the Series II Preferred Stock. Any payment made pursuant to this paragraph
shall be considered an Additional Amount. If the Corporation becomes
generally subject at any time to any taxing jurisdiction other than or in
addition or the United States, references in this Certificate of Designation
to the United States shall be read and construed as reference to the United
States and/or to such other jurisdiction.
Dividends on account of arrears for any past dividend period may be
declared and paid at any time without reference to any regular Dividend
Payment Date, to holders of record on a date not more than a forty-five (45)
calendar days prior to the payment thereof, as may be fixed by the Board of
Directors of the Corporation.
Section 3. LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the
Corporation, voluntary or involuntary, the holders of the Series II Preferred
Stock will be entitled to receive in preference to the holders of the Common
Stock and Junior Stock a cash amount in U.S. Dollars equal to U.S. S105 per
share plus any dividends accumulated on the Series II Preferred Stock but not
paid (the "Liquidation Amount"). In the event of a consolidation or merger of
the Corporation with or into
-6-
<PAGE>
any other entity or a sale or transfer in a single transaction or series of
related transactions of all or substantially all of the assets of the
Corporation, then the holders of the Series II Preferred Stock shall have the
right (but not the obligation) to treat the merger as a liquidation of the
Corporation and require the Corporation to deliver the Liquidation Amount in
cash to any holder of the Series II Preferred Stock making such an election.
Written notice of any payment to the holders of Series II Preferred
Stock as as result of the liquidation, dissolution or winding-up of the
Corporation, stating the payment date or dates when and the place or places
where the amounts distributable in such circumstances shall be payable, shall
be given by first-class mail, postage prepaid, not less than thirty (30) days
prior to any payment date stated therein, to the holders of record of the
Series II Preferred Stock at their respective addresses as the same shall
appear on the books of the transfer agent for the Series II Preferred Stock
("Company Registrar").
Section 4. CONVERSION RIGHT
Each holder of Series II Preferred Stock will have the right, subject as
provided herein and to any applicable Laws and regulations, at any time at
the holder's option to convert any or all of the Series II Preferred Stock
into Common Stock at a conversion price (subject to adjustment as described
below) through March 31, 2000 of Cdn$0.35 (the "Preferred Conversion Price").
The number of shares of Common Stock issuable on conversion pursuant to this
Section 4 shall equal the total nominal value of all of the Series II
Preferred Stock converted, divided by the then applicable Preferred
Conversion Price. If on March 31, 2000, the average of the Market Prices
during the preceding twenty (20) consecutive Stock Exchange Business Days is
lower than the Preferred Conversion Price, the Preferred Conversion Price
will be adjusted downward to the average of the Market Price during the
preceding twenty (20) consecutive Stock Exchange Business Days as determined
on March 31, 2000. The Corporation will ensure that within four months after
the effective date of the issuance of the Preferred Stock ("Four Month
Period"), any Common Stock issued on conversion of the Series II Preferred
Stock or as dividends will be Freely Tradable. If the Common Stock to be
received is not Freely Tradable by such date, then the Preferred Conversion
Price shall be permanently reduced by 5% for each six month period or portion
thereof commencing on the expiration of the Four Month Period until the
Corporation is in a position to deliver Common Stock in connection with any
such Conversion or as dividends that is Freely Tradable. In addition, the
Corporation will ensure that by the expiration of the Four Month Period, the
holders of the Series II Preferred Stock have Series II Preferred Stock that
are Freely Tradable. If the Corporation has not satisfied the foregoing
requirements by the expiration of the Four Month Period, then the Preferred
Conversion Price shall be permanently reduced by 5% for each six month period
or portion thereof commencing on the expiration of the Four Month Period
until the Corporation has satisfied the foregoing requirements with respect
to the Series II Preferred Stock. No fractional shares of Common Stock will
be issued upon conversion but, the number of shares will be rounded to the
nearest whole number. Upon the conversion of any Series II Preferred Stock,
payment will be made by the Corporation for dividends accrued during the
period from the most recent dividend payment date to the conversion date
(which for the purpose of calculating payment shall be deemed to be the
-7-
<PAGE>
date such payment is made). Upon the conversion of any Series II Preferred
Stock for Common Stock as permitted hereunder, payment for dividends accrued
during the period from the most recent dividend payment date to the
conversion date may be made in Freely Tradable Common Stock or cash, at the
Corporation's option. Such payment or delivery shall be made within sixty
(60) days following conversion.
In order to exercise the conversion right, the holder of each share of
Series II Preferred Stock to be converted shall comply with the procedures
for conversion as provided by The Depository Trust Company ("DTC"), New York,
New York and the DTC participant holding the Series II Preferred Stock on
behalf of the holder and shall give written notice to the Corporation in the
form of EXHIBIT A attached hereto. Such notice shall also state the name or
names (with address) in which the shares of Common Stock which shall be
issuable upon such conversion shall be issued. Each share surrendered for
conversion shall, unless the shares issuable on conversion are to be issued
in the same name as the name in which such shares of the Series II Preferred
Stock is registered, be duly endorsed by, or be accompanied by, instruments
of transfer (in each case, in form reasonably satisfactory to the
Corporation), duly executed by the holder or such holder's duly authorized
attorney-in-fact.
As promptly as practicable after the surrender of the shares of the
Series II Preferred Stock for conversion and the receipt of such notice as
aforesaid, the Corporation shall issue and shall deliver to such holder, or on
such holder's written order, the number of shares of Common Stock issuable
upon the conversion of such shares of the Series II Preferred Stock in
accordance with the provisions of this paragraph.
Section 5. CORPORATION CONVERSION OPTION
The Corporation may, at its option, cause the Series II Preferred Stock
to be converted into Common Stock at the then Preferred Conversion Price at
any time after March 31, 2000, provided (i) the average Market Price of the
Common Stock for twenty (20) consecutive Stock Exchange Business Days
commencing on or after March 31, 2000 and ending not more than five (5) days
prior to the giving of such notice, has equaled or exceeded 140% of the then
Preferred Conversion Price and (ii) the Common Stock to be received is Freely
Tradable. The Corporation is required to give thirty (30) days advance
notice in writing to the holders of the Series II Preferred Stock that it has
elected such a mandatory conversion.
The Corporation may, at its option, redeem the Series II Preferred
Stock at any time for a cash price equal to the Liquidation Amount.
Commencing April 1, 2003, at the option of the Corporation, the Corporation
may redeem the Series II Preferred Stock for Common Stock (provided such
Common Stock is Freely Tradable) with a value of (i) 115% of the nominal
amount if the market capitalization of the Corporation is $300 million or
more on such date, or (ii) 120% of the nominal amount if the market
capitalization is less than $300 million on such date. The Common Stock so
issued shall be valued at the average of the Market Price for the Common
Stock for the 20
-8-
<PAGE>
consecutive Stock Exchange Business Days ending five Stock Exchange Business
Days prior to the date of payment as notified in the notice.
The Corporation must give thirty (30) days prior notice of any such
election of conversion or cash redemption. During any such 30-day notice
period holders of the Series II Preferred Stock will retain the right to
exercise their conversion rights as to such Series II Preferred Stock. Upon
any election by the Corporation to convert or redeem any Series II Preferred
Stock pursuant to the terms set forth in this Section 5, payment for
dividends accrued during the period from the most recent dividend payment
date to the conversion date or redemption date will be made by the
Corporation in cash, or if the Series II Preferred Stock are converted into
Common Stock, then in Freely Tradable Common Stock. Such dividends shall be
paid or delivered within sixty (60) days following conversion. Upon the
expiration of any such notice period as is referred to above, the Corporation
shall be bound to redeem or convert the Series II Preferred Stock as to which
notice has been provided pursuant to this Section 5 and holders of such
Series II Preferred Stock have not, by that date, converted such shares.
Section 6. ISSUANCE OF COMMON STOCK
Each conversion with respect to the Series II Preferred Stock shall be
deemed to have been effected immediately prior to the close of business on
the date on which the shares of the Series II Preferred Stock shall have been
effectively surrendered to the Company Registrar and the Person or Persons
entitled to receive the Common Stock issuable upon such conversion shall be
deemed for all purposes to be the record holder or holders of such Common
Stock upon that date. The Corporation shall pay any and all documentary,
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of the Common Share issued in payment of dividends or in exchange or
conversion of the Series II Preferred Stock.
The Corporation shall reserve out of its authorized but unissued Common
Stock or its Common Stock held in treasury enough Common Stock to permit the
conversion of all of the outstanding Series II Preferred Stock. The
Corporation shall from time to time, in accordance with applicable Law,
increase the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all shares of the Series II Preferred
Stock at the time outstanding. If any Common Stock required to be reserved
for issuance upon conversion of the Series II Preferred Stock hereunder
require registration with or approval of any governmental authority under any
applicable Law before the shares may be issued upon conversion, the
Corporation shall cause the shares to be so registered or approved. All
Common Stock delivered upon conversion of the Series II Preferred Stock or
for the payment of dividends due hereunder will, upon delivery, be Freely
Tradable, duly authorized and validly issued, fully paid and nonassessable,
free from all taxes, liens and charges with respect to the issue thereof.
-9-
<PAGE>
Section 7. VOTING RIGHTS
Except with respect to such matters with respect to which the Series II
Preferred Stock are entitled to vote under the Delaware General Corporation
Law or other applicable Law, and except as is provided in Section 8 below,
holders of Series II Preferred Stock will have no voting rights.
Section 8. RESTRICTIONS ON THE CORPORATION
So long as any of the Series II Preferred Stock remain outstanding, the
consent of the holders of at least a majority of the Series II Preferred
Stock outstanding at the time, given in Person or by proxy either in writing
(as permitted by Law and the Certificate of Incorporation and Bylaws of the
Corporation) or at any special or annual meeting, shall be necessary to
permit, effect or validate any one or more of the following:
(a) the payment or setting aside of funds for such payment of
dividends on any Junior Stock during any period in which the
full cumulative dividends due with respect to the Series II
Preferred Stock are not fully current, except dividends on
Junior Stock payable in additional shares of Junior Stock.
Further, no Junior Stock or any other series of Class A
Preferred shares or any class of preferred stock hereafter
established by the Board of Directors of the Company the terms
of which expressly provide that such class or series will rank
on a parity with the Series II Preferred Stock as to dividend
rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Stock") may be repurchased
or otherwise retired nor may funds be set apart for payment
with respect thereto, if cumulative dividends have not been
paid (or deemed paid) in full on the Series II Preferred Stock
in cash or Common Stock. In addition, the Corporation shall not
make payment on account of the purchase or other retirement of
any Parity Stock or Junior Stock, and shall not permit any
corporation or other entity directly or indirectly controlled
by the Corporation to purchase any Parity Stock or Junior
Stock or any warrants, rights, calls or options unless full
cumulative dividends determined in accordance herewith on the
Series II Preferred Stock have been paid (or are deemed paid)
in full; provided that the foregoing shall not prohibit any
officer or director of the Corporation or any Subsidiary from
purchasing or selling any Parity Stock, Junior Stock, warrants,
rights, calls or options in the ordinary course of his or her
ordinary investment activities;
(b) the creation, authorization, issuance or
reclassification of any additional capital stock of the
Corporation or any Subsidiary or the creation, authorization or
issuance of any obligation or security convertible or
exchangeable into or evidencing a right to purchase any share
of capital stock of the Corporation or any Subsidiary ranking
senior to the Series II Preferred Stock as to dividends or the
distribution of assets upon liquidation, dissolution or
winding up of the Corporation.
-10-
<PAGE>
(c) the creation, authorization, issuance or reclassification of any
additional Series II Preferred Stock; provided, however, the foregoing
shall not apply to the issuance of additional Series II Preferred
Stock in connection with (i) the refinancing of that certain U.S.
$2,200,000 of indebtedness entered by Texstar Petroleum, Inc. on
December 31, 1998, this RP&C and other leaders identified by RP&C and
the reacquisition of the mineral interests granted in connection with
the foregoing and (ii) the investment of funds managed by EnCap
Investments L.C.
(d) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the
Certificate of Incorporation or the Bylaws of the Corporation or the
undertaking of any other action that could in any event materially
adversely affect (i) the ability of the Corporation to perform its
obligations with respect to the Series II Preferred Stock or (ii) the
relative rights, preferences, qualifications, limitations or
restrictions of the Series II Preferred Stock or of the holders
thereof; or
(e) any amendment or modification to the terms and conditions of the
Series II Preferred Stock, which amends or modifies the terms of this
Section 8 or may have an adverse impact on (i) the ability of the
Corporation to perform its obligations with respect to the Series II
Preferred Stock or (ii) the relative rights, preferences,
qualifications, limitations or restrictions of the Series II Preferred
Stock or of the holders thereof; or
(f) any amendment or modification to the terms and conditions of the
Class A, Series I Preferred Shares, which may have a material adverse
impact on the Series II Preferred Stock;
(g) the setting aside of funds for the purpose of redeeming,
repurchasing or otherwise retiring the Class A, Series I Preferred
Shares or the election by the Company to do any of the foregoing,
prior to January 23, 2003, unless the Corporation has first offered
the holders of the Series II Preferred Stock the option of redeeming
their shares in cash, as provided herein, contemporaneously with the
redemption of the Class A, Series I Preferred Shares; or
(h) the loss of the Corporation's current listing for its Common
Stock on the VSE without having first obtained a listing for the
Common Stock on an Alternative Stock Exchange acceptable to RP&C
(and the Corporation acknowledges that the quotation service
maintained by the National Quotation Bureau (the pink sheets) is not
currently acceptable to RP&C for the purposes of this Section 8(h)).
-11-
<PAGE>
Section 9. LIQUIDATION EVENT
Upon the occurrence of a Liquidation Event, the Corporation shall
immediately provide written notice of the occurrence of such Liquidation Event
to the holders of the Series II Preferred Stock. Thereafter, each holder of the
Series II Preferred Stock shall have the right (but not the obligation), upon
notice to the Corporation no later than 60-days after its receipt of notice of
the Liquidation Event, to elect to cause the Corporation to redeem its Series II
Preferred Stock at a cash redemption price equal to the Liquidation Amount. The
Corporation shall effect the redemption of such Series II Preferred Stock on the
date which is no more than 30 days after receipt of the above notice, or if such
date is not a Business Day, on the first Business Day immediately thereafter.
A "Liquidation Event" shall include:
(a) the violation of any provision of Section 8;
(b) the failure of the Corporation to pay on the dates due two or
more dividends on the Series II Preferred Stock as they became due and
payable;
(c) the default in the performance, or breach, of any covenant of the
Corporation in this Certificate of Designation, and this continuance
of such default or breach for a period of 60 days after the
Corporation has notice of such default or breach;
(d) if the Corporation or any Material Subsidiary shall fail to pay
its Debts as such Debts come due (except Debts which the Corporation
or such Material Subsidiary, as the case may be, may contest in good
faith generally) and such failure could reasonably be expected to have
a material adverse effect on the business, assets, or the ability of
the Corporation to perform its obligations with respect to the Series
II Preferred Stock or the Corporation shall be declared or adjudicated
by a competent court to be insolvent or bankrupt, shall consent to an
entry of an order of relief against it in an involuntary bankruptcy
case, shall enter into any assignment or other similar arrangement
for the benefit of its creditors or shall consent to the appointment
of a custodian (including, without limitation, a receiver, liquidator
or trustee);
(e) if the Corporation fails to use the proceeds received in
connection with the exchange offer related to the Series II Preferred
Stock for the repayment of a portion of its trade payables, the
repayment of indebtedness due EnCap Capital Fund III pursuant to a
credit facility between the Company and such lender, retirement of the
obligation relating to the acquisition of the seismic materials for
the Old Ocean Prospect and for general corporate purposes;
(f) if the value of the Corporation's Tangible Assets for its fiscal
years ending (i) December 31, 1998 and 1999, falls below 100% of Long
Term Debt at any time,
-12-
<PAGE>
or (ii) after December 31 1999, falls below 140% of Long Term Debt at
any time. This ratio shall be calculated no later than the 135th day
following the end of each of the Corporations's fiscal years, and
shall be based upon the Corporation's annual audited financial
statements (as adjusted for Tangible Assets) and the Independent
Reserve Reports; or
(g) the Common Stock cease to be listed on Vancouver Stock Exchange
or an Alternative Stock Exchange.
Section 10. CONVERSION PRICE ADJUSTMENTS
The Preferred Conversion Price for any Series II Preferred Stock in effect
at any date shall be subject to adjustment from time to time as follows:
(a) If, and whenever at any time any shares of the Series II
Preferred Stock remain outstanding, the Corporation shall (i)
subdivide or redivide the outstanding Common Stock into a greater
number of shares, (ii) reduce, combine or consolidate the outstanding
Common Stock into a smaller number of shares, or (iii) issue Common
Stock or other securities convertible into or exchangeable for Common
Stock to the holders of all or substantially all of the outstanding
Common Stock by way of a stock dividend (other than the issue of
Common Stock to holders of Common Stock pursuant to their exercise of
options to receive dividends in the form of Common Stock in lieu of
dividends paid in the ordinary course on the Common Stock), the
Preferred Conversion Price in effect on the effective date of such
subdivision, redivision, reduction, combination or consolidation or on
the record date for such issue of Common Stock by way of a stock
dividend, as the case may be, shall be adjusted by multiplying the
Preferred Conversion Price then in effect by a fraction the numerator
of which is the number of shares of Common Stock outstanding
immediately prior to such event and the denominator is the number of
shares of Common Stock outstanding immediately following such event.
Such adjustment shall be made successively whenever any event referred
to in this subsection (a) shall occur; any such issue of Common Stock
by way of a stock dividend shall be deemed to have been made on the
record date for the stock dividend for the purpose of calculating the
number of outstanding shares of Common Stock under subsections (c) and
(d) of this Section 10.
(b) If, and whenever at any time any shares of the Series II
Preferred Stock remain outstanding, shares of Common Stock are
reclassified into different shares any holder of Series II Preferred
Stock who has not exercised his right of conversion prior to the
effective date of such reclassification shall be entitled to receive
and shall accept, upon the exercise of such right or upon his being
required to do so at anytime on or thereafter, in lieu of the number
of shares of Common Stock to which he was theretofore entitled upon
conversion, the aggregate number of shares of the
-13-
<PAGE>
Corporation that such holder would have been entitled to receive as a
result of such reclassification if on the effective date thereof, he
had been then the registered holder of the number of shares of Common
Stock to which he was theretofore entitled upon conversion, subject to
adjustment thereafter in accordance with provisions the same, as nearly
as may be possible, as contained in this Section 10.
(c) If, and whenever at any time any shares of the Series II
Preferred Stock remain outstanding, the Corporation shall fix a record
date for the issuance of rights or warrants to all or substantially all
the holders of its outstanding Common Stock entitling them to subscribe
for or purchase Common Stock or shall issue Common Stock other than
to officers and directors or any employee bonus or option plan (or
securities exchangeable for or convertible into Common Stock), in
either case at a price per share (or having a conversion or exchange
price per share) less than 95% of the then current Market Price on such
record date, the Preferred Conversion Price shall be adjusted
immediately after such record date so that it shall equal the price
determined by multiplying the Preferred Conversion Price in effect on
such record date by a fraction, of which the numerator shall be the
total number of shares of Common Stock outstanding on such record date
plus a number of shares of Common Stock equal to the number of
additional shares of Common Stock that the aggregate of the proceeds
to be realized from the issuance of the rights or warrants so offered
(for the aggregate conversion or exchange price of the convertible
securities so offered) would purchase at the then current Market Price,
and of which the denominator shall be the total number of shares of
Common Stock outstanding on such record date plus the total number of
additional shares of Common Stock offered for subscription or purchase
(or into which the convertible securities so offered are convertible):
any Common Stock owned by or held for the account of the Corporation
shall be deemed not to be outstanding for the purposes of any such
computation; such adjustments shall be made successively whenever such
a record date is fixed; to the extent that any such rights or warrants
are not so issued or any such rights or warrants are not exercised
prior to the expiration thereof, the Preferred Conversion Price shall
be readjusted to the Preferred Conversion Price which would then be
in effect if such record date had not been fixed or to the Preferred
Conversion Price which would then be in effect based upon the number of
shares of Common Stock (or securities convertible into Common Stock)
actually issued upon the exercise of such rights or warrants, as the
case may be, provided that this subsection (c) of Section 10 will not
apply to adjust the Preferred Conversion Price if each holder of Series
II Preferred Stock is permitted to participate in the receipt and
exercise of such rights or warrants as though such holder had converted
the whole of his Series II Preferred Stock in accordance with this
Section 10 prior to such record date.
(d) If, and whenever at any time any shares of the Series II
Preferred Stock remain outstanding the Corporation shall fix a record
date for the making of a
-14-
<PAGE>
distribution to all or substantially all the holders of its outstanding
Common Stock of (i) shares of my class other than Common Stock and other
than shares distributed to holders of Common Stock pursuant to their
exercise of options to receive dividends in the form of such shares in
lieu of dividends paid in the ordinary course on the Common Stock and
other than shares issued upon any subdivision of Common Stock referred to
in subsection (a) of this Section 10 or (ii) rights, options, or warrants
(other than those referred to above) or of evidences of indebtedness or
of assets (excluding cash dividends paid in the ordinary course) than, in
each such case, the Preferred Conversion Price shall be adjusted
immediately after such record date so that it shall equal the price
determined by multiplying the Preferred Conversion Price in effect on such
record date by a fraction, of which the numerator shall be the total
number of shares of Common Stock outstanding on such record date
multiplied by the current Market Price, less the fair market value (as
determined by the board of directors with the approval of the Trustee,
which determination shall be conclusive) of such shares or rights,
options or warrants or evidence of indebtedness or assets so
distributed, and of which the denominator shall be the total number of
shares of Common Stock outstanding on such record date multiplied by such
current Market Price; any Common Stock owned by or held for the account
of the Corporation shall be deemed not to be outstanding for the purpose
of any such computation; such adjustment shall be made successively
whenever such a record date is fixed; to the extent that such Distribution
is not so made, the Preferred Conversion Price shall be readjusted to the
Preferred Conversion Price which would then be in effect if such record
date had not been fixed or this Preferred Conversion Price which would
then be in effect based upon such shares or rights or warrants or evidences
of indebtedness or assets actually distributed, as the case may be; in
this subsection (d) the term "dividends paid in the ordinary course" shall
include the value of any securities or other property or assets
distributed in lieu of cash dividends paid in the ordinary course at the
option of the shareholders, provided that this subsection (d) of Section
10 will not apply to adjust the Preferred Conversion Price if each holder
of Series II Preferred Stock is permitted to participate in such
Distribution as though such holder had converted the whole of his Series
II Preferred Stock in accordance with this Section 10 prior to such record
date.
(e) In case of any reclassification of, or any other material change
in, the outstanding Common Stock of the corporation other than a
subdivision, redivision, reduction, combination or consolidation, the
Preferred Conversion Price shall be adjusted in such manner as the board
of directors, acting reasonably and in good faith determined to be
appropriate on a basis consistent with the Section 10.
(f) If and whenever at any time any shares of the Series II Preferred
Stock remain outstanding, there is a capital reorganization of the
Corporation not covered by the foregoing provisions of this Section 10 or
a consolidation or merger or amalgamation of the Corporation with or
into any other company including by way of a sale
-15-
<PAGE>
whereby all or substantially all of the Corporation's undertaking and
assets would become the property of any other company, and a holder of
Series II Preferred Stock who has not exercised his right of conversion
prior to the effective date of such reorganization, consolidation,
merger, amalgamation or sale, shall be entitled to receive and shall,
subject to the provisions hereof, accept, upon the exercise of such right
at any time on such effective date of thereafter, in lieu of the number
of shares of Common Stock to which he was therefore entitled upon
conversion, the aggregate number of shares or other securities of
property of the Corporation or of the company resulting from the
consolidation, merger or amalgamation or to which such sale may be made,
as the case may be, that such holder would have been entitled to
receive as a result of such capital reorganization, consolidation,
merger, amalgamation or sale if, on the effective date thereof, he had
been the registered holder of the number of shares of Common Stock to
which he was theretofore entitled upon conversion, subject to
adjustment thereafter in accordance with provisions the same, as nearly
as may be possible, as contained in this Section 10.
(g) In any case in which this Section 10 shall require that an adjustment
shall become effective immediately after the record date for an event
referred to herein, the Corporation may defer until the occurence of
such event, issuing to the holder of any Series II Preferred Stock
converted after such record date and before the occurence of such event
the additional shares of Common Stock issuable upon such conversion by
reason of the adjustment required by such event before giving effect to
such adjustment; provided, however, that the Corporation shall deliver to
such holder an appropriate instrument evidencing such holder's right to
receive such additional shares of Common Stock upon the occurence of the
event requiring such adjustment and the right to receive any
distributions made on such additional Common Stock declared in favor of
holders of record of Common Stock on and after the Date of Conversion or
such later date as such holder would, but for the provisions of this
subsection (g), have become the holder of record of such additional
shares of Common Stock.
(h) The adjustments provided for in this Section 10 are cumulative and
shall apply, without duplication, to successive subdivisions,
redivisions, reductions, combinations, consolidations, distributions,
issues or other events resulting in any adjustment under the provisions
of this section, provided that, notwithstanding any other provision of
this Section, no adjustment of the Preferred Conversion Price shall be
required unless such adjustment would require an increase or decrease of
at least 1% in the Preferred Conversion Price then in effect; provided
however, that any adjustment which by reason of this subsection (h) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment.
In the event of any question arising with respect to the adjustments
provided in this Section 10, such question shall be conclusively determined by
a nationally recognized firm of
-16-
<PAGE>
independent public accountants appointed by the Corporation (who may be the
auditors of the Corporation); such accountants shall have access to all
necessary records of the Corporation and such determination shall in the
absence of manifest error be binding upon the Corporation and the holders of
the Series II Preferred Stock.
Section 11. PAYMENTS
All cash payments shall be by check to the address as set out on the
books of the Company or the Company Registrar. Any payments or values that
need to be converted into U.S. dollars or Canadian Dollars shall be converted
based upon the Exchange Rate as of the date five (5) Stock Exchange Business
Days prior to the date such payment or value is required, where "Exchange
Rate" means, on any date, for any conversion of Canadian dollars into U.S.
dollars, or VICE VERSA, the applicable spot buying rate for United States
dollars or Canadian dollars, as the case may be, quoted by The Bank of Nova
Scotia at approximately noon (Toronto, Canada time) on such date if it is a
Business Day or on the immediately preceding Business Day if such date is not
a Business Day.
Section 12. NOTICES
Any notice required by the provisions hereof to be given to the holders
of the Series II Preferred Stock shall be deemed given when deposited in the
United States mail, postage prepaid, and addressed to such holder of record at
his or her address appearing on the books of the Corporation. Unless
otherwise expressly provided herein, notice periods shall include both
Business and non-Business Days.
Section 13. FORM OF CERTIFICATE
The Series II Preferred Stock are to be held in a non-certificated form
and shall be deposited with DTC. The Company will cause the DTC account
designated by each holder to be credited as promptly as possible with the
number of shares of Series II Preferred Stock to which such holder is
entitled.
-17-
<PAGE>
EXHIBIT A(1)
HOLDER'S CONVERSION NOTICE
To: Benz Energy Inc.
The undersigned Holder of the Class A Preferred Shares, Series II, par
value U.S.$1.00 per share (the "Preferred Stock"), of Benz Energy, Inc. (the
"Company"), in the aggregate principal amount of U.S.$_____ irrevocably
exercises the option to convert such Preferred Stock into shares of Common
Stock of the Company, par value U.S.$0.01 per share (the "Common Stock"), in
accordance with the terms of the Certificate of Designation relating to the
issuance by the Company of the Preferred Stock, and directs that the Common
Stock issuable and deliverable upon such conversion be issued and delivered to
the undersigned in the name and at the address set forth below.
All terms used and not otherwise defined herein shall have the respective
meanings set forth in the Certificate of Designation.
DATE:
------------------------ ----------------------------------
Name of Holder
----------------------------------
Signature(s) of Holder
Address for Delivery of Shares:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Name for Registration of Shares (if
different to that Holder):
----------------------------------
Pay all cash dividends that accrue under the Common Stock as follows:
- -----------------------------
(1) With a copy to be delivered to RP&C International Limited at 56 Green
Street, London, WIY 3RH
-18-
<PAGE>
IN WITNESS WHEREOF, Benz Energy Inc. has caused this Certificate to be
signed by a duly authorized officer, this 9th day of July, 1999.
BENZ ENERGY INC.
By: /s/ Robert S. Herlin
----------------------------------
Robert S. Herlin
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
-19-
<PAGE>
TEXSTAR PETROLEUM, INC.
BENZ ENERGY LTD.
CALIBRE ENERGY, L.L.C.
December 16, 1998
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
Lasco Energy Partners, L.P.
EnCap Investments L.C.
1100 Louisiana Street, Suite 3150
Houston, Texas 77002
Gentlemen:
In this letter the following terms have the following definitions:
"Bank One" means Bank One, Texas, National Association.
"Bank One Credit Facility" means the loan facility extended by
Bank One to Borrower under the Bank One Loan Agreement.
"Bank One Loan Agreement" means that certain Loan Agreement
dated as of July 17, 1997, between Borrower and Bank One, as from time
to time amended or supplemented (including without limitation, any
amendment made concurrently herewith). "Tranche A" and "Tranche B" have
the meanings given such terms in the Bank One Loan Agreement.
"Benz" means Benz Energy Ltd., a corporation existing under
the laws of the Yukon Territory, Canada.
"Benz Entities" means Borrower, the Guarantors/Shareholders,
and all of their respective past or present shareholders, members,
partners, officers, directors, employees, attorneys, agents,
representatives, subsidiaries, parents, investors, participants,
successors, assigns, and affiliates or associated entities of whatever
kind.
"BOCP" means BOCP Energy Partners, L.P.
"Borrower" and "Texstar" both mean Texstar Petroleum, Inc., a
Texas corporation.
"Calibre" means Calibre Energy, L.L.C., a Texas limited
liability company.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 2
"Collateral" means all collateral or security given by
Borrower or any Guarantor/Shareholder under any of the Loan Documents
to secure the payment or performance of any indebtedness or obligations
owing by Borrower or any Guarantor/Shareholder under any of the Loan
Documents.
"EnCap III LP" means EnCap Energy Capital Fund III, L.P.
"EnCap LC" means EnCap Investments L.C.
"EnCap Credit Agreement" means that certain Credit Agreement
made as of October 9, 1997, as from time to time amended or
supplemented, by and among Borrower, as borrower, Benz and Calibre, as
guarantors, and EnCap III LP, as lender.
"Guarantors/Shareholders" means Benz, Calibre, Benz Properties
Ltd., Prentis B. Tomlinson, Jr., individually, Texstar Holdings,
L.L.C. (f/ka Texstar Petroleum, L.L.C.), Prentis B. Tomlinson, Jr.,
Trustee of and on behalf of The Slattery Trust, Prentis B. Tomlinson,
Jr., Trustee of and on behalf of The Ruston Trust, Prentis B.
Tomlinson, Jr., Trustee of and on behalf of The Houston Trust and
Heather J. Tomlinson, Trustee of and on behalf of The Starbucks Trust.
"Investor Entities" means BOCP, EnCap III LP, Lasco, EnCap LC,
Bank One, the EnCap Designees, and all of their respective past or
present members, partners, shareholders, officers, directors,
employees, attorneys, agents, representatives, subsidiaries, parents,
investors, participants, successors, assigns, and affiliates or
associated entities of whatever kind.
"Lasco" means Lasco Energy Partners, L.P.
"Loan Documents" means all "Loan Documents" as defined in the
EnCap Credit Agreements, all "Loan Documents" as defined in the Bank
One Loan Agreement, and all other documents or instruments at any time
given or entered into by Borrower or any Guarantor/Shareholder in
connection with any of the foregoing.
"November Letter Agreement" means that certain letter
agreement dated November 4, 1998, entered into by the parties hereto.
"Oakvale Drilling Success" means that Ryder Scott Company,
Netherland Sewell, or H. Gruy issues a written opinion that the Oakvale
Wells have economically recoverable proved developed producing reserves
and/or proved developed non-producing gas reserves attributed thereto
which equal or exceed ten billion cubic feet.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 3
"Oakvale Wells" means (a) Borrower's well named the "Howell
Petroleum 32-4 No. 1" that, as of October 26, 1998, was being drilled
on Borrower's Howell Petroleum Co. lease in Jefferson Davis County,
Mississippi, and (b) Borrower's well named the "Fortenberry 32-13 No.
1" that, as of October 26, 1998, was being drilled on Borrower's
Fortenberry lease in Jefferson Davis County, Mississippi.
"Released Claims" means any and all claims, demands, and
causes of action of whatever kind or character which any Benz Entity
has, or may have in the future, based on any actions, failures to act,
or events that have occurred prior to the effective date hereof, which
in any way relate to or are based upon any of the following: (1) the
EnCap Credit Agreement or any other Loan Document, (2) the making of
any loans or advances thereunder or the failure or refusal to make any
loans or advances thereunder, (3) any actual, claimed, threatened, or
alleged exercise by any Investor Entity of any of its rights or
remedies under or in connection with the EnCap Credit Agreement, any of
the other Loan Documents, or any Collateral, (4) any other transactions
of any kind among any of the Benz Entities and any of the Investor
Entities, or (5) any actual or alleged negotiations, discussions,
representations, warranties, promises, or other undertakings by any
Investor Entity in connection with any of the foregoing.
"Voting Securities" means any common shares or other
securities of Benz entitled to vote generally for the election of
directors of Benz and any preferred shares of Benz entitle to vote for
the election of directors of Benz upon the satisfaction of certain
conditions, and the "beneficial ownership" of Voting Securities shall
be determined in accordance with Rule 13d-3 under the U.S. Securities
and Exchange Act of 1934, as amended.
In consideration of the covenants and agreements set out below, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower, the Guarantors/Shareholders, BOCP, Lasco, EnCap
III LP and EnCap LC hereby agree as follows for the benefit of each other and
for the benefit of each of the Investor Entities and the Debenture
Holder Designees:
1. BOCP hereby agrees to purchase an additional participation interest in
Tranche B under the Bank One Credit Facility of $1,000,000 on the
terms set out in the amendment to participation agreement attached
hereto as Exhibit A, provided that (a) Borrower and Bank One
concurrently enter into a Fourth Amendment to Letter Loan Agreement in
the form attached as Exhibit B hereto and (b) Borrower satisfies the
conditions set out in paragraph 3 of such Fourth Amendment. Borrower
agrees to use all proceeds of the additional advance pursuant to
Tranche B which is funded by Bank One as a result of such
participation only for the purposes described in Exhibit F hereto.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 4
2. Borrower has requested that EnCap III LP consent to Borrower's sale of
a dollar denominated production payment for $10,000,000 prior to
December 31, 1998, upon the terms described in the term sheet attached
hereto as Exhibit C, burdening only those properties with respect to
which Bank One presently has a first lien to secure the Bank One
Credit Facility. EnCap III LP hereby gives such consent, provided
that: (a) the other terms of such production payment, and the terms of
any subordination requested from EnCap III LP with respect to its
second lien on such properties, are satisfactory to EnCap III LP in
the reasonable exercise of its discretion, (b) concurrently with such
sale the EnCap Credit Agreement is amended to replace the references
to the Bank One Credit Facility in Sections 7.1(b) and 7.2(b) thereof
with references to such production payment, (c) a portion of the
proceeds from the sale of such production payment are used to repay in
full and terminate the Bank One Credit Facility (including both
Tranche A and Tranche B thereunder), and (d) as a part of such sale
Borrower agrees to use the remainder of such proceeds only for the
purposes described in Exhibit F hereto.
3.
(a) Benz covenants, agrees, represents and warrants that, until
January 1, 2001:
(i) Neither Benz nor Texstar will enter into any new
financial commitments of more than $50,000 without
approval of the Benz Board of Directors (excluding any
existing contractual commitment and any commitment
entered into in the future to deal with well blowouts
and other operational emergencies), provided that such
approval may be given generally for particular projects
rather than on an item-by-item basis. Neither Benz nor
Texstar will enter into any transactions any of the
other Guarantors/Shareholders without approval of the
Benz Board of Directors. In connection with their
resolutions authorizing this letter agreement, the Board
of Directors of Benz has adopted standing resolutions
providing for the foregoing.
(ii) The authorized size of Benz's Board of Directors on the
date hereof is six persons, and the Board has the
authority to appoint up to two additional directors.
Benz agrees not to increase the size of the Board to
more than seven. Benz has six incumbent directors, who
are Prentis B. Tomlinson, Jr., Robert L. Zorich, Yale
Fisher, Ernest LaFlure, Robert Herlin, and L. E. Walker.
(iii) A true and correct copy of its articles of incorporation
and bylaws, as amended to date, are attached hereto as
Exhibits H and I.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 5
(iv) Prior to the occurrence of a Stakeholder Election, as
defined below, EnCap III LP will be entitled to have
Gary Petersen or Marty Phillips (in addition to Robert
L. Zorich) attend and observe any meeting of the Benz or
Texstar Board of Directors.
(v) As soon as reasonably possible hereafter, Benz will
cause its bylaws (or, in the case of the following
subparagraph (1), its articles of incorporation) to be
amended to provide that until January 1, 2001:
(1) The size of the Board will be fixed at seven
directors (rather than the current
arrangement allowing the size of the Board
to vary between three and ten).
(2) Board decisions will be made by a majority
of the board members, provided that (A)
sales or acquisitions of assets for more
than $5,000,000, sales of substantially all
assets, sales of equity or of rights to
acquire equity, bankruptcy filings, new
financings, changes to the size or
composition of the Executive Committee of
Benz's Board, and recommendations to the
shareholders with respect to mergers will
require the affirmative vote of 60% or more
of the directors, (B) all votes of the
Executive Committee of Benz's Board will be
required to be unanimous, and (C) amendment
or elimination of the requirements of the
foregoing clauses (A) or (B) will require
the affirmative vote of all directors or
approval of Benz's shareholders.
(3) Board approval will be required for (A) new
financial commitments of more than $50,000
(excluding any existing contractual
commitment and any commitment entered into
in the future to deal with well blowouts and
other operational emergencies), provided
that such approval may be given generally
for particular projects rather than on an
item-by-item basis, and (B) transactions
between Benz and Texstar or between either
Benz or Texstar and any of the other
Guarantors/Shareholders.
Benz has consulted with its Canadian counsel and has been
informed that the above changes to its bylaws can all be
properly made by Benz's existing Board of Directors,
provided that such changes will be effective only until the
next meeting of Benz's shareholders, at which time such
changes will cease to be effective unless ratified by the
shareholders. Benz shall present such changes to its bylaws
and articles of incorporation to Benz's shareholders for
ratification and adoption at
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 6
or before its next scheduled shareholders meeting, and in no
event later than February 28, 1999.
(b) Benz covenants, agrees, represents and warrants that it has
obtained executed letters from Robert Herlin and L. E. Walker
(the "Director Resignations), true and correct copies of which
are attached hereto as Exhibit D, that Benz has not yet
accepted or rejected the Director Resignation from Robert
Herlin and that Benz has accepted the Director Resignation
from L. E. Walker.
(c) Benz covenants and agrees that it will, provided an Oakvale
Drilling Success has occurred, accept the Director
Resignations immediately upon request that it do so made by
EnCap LC prior to January 1, 2001. Any such request by EnCap
LC after the occurrence of an Oakvale Drilling Success is
herein called a "Stakeholder
Election".
(d) Benz warrants and covenants that if a Stakeholder Election
occurs, its Board of Directors (who have approved this
letter agreement) will immediately appoint to the Board (i)
one EnCap Designee (as defined below) and (ii) two Debenture
Holder Designees (as defined below), provided that the same
have been designated, to fill the vacancies arising from the
Director Resignations and to hold the position of a seventh
director. As used herein, the term "EnCap Designee" means a
person designated by EnCap LC, the term "Debenture Holders"
means the holders of Benz's largest issue (at each time in
question) of outstanding unsecured debt securities (which
currently is Benz's 9% Convertible Debentures, Series 1 due
March 31, 2003), and the term "Debenture Holder Designee"
means a person designated by a majority of the Debenture
Holders.
(e) Benz warrants and covenants that, with respect to any vote of
the Benz shareholders or the Benz Board of Directors that
occurs after a Stakeholder Election and prior to January 1,
2001, concerning the election or appointment of persons to
serve on its Board of Directors:
(i) Benz's Board of Directors will nominate for election
to the Board, or appoint to the Board, two EnCap
Designees, two Debenture Holder Designees, and three
persons designated by the Guarantors/Shareholders
other than Benz and Calibre (the "Guarantor/
Shareholder Designees"), provided that the same have
been designated and further provided that at least one
Guarantor/Shareholder Designee must be an independent
director not associated or affiliated with the
Guarantor/Shareholders, EnCap LC, or the Debenture
Holder Designees (the "Independent Nominee").
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 7
(ii) Benz will use its best efforts to cause the EnCap
Designees, the Debenture Holder Designees, and the
Guarantor/Shareholder Designees to be elected or
appointed to the Benz Board of Directors.
The independence of the Independent Nominee must be consented
to by EnCap LC, which consent may not be unreasonably
withheld. EnCap LC hereby consents to Yale Fisher as the
Independent Nominee.
(f) Each Guarantor/Shareholder covenants and agrees that it
will use its best efforts to cause Benz to comply with its
covenants and agreements contained in this paragraph 3.
Each Guarantor/Shareholder and Lasco covenants and agrees
that it will support the nomination and election of the
EnCap Designees, the Debenture Holder Designees and the
Guarantor/Shareholder Designees to Benz's Board of
Directors. Each Guarantor/Shareholder and Lasco covenants
and agrees that, with respect to any vote of the Benz
shareholders that occurs after a Stakeholder Election and
prior to January 1, 2001, concerning the election of
persons to serve on Benz's Board of Directors:
(i) It (i.e., such Guarantor/Shareholder or Lasco) will
vote or cause to be voted all Voting Securities
beneficially owned by it in favor of the election of
the EnCap Designees, the Debenture Holder Designees,
and the Guarantor/Shareholder Designees to Benz's
Board of Directors, provided that the same have been
designated, and in favor of any merger or sale
requiring shareholder consent which has been approved
by the affirmative vote of 60% or more of Benz's
Directors.
(ii) It will, upon request made by EnCap LC after a
Stakeholder Election has occurred, enter into a Voting
Agreement substantially in the form attached as
Exhibit G hereto, providing for the granting of an
irrevocable proxy to an unaffiliated bank or trust
company chosen by EnCap LC to vote such
Guarantor/Shareholder's or Lasco's shares as provided
herein. The Guarantors/Shareholders can sell up to a
total of 20% of the aggregate number of shares of Benz
common stock held by the Guarantor/Shareholders on the
date the Voting Agreement is executed without the
assignee or transferee being subject to the terms of
the Voting Agreement. If, however, the
Guarantors/Shareholders sell any shares of Benz common
stock that exceed such amount, the assignee or
transferee of such shares must agree to be subject to
the terms of this letter agreement and the Voting
Agreement as a condition to the sale.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 8
(iii) Such Guarantor/Shareholder and Lasco will otherwise
use its best efforts to cause the EnCap Designees, the
Debenture Holder Designees and the Guarantor/Shareholder
Designees to be elected to Benz's Board of Directors.
(g) Benz, each Guarantor/Shareholder and Lasco warrants and
agrees that, in the event of the death, incapacity,
resignation or removal of an EnCap Designee, a Debenture
Holder Designee or a Guarantor/Shareholder Designee after a
Stakeholder Election and prior to January 1, 2001,
preventing his or her serving on the Benz Board of
Directors, it will promptly use its best efforts to cause
the election or appointment of another EnCap Designee,
Debenture Holder Designee or Guarantor/Shareholder Designee
(as applicable) to fill the vacancy created thereby.
(h) Each Guarantor/Shareholder represents and warrants to BOCP
that as of the date hereof such Guarantor/Shareholder is the
record and beneficial owner of the number of shares of
Common Shares of Benz, no par value per share, set forth
opposite its name in Exhibit E attached hereto.
4. BOCP, EnCap III LP and EnCap LC consent to Benz and Texstar entering
into an employment agreement with Prentis B. Tomlinson, Jr., providing
for the following benefits if Mr. Tomlinson's employment is ever
terminated except for "cause" (as hereafter defined):
(a) a $1,000,000 cash severance payment, payable within 30 days after
termination;
(b) a consulting contract with a term of three years after
termination, providing for Mr. Tomlinson to receive payments of
$185,000 per annum and to devote a substantial portion of his
time, as requested, to assisting Benz and Texstar with their
oil and gas activities, restricting Mr. Tomlinson from
competing with Benz and Texstar with respect to their active
oil and gas prospects during such period, and requiring Mr.
Tomlinson to hold in confidence all confidential, proprietary,
non-public information at any time in his possession concerning
Benz or Texstar or their properties or prospects; and
(c) the grant of an overriding royalty interest equal to 1%,
proportionately reduced to Texstar's working interest in
Texstar's Oakvale, LaHinch, and Rayburn/Plum Grove properties,
and equal to a .25% net revenue interest (calculated on an
8/8ths basis), in Texstar's Old Ocean properties (subject in
each case to all liens, burdens and encumbrances on Texstar's
title at such time and reduced by the amount of any royalties
already existing on such properties in favor of Mr. Tomlinson,
his
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 9
family members, or any Guarantors/Shareholders other than Benz
or Texstar, excluding only an overriding royalty of
approximately .38% presently owned by Heather Tomlinson in the
Oakvale Dome properties.
BOCP, EnCap III LP and EnCap LC further consent to Texstar granting the
foregoing overriding royalties to Mr. Tomlinson at any time. Regardless of
when such overriding royalties are granted, if a Stakeholder Election
occurs and thereafter Mr. Tomlinson's employment with Benz is terminated by
Benz (except for cause) prior to January 1, 2001, then BOCP and EnCap III
LP will release any liens which they may have on such overriding royalties
at the time of such termination. As used in this paragraph 4 and the
following paragraph 5, "cause" means any of the following: (i) a material
failure of Mr. Tomlinson to follow or comply with any lawful directive of
the requisite majority of the Benz Board of Directors; (ii) a material
failure of Mr. Tomlinson to perform his duties as the chief executive
officer of Benz; (iii) conduct by Mr. Tomlinson which constitutes an act of
fraud, theft, dishonesty, or violation of any statutory or common law duty
of loyalty to Benz; (iv) Mr. Tomlinson's conviction of a felony or any
crime of moral turpitude, or (v) Mr. Tomlinson's unreasonable absence from
employment without excuse or justification.
5. EnCap III LP agrees that, if a Stakeholder Election occurs and thereafter
Mr. Tomlinson's employment with Benz is terminated by the shareholders or
Board of Directors of Benz (except for cause) prior to January 1, 2001,
then EnCap III LP will make the cash severance payment to Mr. Tomlinson
described in paragraph 4(a) above on behalf of Benz if Benz fails to make
such payment within 30 days after becoming obligated to do so. If EnCap III
LP makes such payment after Benz fails to do so, such payment will be
deemed an advance to Texstar under the EnCap Credit Agreement that is
secured by all liens and security interests given by Texstar to EnCap III
LP, and Texstar and Benz will immediately reimburse EnCap III LP for the
amount of such payment. EnCap III LP's obligation to make such payment on
behalf of Benz will not be affected by Benz or Texstar having inadequate
funds to make such reimbursement, but EnCap III LP will not be obligated to
make such payment if Benz or Texstar is, at the time in question, in
bankruptcy proceedings, and EnCap III LP's obligation will also be limited
by any affirmative defense, offset or other limitation on Benz's obligation
to Mr. Tomlinson. At such time as a Stakeholder Election occurs, Benz and
Texstar will execute such instruments as EnCap III LP may reasonably
request to more fully provide for the foregoing.
6. Borrower will, on or before December 31, 1998, amend its articles of
incorporation to provide that no bankruptcy or insolvency proceedings can
be initiated on behalf of Borrower without the express consent of at least
two-thirds of its shareholders of record. At the same time, Benz will amend
its bylaws to provide that no such consent will be
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 10
given with respect to Borrower except upon the affirmative vote of 60% or
more of Benz's directors.
7. If and when the EnCap Designee (other than Robert L. Zorich) and the two
Debenture Holder Designees become members of the Benz Board of Directors,
each Guarantor/Shareholder (other than Benz, Calibre, and Benz Properties
Ltd.) shall be deemed automatically released from any personal liability
under its respective guaranty agreement executed in favor of EnCap III LP
(although any pledges of its stock in Benz or Benz's subsidiaries or
affiliates will remain in effect), and EnCap III LP and each such
Guarantor/Shareholder will execute appropriate instruments to confirm such
release and confirm that such pledges remain in effect, but without
personal liability to such Guarantor/Shareholder. At the same time,
Borrower, Benz, Calibre and Benz Properties Ltd. will consent to such
instruments and ratify and confirm their obligations under the Loan
Documents. Prior to the time, if any, that such automatic releases occur,
EnCap III LP will not enforce such guaranty agreement against such
Guarantor/Shareholder (other than Benz, Calibre, and Benz Properties Ltd.)
until 180 days after EnCap III LP has either (a) commenced enforcement of
its remedies against Texstar under one or more Loan Documents following the
occurrence of an "Event of Default" under the EnCap Credit Agreement or (b)
been stayed from commencing such enforcement, provided that EnCap III LP
shall not be prevented from filing any claim or otherwise acting to
preserve its rights under such guaranty agreement from becoming
unenforceable due to any statute of limitations, filing deadline or similar
requirement.
8. BORROWER AND THE GUARANTORS/SHAREHOLDERS -- ON BEHALF OF THEMSELVES AND, TO
THE EXTENT THEY ARE PERMITTED BY LAW OR ARE OTHERWISE EXPRESSLY AUTHORIZED
TO DO SO, ON BEHALF OF ALL OTHER BENZ ENTITIES -- HEREBY RATIFY AND CONFIRM
EACH OF THE LOAN DOCUMENTS (AS MODIFIED AND SUPPLEMENTED HEREBY) IN ALL
RESPECTS, WAIVE ANY DEFENSES, SET-OFFS OR COUNTERCLAIMS WITH RESPECT TO THE
LOAN DOCUMENTS OR ANY OF THE INDEBTEDNESS THEREUNDER, AND RATIFY AND
CONFIRM ALL LIENS AND SECURITY INTERESTS WITH RESPECT TO THE COLLATERAL
HERETOFORE GIVEN BY ANY OF THEM TO OR FOR THE BENEFIT OF ANY INVESTOR
ENTITY. BORROWER AND THE GUARANTORS/SHAREHOLDERS HEREBY AGREE NOT TO
CHALLENGE THE VALIDITY, PRIORITY OR ENFORCE ABILITY OF THE LOAN DOCUMENTS
OR OF ANY LIENS OR SECURITY INTERESTS AT ANY TIME
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 11
GIVEN TO ANY INVESTOR ENTITY WITH RESPECT TO ANY COLLATERAL.
9. BORROWER AND THE GUARANTORS/SHAREHOLDERS -- ON BEHALF OF THEMSELVES AND, TO
THE EXTENT THEY ARE PERMITTED BY LAW OR ARE OTHERWISE EXPRESSLY AUTHORIZED
TO DO SO, ON BEHALF OF ALL OTHER BENZ ENTITIES -- HEREBY GENERALLY RELEASE
AND FOREVER DISCHARGE THE INVESTOR ENTITIES FROM ANY AND ALL RELEASED
CLAIMS. THIS RELEASE IS TO BE CONSTRUED AS THE BROADEST TYPE OF GENERAL
RELEASE AND COVERS AND RELEASES ANY AND ALL RELEASED CLAIMS, WHETHER KNOWN
OR UNKNOWN AND HOWEVER OR WHENEVER ARISING, WHETHER BY CONTRACT OR
AGREEMENT, AT LAW OR UNDER ANY STATUTE (INCLUDING WITHOUT LIMITATION ANY
LAW OR STATUTE PERTAINING TO NEGLIGENCE, GROSS NEGLIGENCE, STRICT
LIABILITY, FRAUD, DECEPTIVE TRADE PRACTICES, NEGLIGENT MISREPRESENTATION,
SECURITIES VIOLATIONS, BREACH OF FIDUCIARY DUTY, BREACH OF CONTRACT, TRADE
REGULATION, REGULATION OF BUSINESS OR COMPETITION, CONSPIRACY OR
RACKETEERING), OR OTHERWISE ARISING, AND EXPRESSLY INCLUDING ANY CLAIMS FOR
PUNITIVE OR EXEMPLARY DAMAGES, ATTORNEYS' FEES, OR PENALTIES. TO THE EXTENT
THAT ANY RELEASED CLAIMS WITH RESPECT TO ANY INVESTOR ENTITY HAVE NOT BEEN
RELEASED BY THIS LETTER AGREEMENT, BORROWER AND THE GUARANTORS/SHAREHOLDERS
HEREBY ASSIGN SUCH RELEASED CLAIMS TO SUCH INVESTOR ENTITY.
10. Borrower, the Guarantors/Shareholders, BOCP and EnCap III LP hereby ratify
and confirm the arbitration provisions of the November Letter Agreement.
Borrower ratifies and confirms its agreement in the November Letter
Agreement to provide to EnCap III LP and to Bank One, within five business
days after the end of every two-week period, schedules showing all of its
accounts payable (in any categories) at the end of such period and all
payments made on its accounts payable during such period, and to provide to
EnCap III LP and to Bank One, within fifteen days after the end of every
calendar month, a schedule showing all of its accounts receivable (in any
categories) at the end of such
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 12
month. Benz agrees to provide BOCP and Bank One with similar schedules, at
the same times, with respect to Benz and its subsidiaries other than
Borrower.
11. Borrower and the Guarantor/Shareholders agree that no payments of any kind
(whether repayments of debt, fees for services, or otherwise) will be made
by Borrower or Benz to any Shareholder/Guarantor other than Benz, provided
that Benz may make salary payments to Prentis Tomlinson of up to $16,667
per month (and may accrue additional salary payments of up to $5,450 per
month provided that such accrued salary may not be paid until the earlier
of January 1, 2002 and the termination of the EnCap Credit Agreement.) The
EnCap Credit Agreement is hereby amended by deleting the last two sentences
of Section 7.5 thereof.
12. EACH OF BORROWER, THE GUARANTORS/SHAREHOLDERS, ENCAP III LP, LASCO, ENCAP
LC, AND BOCP HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY
WAIVES AND RELEASES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT
IT MAY HAVE TO CLAIM OR RECOVER ANY "SPECIAL DAMAGES", AS DEFINED BELOW,
FROM ANY OTHER PARTY HERETO IN RESPECT OF ANY LITIGATION (INCLUDING
ARBITRATION PROCEEDINGS) BASED ON, OR DIRECTLY OR INDIRECTLY AT ANY TIME
ARISING OUT OF, UNDER OR IN CONNECTION WITH, ANY ACTIONS, FAILURES TO ACT,
OR EVENTS AT ANY TIME OCCURRING (WHETHER BEFORE, AT OR AFTER THE EFFECTIVE
DATE HEREOF) WHICH IN ANY WAY RELATE TO OR ARE BASED UPON ANY OF THE
FOLLOWING: (1) THE ENCAP CREDIT AGREEMENT OR ANY OTHER LOAN DOCUMENT, (2)
THE MAKING OF ANY LOANS OR ADVANCES THEREUNDER OR THE FAILURE OR REFUSAL TO
MAKE ANY LOANS OR ADVANCES THEREUNDER, (3) ANY ACTUAL, CLAIMED, THREATENED,
OR ALLEGED EXERCISE BY ANY INVESTOR ENTITY OF ANY OF ITS RIGHTS OR REMEDIES
UNDER OR IN CONNECTION WITH THE ENCAP CREDIT AGREEMENT, ANY OF THE OTHER
LOAN DOCUMENTS, OR ANY COLLATERAL, (4) ANY OTHER TRANSACTIONS OF ANY KIND
AMONG ANY OF THE BENZ ENTITIES AND ANY OF THE INVESTOR ENTITIES OR ANY
ACTIONS OR INACTIONS BY ANY INVESTOR ENTITY WITH RESPECT TO ANY BENZ
ENTITY, OR BY ANY BENZ ENTITY WITH RESPECT TO ANY
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 13
INVESTOR ENTITY, OR (5) ANY ACTUAL OR ALLEGED NEGOTIATIONS, DISCUSSIONS,
REPRESENTATIONS, WARRANTIES, PROMISES, OR OTHER UNDERTAKINGS BY ANY PARTY
HERETO IN CONNECTION WITH ANY OF THE FOREGOING. AS USED IN THIS LETTER
"SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR
PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY
PAYMENTS OR FUNDS WHICH ANY PARTY HERETO HAS IN A DOCUMENT, SECURITY OR
INSTRUMENT EXPRESSLY PROMISED TO PAY OR DELIVER.
13. EACH OF BORROWER, THE GUARANTORS/SHAREHOLDERS, ENCAP III LP, LASCO, ENCAP
LC, AND BOCP HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY
WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR DIRECTLY OR
INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN
DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH,
BEFORE OR AFTER MATURITY, AND CERTIFIES THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT
OF LITIGATION, SEEK TO ENFORCE THE WAIVERS IN THIS PARAGRAPH AND THE
FOREGOING PARAGRAPH, AND ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER
INTO THIS LETTER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY BY,
AMONG OTHER THINGS, THE ARBITRATION PROVISIONS, MUTUAL WAIVERS, AND
CERTIFICATIONS CONTAINED IN THIS PARAGRAPH AND THE TWO PRECEDING
PARAGRAPHS.
14. Borrower and the Guarantors/Shareholders hereby represent and warrant to
BOCP and EnCap III LP that this letter agreement has been duly authorized
in all respects, does not conflict with any obligation or duty owed by any
of them, and is enforceable in accordance with its terms.
15. The rights and duties of the parties to this letter agreement shall never
terminate, except to the extent expressly provided herein. No
Guarantor/Shareholder shall be deemed, under
<PAGE>
BOCP Energy Partners, L.P. EnCap
Energy Capital Fund III, L.P.
December 16, 1998
Page 14
any guaranty agreement referred to in paragraph 7 above, to have guarantied
the obligations under this letter agreement of any other party hereto. This
letter agreement shall not be considered a "Loan Document", as defined in
the EnCap Credit Agreement, except for the purposes of Article VIII thereof
(which sets out the "Events of Default" thereunder).
16. This letter agreement shall be governed by and construed under the laws of
the State of Texas and of the United States of America. This letter
agreement may be executed in multiple counterparts and by the different
parties hereto in separate counterparts, all of which shall constitute one
and the same agreement. This letter agreement shall take effect upon its
execution by all parties hereto.
Please execute a counterpart of this letter in the space provided below
to evidence your agreement to the foregoing.
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson, Jr.
--------------------------------
Prentis B. Tomlinson, Jr.,
Chief Executive Officer
BENZ ENERGY LTD.
By: /s/ Prentis B. Tomlinson, Jr.
--------------------------------
Prentis B. Tomlinson, Jr., Chairman
CALIBRE ENERGY, L.L.C.
By: /s/ Heather J. Tomlinson
--------------------------------
Heather J. Tomlinson, Manager
BENZ PROPERTIES LTD.
By: /s/ Prentis B. Tomlinson, Jr.
--------------------------------
Prentis B. Tomlinson, Jr., President
/s/ PRENTIS B. TOMLINSON, JR.
------------------------------------
PRENTIS B. TOMLINSON, JR.
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 15
TEXSTAR HOLDINGS, L.L.C.
By: /s/ Prentis B. Tomlinson, Jr.
--------------------------------
Prentis B. Tomlinson, Jr., President
/s/ PRENTIS B. TOMLINSON, JR.
------------------------------------
PRENTIS B. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE SLATTERY TRUST
/s/ PRENTIS B. TOMLINSON, JR.
------------------------------------
PRENTIS B. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE RUSTON TRUST
/s/ PRENTIS B. TOMLINSON, JR.
------------------------------------
PRENTIS B. TOMLINSON, JR., TRUSTEE
FOR AND ON BEHALF OF THE HOUSTON TRUST
/s/ HEATHER J. TOMLINSON
------------------------------------
HEATHER J. TOMLINSON, TRUSTEE
FOR AND ON BEHALF OF THE STARBUCKS TRUST
AGREED TO as of the date first written above:
BOCP ENERGY PARTNERS, L.P.
ENCAP ENERGY CAPITAL FUND III, L.P.
By: EnCap Investments L.C., Manager of each
By: ---------------------------
Robert L. Zorich, Managing Director
<PAGE>
BOCP Energy Partners, L.P.
EnCap Energy Capital Fund III, L.P.
December 16, 1998
Page 16
ENCAP INVESTMENTS L.C.
By: ---------------------------
Robert L. Zorich, Managing Director
LASCO ENERGY PARTNERS, L.P.
By: Riverhill Energy Corporation, General Partner
By: /s/ Gary L. Trotter
--------------------------
Gary L. Trotter, President
<PAGE>
EXHIBIT A
FIRST AMENDMENT TO PARTICIPATION AGREEMENT
<PAGE>
P R O M I S S O R Y N O T E
$10,000,000.00 July 17, 1997
FOR VALUE RECEIVED, after date, without grace, in the manner, on the
dates and in the amounts so herein stipulated, the undersigned, TEXSTAR
PETROLEUM, INC., a Texas corporation ("Borrower"), PROMISES TO PAY TO THE
ORDER OF BANK ONE, TEXAS, N.A., a national banking association ("Lender"), in
Houston, Harris County, Texas, the sum of TEN MILLION AND NO/100 DOLLARS
($10,000,000.00) or, if less, the aggregate unpaid principal amount of
advances made by Lender to Borrower pursuant to this Promissory Note (this
"Note"), in lawful money of the United States of America, which shall be
legal tender in payment of all debts and dues, public and private, at the
time of payment, and to pay interest on the advanced and unpaid principal
amount from date until maturity at a rate equal to the Base Rate (hereinafter
defined) plus two percent (2%) per annum ("Stated Rate"), not to exceed the
maximum non-usurious interest rate permitted by applicable law from time to
time in effect as such law may be interpreted, amended, revised, supplemented
or enacted ("Maximum Rate"), provided that if at any time the Stated Rate
exceeds the Maximum Rate then interest hereon shall accrue at the Maximum
Rate. In the event the Stated Rate subsequently decreases to a level less
than the Maximum Rate or if the Maximum Rate applicable to this Note should
subsequently be increased to a level greater than the Stated Rate, then, in
either case, interest hereon shall thereafter accrue at a rate equal to the
applicable Maximum Rate until the aggregate amount of interest accrued
through the term of this Note equals the aggregate amount of interest which
would have accrued at the Stated Rate without regard to any usury limit, at
which time interest hereon shall again accrue at the Stated Rate.
This Note is payable as follows:
1. Accrued and unpaid interest shall be due and
payable on the first day of each month, commencing
August 1, 1997.
2. All accrued and unpaid interest and unpaid
principal shall be due and payable on June 30, 2000.
All payments under this Note shall be applied first against the accrued and
unpaid interest hereon and the remainder against the principal balance hereof.
This Note is subject to mandatory prepayments, as set forth in the
Loan Agreement (hereinafter defined). In addition, Borrower may prepay this
Note, in whole or in part, at any time prior to maturity without penalty, and
interest shall cease on any amount
- --------
Initials
<PAGE>
prepaid. Any partial prepayment shall be applied toward the payment of the
principal installments last maturing on the Note, that is, in the inverse
order of maturity, without reducing the amount or time of payment of the
remaining installments.
Any check, draft, money order or other instrument given in payment
of all or any part hereof may be accepted by Lender and handled in collection
in a customary manner, but same shall not constitute payment hereof or
diminish any rights of Lender except to the extent that actual cash proceeds
of such instrument are unconditionally received by Lender.
It is agreed that time is of the essence of this agreement. In the
event of default in the payment of any installment of principal or interest
when due or in the event of any other default hereunder, Lender may
accelerate and declare this Note immediately due and payable without notice.
Any failure to exercise this option shall not constitute a waiver by Lender
of the right to exercise the same at any other time.
In the event of default in the making of any payment herein
provided, either of principal or interest, or in the event this Note is
declared due, interest hereunder shall accrue at the Maximum Rate.
Borrower hereby agrees to pay all expenses, including reasonable
attorneys' fees, all of which shall become a part of the principal hereof,
incurred by Lender if this Note is placed in the hands of an attorney for
collection or if collected by suit or through any probate, bankruptcy or any
other legal proceedings.
Interest charges will be calculated on amounts advanced hereunder on
the actual number of days the amounts are outstanding on the basis of a
365-day or 366-day year, as is applicable.
It is expressly stipulated and agreed to be the intent of Borrower
and Lender to comply with applicable Texas law governing the maximum
non-usurious rate or amount of interest payable on or in connection with this
Note (or applicable United States federal law to the extent that it permits
Lender to contract for, charge, take, reserve or receive a greater amount of
interest than under Texas law). Accordingly, it is agreed that
notwithstanding any provision to the contrary in this Note, or in any of the
documents securing payment hereof or otherwise relating hereto, no such
provision shall require the payment or permit the collection of interest at a
rate in excess of the Maximum Rate. If any excess of interest in such respect
is provided for, or shall be judicially interpreted to be so provided for, in
this Note or in any of the documents securing payment hereof or otherwise
relating hereto, or if the acceleration of the maturity of this Note or any
prepayment by Borrower results in Borrower's having paid any interest in
excess of that permitted by applicable law, then in any such event,
- --------
Initials
-2-
<PAGE>
it is the express intent of Borrower and Lender that (1) the provisions of
this paragraph shall govern and control, (2) neither Borrower nor any other
person primarily liable on this Note, nor their respective heirs, legal
representatives, successors or assigns, shall be obligated to pay the amount
of such interest to the extent that it is in excess of the Maximum Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid amount hereof or refunded to Borrower, and (4)
the provisions of this Note and any documents securing payment of this Note
shall be automatically deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so that the effective rate of interest shall be reduced to the
Maximum Rate. For the purpose of determining the maximum amount of interest
permitted to be charged or collected hereunder, all sums paid or agreed to be
paid to Lender for the use, forbearance or detention of the proceeds of this
Note shall be amortized, prorated, allocated and spread throughout the full
term of this Note so that the rate or amount of interest on account of this
Note is uniform throughout the term hereof and does not exceed the applicable
usury ceiling.
Borrower agrees that the Maximum Rate to be charged or col lected
pursuant to this Note shall be the indicated rate ceiling referred to in TEX.
REV. CIV. STAT. ANN. Art. 5069-1.04, provided that Lender may rely on other
applicable laws, including without limitation laws of the United States, for
calculation of the Maximum Rate if the application thereof results in a
greater Maximum Rate. Except as provided above, the provisions of this Note
shall be governed by the laws of the State of Texas.
Borrower and each other person who is a maker, surety, guarantor or
endorser of this Note hereby waives demand, grace, notice, presentment for
payment, notice of intention to accelerate the maturity hereof, notice of the
acceleration of the maturity hereof and protest, and agrees that this Note
and the liens securing its payment may be renewed, and the time of payment
extended, from time to time, without notice and without releasing any of the
foregoing. As additional security for all amounts owed by Borrower to Lender,
Borrower hereby grants to Lender a lien and security interest on (and the
express right of setoff against) any of Borrower's funds which may from time
to time be deposited with or in the possession of Lender.
As used in this Note, the term "Base Rate" shall mean at any time
the variable rate of interest then most recently announced publicly by Lender
(or any successor to all or substantially all of its assets) as its base rate
of interest and, without notice to Borrower or any other person, such rate of
interest shall change as and when changes in that base rate of interest are
announced.
- --------
Initials
-3-
<PAGE>
The principal of this Note represents funds which Lender may advance
to Borrower, pursuant to and subject to the Loan Agreement, from time to time
upon request of Borrower. Any part of the principal may be repaid by Borrower
and thereafter reborrowed, provided the outstanding principal amount of this
Note shall never exceed the face amount of this Note. Each advance shall
constitute a part of the principal hereof and shall bear interest from the
date of the advance. The provisions of Tex. Rev. Civ. Stat. Ann. art.
5069-15.01, ET. SEQ., as the same may be amended, shall not apply to this
Note or to any of the Security Documents.
Borrower has acquired various oil and gas properties which are
described in one or more of the Security Documents (hereinafter defined). The
acquisition of such oil and gas properties was made subject to certain
indebtedness of Texstar Petroleum, L.L.C. ("Texstar L.L.C.") to Lender,
including, without limitation, the indebtedness pursuant to that certain
$750,000.00 Promissory Note dated July 3, 1996, executed by Texstar L.L.C.
and payable to the order of Lender. A portion of the principal of this Note
represents funds which will be used to repay the indebtedness of Texstar
L.L.C. secured by the existing liens on such oil and gas properties of
Borrower, including the indebtedness pursuant to the above-described
$750,000.00 Promissory Note, and the liens securing the payment of such note,
which burden the interests acquired by Borrower, are not released, but are
hereby ratified and hereby carried forward to secure this Note.
This Note is the Revolving Note referred to in, is subject to, and
is entitled to the benefits of and security afforded by the following
documents (the "Security Documents"):
(a) that certain letter loan agreement of even date herewith
between Borrower and Lender, as that letter loan agreement may be
amended, modified or supplemented from time to time (the "Loan
Agreement");
(b) those certain Mortgages, Deeds of Trust, Assignments of
Production, Security Agreements and Financing Statements of even date
herewith, executed by Borrower for the benefit of Lender and covering
certain oil and gas properties in Jefferson Davis and Jones Counties,
Mississippi;
(c) those certain Mortgages, Collateral Assignments, Security
Agreements and Financing Statements of even date herewith, executed by
Borrower for the benefit of Lender and covering certain oil and gas
properties in Ascension and Iberville Parishes, Louisiana;
(d) that certain Mortgage, Collateral Assignment, Security
Agreement and Financing Statement dated
- --------
Initials
-4-
<PAGE>
September 14, 1995, executed for the benefit of Lender by Prentis B.
Tomlinson, Jr. (the "Trustee"), Trustee of and on behalf of The
Slattery Trust, The Ruston Trust and The Houston Trust, created by
Trust Agreements dated January 14, 1987, executed by Marjorie J.
Tomlinson, as Grantor, and Prentis B. Tomlinson, Jr., as Trustee,
covering certain oil and gas properties in Iberville Parish, Louisiana,
and filed for record under Mortgage Book 290, Entry 315 of the Mortgage
Records of Iberville Parish, Louisiana, as the same has been amended by
that certain Supplemental Mortgage, Deed of Trust and Modification
Agreement dated July 3, 1996 among the Trustee, Texstar L.L.C., Prentis
B. Tomlinson, Jr. ("Tomlinson") and Lender, filed for record under
Mortgage Book 296, Entry 168 of the Mortgage Records of Iberville
Parish, Louisiana, and by that certain Supplemental Mortgage,
Collateral Assignment, Security Agreement and Financing Statement of
even date herewith among the Trustee, Texstar L.L.C., Borrower and
Lender;
(e) that certain Mortgage, Collateral Assignment, Security
Agreement and Financing Statement dated July 3, 1996, executed by
Texstar, L.L.C. for the benefit of Lender, covering certain oil and gas
properties in Iberville Parish, Louisiana and filed for record under
Mortgage Book 296, Entry 169 of the Mortgage Records of Iberville
Parish, Louisiana, as the same has been amended by that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement dated July 24, 1996 among Texstar L.L.C., Tomlinson
and Lender, filed for record under Mortgage Book 297, Entry 102 of the
Mortgage Records of Iberville Parish, Louisiana, that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement dated August 5, 1996, among Texstar L.L.C.,
Tomlinson and Lender, filed for record under Mortgage Book 297, Entry
103 of the Mortgage Records of Iberville Parish, Louisiana, and that
certain Supplemental Mortgage, Collateral Assignment, Security
Agreement and Financing Statement of even date herewith among Texstar
L.L.C., Borrower and Lender;
(f) that certain Mortgage, Collateral Assignment, Security
Agreement and Financing Statement dated September 14, 1995, executed by
the Trustee for the benefit of Lender, covering certain oil and gas
properties in Ascension Parish, Louisiana, and filed for record under
Clerk's File No. 363153 of the Real Property Records of Ascension
Parish, Louisiana, as the same has been amended by that certain
Supplemental Mortgage, Deed of Trust and Modification Agreement dated
July 3, 1996 among the Trustee, Texstar L.L.C., Tomlinson and Lender,
- --------
Initials
-5-
<PAGE>
filed for record under Clerk's File No. 375873 of the Real Property
Records of Ascension Parish, Louisiana, that certain Supplemental
Mortgage, Collateral Assignment, Security Agreement and Financing
Statement dated August 5, 1996, among Texstar L.L.C., Tomlinson and
Lender, filed for record under Clerk's File No. 377497 of the Real
Property Records of Ascension Parish, Louisiana, and by that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement of even date herewith among the Trustee, Texstar
L.L.C., Borrower and Lender;
(g) that certain Guaranty Agreement of even date
herewith, executed by Benz Energy Ltd. for the benefit of
Lender;
(h) that certain Guaranty Agreement of even date
herewith, executed by Tomlinson for the benefit of
Lender;
(i) that certain Guaranty Agreement of even date
herewith, for the benefit of Lender, executed by Prentis B.
Tomlinson, Jr., Trustee of and on behalf of The Slattery Trust,
The Ruston Trust and The Houston Trust, created by Trust
Agreements dated January 14, 1987, executed by Marjorie J.
Tomlinson, as Grantor, and Prentis B. Tomlinson, Jr., as Trustee;
and
(j) that certain Guaranty Agreement of even date herewith,
executed by Heather M. Tomlinson, as Trustee of and on behalf of The
Starbucks Trust, created by Trust Agreement dated January 17, 1996,
executed by Karen Rae Halver, as Grantor, and Heather M. Tomlinson, as
Trustee, for the benefit of Lender.
This Note is subject to the provisions contained in the Security Documents
which, among other things, provide for the acceleration of the maturity
hereof upon the occurrence of certain events.
Borrower represents and warrants that this loan is for business,
commercial, investment or other similar purpose and not primarily for
personal, family, household or agricultural use.
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson, Jr.
-------------------------------------
Name: Prentis B. Tomlinson, Jr.
----------------------------
Title: President
----------------------------
- --------
Initials
-6-
<PAGE>
July 17, 1997
Bank One, Texas, N.A.
910 Travis
Houston, Texas 77002
Gentlemen:
This letter loan agreement (this "Agreement") confirms the mutual
agreements between TEXSTAR PETROLEUM, INC., a Texas corporation ("Borrower"),
and BANK ONE, TEXAS, N.A., a national banking association ("Lender"), in
connection with a credit facility more fully described herein.
Section 1. CREDIT FACILITY. Subject to the terms of this Agreement,
Lender agrees to lend and Borrower agrees to borrow certain amounts pursuant
to the following terms and conditions (the "Credit Facility"):
(a) NOTE: Borrower's obligation to repay the Credit Facility shall be
evidenced by its execution of a promissory note (the "Revolving Note") of
even date herewith, payable to the order of Lender, in the original
principal amount of Ten Million and No/100 Dollars ($10,000,000.00), and
in the form attached as Exhibit "A" attached hereto.
(b) MAXIMUM AVAILABILITY: The lesser of $10,000,000.00 and the
Borrowing Base (as defined in Section 5(c) hereof).
(c) ADVANCE PROCEDURES: At least one (1) Business Day (hereinafter
defined) prior to the requested date of advance (other than the initial
advance being made on the date hereof), Borrower may make a written request
to Lender for direct advances pursuant to the Credit Facility. Prior to the
requested date of advance, Lender shall advise Borrower of whether Lender
will make the advance as requested by Borrower or whether Lender will
require additional engineering reports or other documents prior to making
the requested advance.
(d) TERM: Through June 30, 2000 (the "Maturity Date").
(e) PURPOSE: To finance certain costs associated with the
acquisition and development of Borrower's oil and gas properties included
in the determination of the Borrowing Base.
(f) FACILITY FEE: Borrower shall pay to Lender a facility fee in the
amount of $5,000 plus two percent (2%) of any
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 2
increase in the Borrowing Base over $750,000.00 upon the effectiveness
of such increase.
(g) UNUSED FEE: Borrower shall pay to Lender an unused fee in an
amount equal to one-half percent (1/2%) of the average unused portion of
the Borrowing Base, payable in arrears on the last day of each calendar
quarter.
(h) BORROWING BASE REDETERMINATION FEES: Borrower shall pay to
Lender a fee of $2,500.00 for the initial determination of the Borrowing
Base and, with respect to each redetermination of the Borrowing Base,
Borrower shall pay a like amount to Lender for all engineering and
related expenses (including a reasonable charge for services performed by
employees of Lender or affiliates of Lender) incurred by Lender in
connection with such redetermination.
Section 2. INTEREST RATE AND REPAYMENT TERMS.
(a) INTEREST RATE.
(1) Subject to the provisions of paragraphs (2) and (3) of this
Section 2(a), Borrower shall pay interest on the outstanding principal
amount of the Revolving Note at two percent (2%) per annum over the Base
Rate. Accrued and unpaid interest on the Revolving Note shall be
calculated on the basis of a 365-day year of 366-day year, as the case
may be, and the actual number of days elapsed.
(2) In the event that, and for so long as, any event of default
hereunder shall have occurred and be continuing, then and in any such
event, the outstanding principal amount of the Revolving Note shall bear
interest at the Maximum Rate (as defined in the Revolving Note).
(3) Notwithstanding anything contained herein to the contrary, in no
event shall the interest rate payable with respect to the Revolving Note
exceed the Maximum Rate.
(4) As used herein, the following terms shall have the following
meanings:
(A) "Business Day" shall mean a day other than a Saturday,
Sunday, or legal holiday for commercial banks under the laws of the
State of Texas.
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 3
(B) "Base Rate" shall mean at any time the variable rate of
interest then most recently announced publicly by Lender (or any
successor to all or substantially all of its assets) as its base
rate of interest and, without notice to Borrower or any other
person, such rate of interest shall change as and when changes in
that base rate of interest are announced.
(b) REPAYMENT TERMS. Accrued and unpaid interest on the Revolving Note
shall be due and payable on August 1, 1997, and on the first day of each
month thereafter. The principal portion of the Revolving Note is subject to
mandatory prepayments as set forth in Section 5(c) hereof. The balance of
unpaid principal and accrued and unpaid interest on the Revolving Note shall
be due and payable on the Maturity Date.
Section 3. REPRESENTATION AND WARRANTIES. Borrower represents and
warrants to Lender that, as of the date hereof and as of the date of each
advance the Credit Facility:
(a) ORGANIZATION, AUTHORITY, ETC. Borrower is a corporation, duly
organized, validly existing and in good standing under the laws of the
State of Texas and is qualified to transact business in the State of
Louisiana and Mississippi, and in all other jurisdictions where such
qualification is necessary. Borrower is authorized to execute this
Agreement, the Revolving Note, and all other Loan Documents (hereinafter
defined), and those documents or instruments, when executed and
delivered will be valid and binding obligations of Borrower, enforceable
in accordance with their terms and do not violate the provisions of the
Articles of Incorporation or Bylaws of Borrower, or any contract,
agreement, law or regulation to which Borrower is subject.
(b) FINANCIAL STATEMENTS. All financial statements of Borrower
delivered to Lender are complete and correct and have been prepared in
accordance with generally accepted accounting principles, consistently
applied, and no material adverse change in the condition of Borrower,
financial or otherwise, has occurred since the date of the most recent
financial statements of Borrower in Lender's possession.
(c) INVESTMENTS, LIABILITIES AND LITIGATION. Borrower has not
made any investments, guarantees or advances or incurred any liabilities
except (i) for investments in, guarantees of, or advances to other
entities in the ordinary course of business and liabilities incurred in
the ordinary course of business
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 4
and (ii) as disclosed in the most recent financial statements of
Borrower in Lender's possession. Borrower has no litigation and there
is no legal or administrative proceeding, investigation or other action
pending or threatened against or affecting Borrower which, in any case,
involves the possibility of any judgment or liability not fully covered
by insurance.
(d) TITLE. Borrower has good title to its assets and properties,
free and clear of adverse claims, except as disclosed in the most recent
financial statements of Borrower in Lender's possession.
(e) TAX RETURNS. Borrower has filed all federal and state tax
returns required to be filed as of the date of this Agreement and has
paid all taxes or assessments related to said returns.
(f) NO DEFAULT. Borrower is not, and after giving effect to any
requested advance under the Credit Facility will not be, in default in
any respect under this Agreement, any other Loan Document, or any other
contract, agreement, or instrument to which Borrower is a party or by
which Borrower may be bound, and Borrower is in compliance with all
applicable laws and regulations.
(g) ERISA; MARGIN SECURITIES. No fact exists, including but not
limited to any reportable event or prohibited transaction (as defined
in the Employee Retirement Income Security Act of 1974, as amended
["ERISA"]) which might constitute grounds for termination of any plan of
Borrower or appointment of a trustee to administer such plan. Borrower
does not own any "margin security" or "margin stock" as defined in
Regulations G, U, or X of the Board of Governors of the Federal Reserve
System.
(h) PATENTS, ETC. Borrower has all patents, licenses, trademarks,
franchises and the like necessary to conduct its business and is not
aware of any conflict with the rights of others.
(i) NO UNTRUE STATEMENTS. Neither this Agreement nor any other
information furnished by Borrower to Lender contains any untrue statement
of a fact or omits a fact necessary to make the statements not misleading.
Section 4. REPORTING REQUIREMENTS. Borrower will deliver the following
reports to Lender:
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 5
(a) ENGINEERING REPORTS: On or before each October 1, and each
April 1, commencing October 1, 1997, an engineering report, containing
such engineering, title and other information as Lender may request,
covering all properties of Borrower forming a part of the Borrowing Base
and all other properties of Borrower that Borrower proposes to add to
the Borrowing Base.
(b) QUARTERLY FINANCIAL STATEMENTS OF BORROWER: Within sixty (60)
days after the last day of each calendar quarter, the balance sheet of
Borrower as of the last day of such quarter and the statements of
income, stockholders' equity and cash flow of Borrower for such quarter,
certified by the chief financial officer of Borrower.
(c) QUARTERLY REPORTS: Simultaneously with the financial
statements delivered pursuant to Section 4(b) above, a certificate of
the chief financial officer of Borrower (A) stating whether Borrower has
kept and performed all covenants set forth in this Agreement and the
other Loan Documents and, if Borrower has not, specifying the default
and corrective action, if any, and (B) containing a calculation to
verify compliance with the financial covenants set forth herein.
(d) FINANCIAL STATEMENTS OF BENZ ENERGY: Within sixty (60) days
after the last day of each calendar quarter, the balance sheet of Benz
Energy (hereinafter defined) as of the last day of such quarter and the
statements of income, stockholders' equity and cash flow of Benz Energy
for such quarter, certified by the chief financial officer of Benz
Energy, and within one hundred twenty (120) days after the last day of
each calendar year, the balance sheet of Benz Energy as of the last day
of such year and the statements of income, stockholders' equity and cash
flow of Benz Energy for such year, certified without qualification by
independent certified public accountants acceptable to Lender.
(e) FINANCIAL STATEMENTS OF OTHER GUARANTORS: Within ninety (90)
days after the last day of each calendar year, the balance sheet
(including specifically, a listing in reasonable detail of contingent
liabilities) of each Guarantor other than Benz Energy, as of the last
day of such year, and the statements of income and cash flow of such
Guarantor for such year, certified by such Guarantor.
(f) NOTICE OF DEFAULT. Within three (3) days after the occurrence
of a default, or an event which with the
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 6
giving of notice, the passage of time, or both, would constitute a
default, under this Agreement, notice of such default (or event)
together with Borrower's plans to correct such default.
(g) NOTICE OF LIABILITIES. Within five (5) days of notice
thereof, written notice of any liability outside the ordinary course
of business (whether actual or contingent) in which the liability or
claimed liability of Borrower is greater than $100,000.00.
(h) OTHER INFORMATION. Such other information as Lender may
request from time to time.
Section 5. AFFIRMATIVE COVENANTS.
(a) COMPLIANCE AND PERFORMANCE. Borrower will comply with all statutes
and governmental regulations and will pay all taxes, assessments,
governmental charges, claims for labor and the like. Borrower will maintain
its existence as a Texas corporation and will remain qualified to do business
in the State of Louisiana and Mississippi, and in all other jurisdictions in
which it is required to be qualified and will maintain its properties in good
and workable condition at all times. Borrower will perform all obligations
under this Agreement, and under all indentures, agreements, and contracts by
which Borrower is bound. Borrower will maintain with financially sound and
reputable insurers acceptable to Lender, insurance with respect to its
properties and business against such liabilities, casualties, risks and
contingencies as is customary for its business naming Lender as loss payee
with respect to any insurance covering collateral securing the loans
hereunder, and will, upon Lender's request, provide satisfactory evidence of
such insurance. Upon Lender's request, Borrower will provide Lender and/or
Lender's representatives access to Borrower's books, records and properties
at such times during ordinary business hours as Lender may request.
(b) REIMBURSEMENT; INDEMNITY. Borrower will reimburse Lender for all
its costs and expenses in connection with this Agreement, including, without
limitation, any and all legal fees and expenses incurred in the preparation
or enforcement of this Agreement or any other Loan Document. Borrower agrees
to indemnify and hold Lender harmless from any costs or expense incurred by
Lender as a result of the provisions of federal, state and local environmental
laws and ordinances, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, as such laws and
ordinances may relate to Borrower or any property or operations of Borrower.
(c) BORROWING BASE. The aggregate outstanding indebtedness pursuant to
the Credit Facility shall never exceed the maximum
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 7
amount determined by Lender, in its sole discretion, in accordance with its
normal customary oil and gas lending parameters and procedures (the
"Borrowing Base"). The initial Borrowing Base shall be Seven Hundred Twenty
Thousand and No/100 Dollars ($720,000.00). The Borrowing Base shall be
reduced by $30,000.00 effective the first day of each month commencing
August 1, 1997. The amount of the Borrowing Base will be redetermined by
Lender as of each Borrowing Base Redetermination Date, taking into
consideration such matters as Lender, in its sole discretion, deems relevant.
The Borrowing Base shall be increased or decreased, as the case may be,
immediately upon each Borrowing Base Redetermination Date. As used herein,
the term "Borrowing Base Redetermination Date" shall mean each November 1 and
each May 1, commencing November 1, 1997, as well as any other date on which
Lender, in its sole discretion, redetermines the Borrowing Base. Upon any
change in the Borrowing Base, Lender shall redetermine, in its sole
discretion, the amount by which the Borrowing Base will reduce effective the
first day of each month thereafter. If the amount outstanding under the
Credit Facility at any time is greater than the Borrowing Base at such time,
Borrower shall, within thirty (30) days after written notice thereof from
Lender, make a prepayment on the Revolving Note in an amount sufficient to
reduce the outstanding amount thereof to an amount not more than the
Borrowing Base.
(d) SECURITY. The Revolving Note and the other indebtedness hereunder
shall be secured by a first and prior lien on the oil and gas properties of
Borrower included in the determination of the Borrowing Base (collectively,
the "Mortgaged Property").
(e) OPERATING ACCOUNTS. Borrower shall maintain with Lender all of
Borrower's operating accounts and will deposit into such accounts all
proceeds of any property forming a portion of the Borrowing Base. Borrower
hereby authorizes Lender to debit, without notice to Borrower, from any
operating or other deposit account maintained by Borrower with lender, all
sums which may become due or owing under the terms of this Agreement or the
Revolving Note, including without limitation, all payments of principal and
interest as they become due under the Revolving Note.
(f) GUARANTEE. The Revolving Note and the other indebtedness hereunder
shall be guaranteed by Prentis B. Tomlinson, Jr. ("Tomlinson"), Benz Energy
Ltd., a Yukon Territory corporation ("Benz Energy"), Prentis B. Tomlinson,
Jr., Trustee of and on behalf of The Slattery Trust, the Ruston Trust and the
Houston Trust, created by Trust Agreements dated January 14, 1987, executed
by Marjorie J. Tomlinson, as Grantor, and Prentis B. Tomlinson, Jr., as
Trustee, and Heather M. Tomlinson, Trustee of and on behalf
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 8
of The Starbucks Trust, created by Trust Agreement dated January 17, 1996,
executed by Karen Rae Halver, as Grantor and Heather M. Tomlinson, as
Trustee. The foregoing guarantors are individually referred to herein as a
"Guarantor" and collectively referred to herein as the "Guarantors".
Section 6. NEGATIVE COVENANTS. Unless waived by Lender in writing:
(a) INVESTMENTS, LOANS AND ADVANCES. Borrower will not make
investments in or loans or advances to any company, person or entity,
except those made in the ordinary course of its business and investments
in obligations of the United States of America or certificates of deposit
issued by Lender.
(b) MERGER AND CONSOLIDATION. Borrower will not merge or
consolidate with any person or create any subsidiaries, enter into any
partnerships or acquire any other entity. Borrower may enter into joint
ventures in the ordinary course of business.
(c) DIVIDENDS AND DISTRIBUTIONS. Borrower will not declare or pay
any dividends or distributions in cash or otherwise or purchase or redeem
any stock of Borrower.
(d) SALE OF ASSETS. Borrower will not sell, transfer or otherwise
dispose of any of its assets or enter into any arrangement accomplishing
substantially the same purpose, except that the foregoing restrictions
shall not apply to transactions in the ordinary course of business.
(e) INDEBTEDNESS. Borrower will not incur, create, assume or
guarantee in any manner any indebtedness, obligation or liability (direct
or contingent), except (i) for indebtedness under the Credit Facility,
and (ii) up to $100,000.00 in purchase money indebtedness incurred by
Borrower in the ordinary course of its business.
(f) LIENS. Borrower will not create or permit to exist any lien,
security interest or other encumbrance on any of its properties or assets
except (1) liens in favor of Lender, (2) liens for taxes or other
governmental charges not yet due or contested in good faith, (3) liens
in connection with workers' compensation, unemployment insurance or
other such obligations, (4) legal or equitable encumbrances deemed to
exist by reason of this or other negative pledge covenants, (5) legal
or equitable encumbrances resulting from legal proceedings, (6) vendors',
mechanics', or other like liens, or
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 9
(7) servitudes, easements and other similar property rights.
(g) BASIC BUSINESS. Borrower will not change or add to its basic line
of business from that on the date hereof.
(h) TRANSACTIONS WITH AFFILIATES. Borrower will not enter into any
agreement or transaction with any affiliate of Borrower unless the terms and
provisions thereof are no less favorable to Borrower than what Borrower could
obtain from an unrelated third party.
(i) HEDGING. Borrower will not enter into any agreement by which
Borrower hedges the prices to be received by Borrower for any oil or gas
produced by or attributable to the interests of Borrower.
Section 7. FINANCIAL COVENANTS.
(a) Borrower will not at any time permit its Tangible Net Worth to be
less than $2,500,000.00 PLUS all net proceeds of any issuance of any equity
of Borrower after February 28, 1997, PLUS seventy-five (75%) of positive net
income for each fiscal quarter of Borrower, commencing with respect to the
fiscal quarter ended June 30, 1997.
(b) Borrower will not at any time permit its Debt Coverage Ratio to be
less than 1.25 to 1.00.
(c) Borrower will not at any time permit its Debt to Worth Ration to be
greater than 2.00 to 1.00.
(d) For the purposes of this Agreement, the following terms shall have
the following meanings:
(1) "Cash Flow" shall mean net income before taxes, plus
depreciation, depletion, amortization and other non-cash charges.
(2) "Debt Coverage Ratio" shall mean the ratio of (i) Cash Flow
plus interest expense for the preceding four (4) calendar quarters
(except that for the calculations made with respect to any period prior
to the quarter ending June 30, 1998, the Cash Flow and interest expense
for such period shall be annualized) to (ii) projected Debt Service for
the succeeding four (4) calendar quarters.
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 10
(3) "Debt Service" shall mean the sum of current maturities of
long-term indebtedness plus required interest payments on all
indebtedness.
(4) "Debt to Worth Ratio" shall mean the ratio of total debt
to Tangible Net Worth.
(5) "Tangible Net Worth" shall mean the amount by which total
assets (excluding the amount of any write up of any assets over the
depreciated costs, intangible assets such as good will and patent
rights and all notes or accounts receivable due from affiliates)
exceeds total liabilities.
All terms not expressly defined shall be defined in accordance with generally
accepted accounting principles. All determinations under this Agreement shall
be made in accordance with generally accepted accounting principles
consistently applied, except where expressly provided to the contrary. All
references to a preceding period shall mean the period ending as of the end
of the month, quarter or fiscal year for which the applicable report is
delivered. All references to a period immediately following shall mean the
period beginning on the first day of the month, quarter or fiscal year
following the end of the period for which the applicable report is delivered.
Section 8. DEFAULT AND REMEDIES. It shall constitute an event of
default hereunder if (a) Borrower fails to make when due any payment on the
Revolving Note or on any other indebtedness hereunder, (b) Borrower fails to
comply with any provision of Section 7 hereof and such violation remains
uncured for a period of thirty (30) days, (c) Borrower fails to perform any
of its other agreements contained herein, (d) Borrower defaults under the
terms or provisions of any other Loan Document or any other agreement,
instrument or document executed in connection with or as security for the
Credit Facility, (e) any representation or warranty of Borrower proves to
have been untrue when made, (f) any petition in bankruptcy is filed by
Borrower, or any order granting relief under any bankruptcy or receivership
law is filed with respect to Borrower, (g) Borrower permits a monetary
judgment against it to remain undischarged for a period in excess of thirty
(30) days, or (h) Borrower dissolves. Upon the occurrence of an event of
default specified in clause (f) above, immediately, and upon the occurrence
of any other event of default hereunder at the option of Lender, without
notice to Borrower or any other person, the obligation of Lender to make any
advances (or deemed advances) under the Credit Facility shall be terminated,
all indebtedness of Borrower to Lender shall be immediately due and payable
and Lender may take any other actions as may be permitted by this Agreement,
any other Loan Document or any other document or instrument evidencing or
securing the Credit Facility. Borrower expressly waives presentment,
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 11
demand, protest, notice of protest, or other notice of dishonor of any kind
including, without limitation, notice of intent to accelerate the maturity of
the Revolving Note and other indebtedness hereunder and notice of
acceleration of the maturity of the Revolving Note and other indebtedness
hereunder.
Section 9. CLOSING. The initial funding of the Credit Facility shall
be subject to the payment upon execution hereof of all legal fees and
expenses incurred by Gardere Wynne Sewell & Riggs, L.L.P., counsel to Lender,
in connection with the preparation, negotiation and execution of this
Agreement and the other Loan Documents, as well as the receipt by Lender of
the following documents, instruments and certificates (the "Loan Documents"),
each of which shall be satisfactory in form and substance to Lender and its
counsel:
(a) a copy of this Agreement executed by Borrower;
(b) the Revolving Note executed by Borrower;
(c) a Mortgage, Collateral Assignment, Security Agreement and
Financing Statement covering certain oil and gas properties of Borrower
in Ascension and Iberville Parishes, Louisiana, executed by Borrower;
(d) a Mortgage, Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement executed by Borrower, covering certain
oil and gas properties of Borrower in Jefferson Davis and Jones
Counties, Mississippi;
(e) a Supplemental Mortgage, Collateral Assignment, Security
Agreement and Financing Statement executed by Borrower with respect to
each parish in which any property presently pledged to Lender and
included in the determination of the Borrowing Base is located, covering
all of such properties;
(f) a Guaranty Agreement executed by each Guarantor;
(g) all financing statements or amendments thereto requested by
Lender, executed by Borrower;
(h) various Transfer Orders and Instructions to Pipeline
Companies, executed in blank by Borrower;
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 12
(i) a Notice of Final Agreement executed by Borrower and the
Guarantors;
(j) certificate of the Secretary of Borrower, certifying as to the
Articles of Incorporation and Bylaws of Borrower, resolutions of the
board of directors of Borrower, and the signatures of authorized officers
of Borrower;
(k) resolutions of the board of directors of Borrower;
(l) resolutions of the board of directors of Benz Energy;
(m) a Certificate of Existence issued by the Secretary of State of
Texas with respect to Borrower;
(n) a Certificate of Existence and Good Standing issued by the
Registrar of Corporations of the Yukon Territory with respect to Benz
Energy;
(o) a Certificate of Good Standing issued by the Comptroller of
Public Accounts of the State of Texas with respect to Borrower;
(p) Certificates of Authority and Good Standing with respect to
Borrower, issued by the Secretary of State of Louisiana and the
Secretary of State of Mississippi;
(q) an opinion of counsel of Borrower and each Guarantor; and
(r) such other documents and instruments as may be reasonably
requested by Lender or its counsel.
Section 10. CHANGE IN OWNERSHIP OR MANAGEMENT. If at any time while
Borrower is indebted to Lender or Lender has a commitment to Borrower
hereunder, any change in the ownership of the Borrower occurs, whatever
class, or if any member of senior management of Borrower ceases to hold the
position he or she currently holds with Borrower or perform the functions he
or she currently performs, then in any such event, Borrower shall give Lender
written notice thereof and Lender shall have the option for a period of
thirty (30) days from receipt of said notice to declare all indebtedness of
Borrower to Lender immediately due and payable.
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 13
Section 11. DISCLOSURE. Any additions or exceptions applicable to the
terms of this Agreement, the representations and warranties of Borrower
herein or the covenants hereof shall only be those disclosed in writing to
Lender concurrently with the execution hereof.
Section 12. MISCELLANEOUS.
(a) NOTICES. All notices hereunder (including, without limitation, any
notice of default) shall be in writing or by telecopy or telegram, confirmed
in writing, and shall be sufficient in all respects if delivered or sent by
registered or certified mail to the address set forth on the signature page
of this Agreement. Either party may, by proper written notice hereunder to
the other party, change the address to which notices shall thereafter be sent.
(b) SUCCESSORS AND ASSIGNS. All covenants and agreements herein
contained by or on behalf of Borrower shall bind its successors and assigns
and shall inure to the benefit of Lender and its successors and assigns.
(c) RENEWALS AND EXTENSIONS. All provisions of this Agreement shall
apply with equal force and effect to each and all renewals and extensions, in
whole or in part, of the Revolving Note or the Credit Facility.
(d) USURY AND SAVINGS CLAUSE. Nothing contained in this Agreement or in
any of the other Loan Documents shall be construed to obligate Borrower,
under any circumstances whatsoever, to pay interest in excess of the maximum
non-usurious interest rate applicable to Borrower. In the event that any sums
received from Borrower are at any time under applicable law deemed to be in
excess of the maximum non-usurious amount Lender could collect under
applicable usury law, the effective rate of interest on the loans hereunder
shall be reduced to and be the maximum non-usurious interest rate permitted
under applicable law and Borrower and all sureties, endorsers and guarantors
shall accept as their sole remedy under such circumstances either the return
of any sums of interest which may have been collected and which produced a
rate of interest in excess of the applicable maximum non-usurious interest
rate or the application of those sums as a credit against the unpaid
principal amount of the loan, whichever remedy may be elected by Lender.
(e) HEADINGS. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way affect, limit,
amplify or modify the terms and provisions hereof.
(f) NO WAIVER; REMEDIES CUMULATIVE. No course of dealing on the part of
Lender or its members, managers or employees, or any
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 14
failure or delay by Lender with respect to exercising any right, power, or
privilege of Lender under this Agreement or any other Loan Document shall
operate as a waiver thereof. The rights and remedies of Lender under this
Agreement and the other Loan Documents shall be cumulative and the exercise
or partial exercise of any such right or remedy shall not preclude the
exercise of any other right or remedy.
(g) GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
(h) INVALID PROVISIONS. In the event any one or more of the provisions
contained in this Agreement or any of the other Loan Documents shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or the other Loan Documents. Furthermore, in lieu
of such invalid, illegal or unenforceable provision, there shall
automatically be added a provision as similar in terms to such invalid,
illegal or unenforceable provision as may be possible and as may be valid,
legal and enforceable.
Section 13. ENTIRE AGREEMENT. THIS WRITTEN LOAN AGREEMENT, TOGETHER WITH
THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
If this evidences your understanding of the agreements herein, please
execute in the space provided.
Sincerely,
TEXSTAR PETROLEUM, INC.
By /s/ Prentis B. Tomlinson, Jr.
-----------------------------------
Name: Prentis B. Tomlinson, Jr.
--------------------------------
Title: President
-------------------------------
Address for Notice:
1000 Louisiana, Suite 3950
Houston, Texas 77002
Attention: Todd E. Grabois
Telephone No.: (713) 739-0351
Telecopy No.: (713) 739-8402
<PAGE>
Bank One, Texas, N.A.
July 17, 1997
Page 15
ACCEPTED AND AGREED TO
BANK ONE, TEXAS, N.A.
By: /s/ Gary L. Stone
--------------------------------
Name: Gary L. Stone
--------------------------
Title: Senior Vice President
-------------------------
Address for Notice:
910 Travis, 7th Floor
Houston, Texas 77002
Attention: Gary Stone
Telephone No.: (713) 751-6148
Telecopy No.: (713) 751-7894
<PAGE>
EXHIBIT A
P R O M I S S O R Y N O T E
----------------------------
$10,000,000.00 July 17, 1997
FOR VALUE RECEIVED, after date, without grace, in the manner, on the
dates and in the amounts so herein stipulated, the undersigned, TEXSTAR
PETROLEUM, INC., a Texas corporation ("Borrower"), PROMISES TO PAY TO THE
ORDER OF BANK ONE, TEXAS, N.A., a national banking association ("Lender"), in
Houston, Harris County, Texas, the sum of TEN MILLION AND NO/100 DOLLARS
($10,000,000.00) or, if less, the aggregate unpaid principal amount of
advances made by Lender to Borrower pursuant to this Promissory Note (this
"Note"), in lawful money of the United States of America, which shall be
legal tender in payment of all debts and dues, public and private, at the
time of payment, and to pay interest on the advanced and unpaid principal
amount from date until maturity at a rate equal to the Base Rate (hereinafter
defined) plus two percent (2%) per annum ("Stated Rate"), not to exceed the
maximum non-usurious interest rate permitted by applicable law from time to
time in effect as such law may be interpreted, amended, revised, supplemented
or enacted ("Maximum Rate"), provided that if at any time the Stated Rate
exceeds the Maximum Rate then interest hereon shall accrue at the Maximum
Rate. In the event the Stated Rate subsequently decreases to a level less
than the Maximum Rate or if the Maximum Rate applicable to this Note should
subsequently be increased to a level greater than the Stated Rate, then, in
either case, interest hereon shall thereafter accrue at a rate equal to the
applicable Maximum Rate until the aggregate amount of interest accrued
through the term of this Note equals the aggregate amount of interest which
would have accrued at the Stated Rate without regard to any usury limit, at
which time interest hereon shall again accrue at the Stated Rate.
This Note is payable as follows:
1. Accrued and unpaid interest shall be due and payable on the
first day of each month, commencing August 1, 1997.
2. All accrued and unpaid interest and unpaid principal shall
be due and payable on June 30, 2000.
All payments under this Note shall be applied first against the accrued and
unpaid interest hereon and the remainder against the principal balance hereof.
This Note is subject to mandatory prepayments, as set forth in the
Loan Agreement (hereinafter defined). In addition, Borrower may prepay this
Note, in whole or in part, at any time prior to maturity without penalty, and
interest shall cease on any amount
- --------
Initials
<PAGE>
prepaid. Any partial prepayment shall be applied toward the payment of the
principal installments last maturing on the Note, that is, in the inverse
order of maturity, without reducing the amount or time of payment of the
remaining installments.
Any check, draft, money order or other instrument given in payment
of all or any part hereof may be accepted by Lender and handled in collection
in a customary manner, but same shall not constitute payment hereof or
diminish any rights of Lender except to the extent that actual cash proceeds
of such instrument are unconditionally received by Lender.
It is agreed that time is of the essence of this agreement. In the
event of default in the payment of any installment of principal or interest
when due or in the event of any other default hereunder, Lender may
accelerate and declare this Note immediately due and payable without notice.
Any failure to exercise this option shall not constitute a waiver by Lender of
the right to exercise the same at any other time.
In the event of default in the making of any payment herein
provided, either of principal or interest, or in the event this Note is
declared due, interest hereunder shall accrue at the Maximum Rate.
Borrower hereby agrees to pay all expenses, including reasonable
attorneys' fees, all of which shall become a part of the principal hereof,
incurred by Lender if this Note is placed in the hands of an attorney for
collection or if collected by suit or through any probate, bankruptcy or any
other legal proceedings.
Interest charges will be calculated on amounts advanced hereunder on
the actual number of days the amounts are outstanding on the basis of a
365-day or 366-day year, as is applicable.
It is expressly stipulated and agreed to be the intent of Borrower
and Lender to comply with applicable Texas law governing the maximum
non-usurious rate or amount of interest payable on or in connection with this
Note (or applicable United States federal law to the extent that it permits
Lender to contract for, charge, take, reserve or receive a greater amount of
interest than under Texas law). Accordingly, it is agreed that notwithstanding
any provision to the contrary in this Note, or in any of the documents
securing payment hereof or otherwise relating hereto, no such provision shall
require the payment or permit the collection of interest at a rate in excess
of the Maximum Rate. If any excess of interest in such respect is provided
for, or shall be judicially interpreted to be so provided for, in this Note
or in any of the documents securing payment hereof or otherwise relating
hereto, or if the acceleration of the maturity of this Note or any prepayment
by Borrower results in Borrower's having paid any interest in excess of that
permitted by applicable law, then in any such event,
- --------
Initials -2-
<PAGE>
it is the express intent of Borrower and Lender that (1) the provisions of
this paragraph shall govern and control, (2) neither Borrower nor any other
person primarily liable on this Note, nor their respective heirs, legal
representatives, successors or assigns, shall be obligated to pay the amount
of such interest to the extent that it is in excess of the Maximum Rate,
(3) any such excess which may have been collected shall be either applied as
a credit against the then unpaid amount hereof or refunded to Borrower, and
(4) the provisions of this Note and any documents securing payment of this
Note shall be automatically deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of any
new document, so that the effective rate of interest shall be reduced to the
Maximum Rate. For the purpose of determining the maximum amount of interest
permitted to be charged or collected hereunder, all sums paid or agreed to be
paid to Lender for the use, forbearance or detention of the proceeds of this
Note shall be amortized, prorated, allocated and spread throughout the full
term of this Note so that the rate or amount of interest on account of this
Note is uniform throughout the term hereof and does not exceed the applicable
usury ceiling.
Borrower agrees that the Maximum Rate to be charged or collected pursuant
to this Note shall be the indicated rate ceiling referred to in TEX. REV.
CIV. STAT. ANN. Art. 5060-1.04, provided that Lender may rely on other
applicable laws, including without limitation laws of the United States, for
calculation of the Maximum Rate if the application thereof results in a
greater Maximum Rate. Except as provided above, the provisions of this Note
shall be governed by the laws of the State of Texas.
Borrower and each other person who is a maker, surety, guarantor or
endorser of this Note hereby waives demand, grace, notice, presentment for
payment, notice of intention to accelerate the maturity hereof, notice of the
acceleration of the maturity hereof and protest, and agrees that this Note and
the liens securing its payment may be renewed, and the time of payment
extended, from time to time, without notice and without releasing any of the
foregoing. As additional security for all amounts owed by Borrower to Lender,
Borrower hereby grants to Lender a lien and security interest on (and the
express right of setoff against) any of Borrower's funds which may from time
to time be deposited with or in the possession of Lender.
As used in this Note, the term "Base Rate" shall mean at any time the
variable rate of interest then most recently announced publicly by Lender (or
any successor to all or substantially all of its assets) as its base rate of
interest and, without notice to Borrower or any other person, such rate of
interest shall change as and when changes in that base rate of interest are
announced.
- -------------
Initials -3-
<PAGE>
The principal of this Note represents funds which Lender may advance to
Borrower, pursuant to and subject to the Loan Agreement, from time to time
upon request of Borrower. Any part of the principal may be repaid by Borrower
and thereafter reborrowed, provided the outstanding principal amount of this
Note shall never exceed the face amount of this Note. Each advance shall
constitute a part of the principal hereof and shall bear interest from the
date of the advance. The provisions of Tex. Rev. Civ. Stat. Ann.
art. 5069-15.01, ET. SEQ., as the same may be amended, shall not apply to
this Note or to any of the Security Documents.
Borrower has acquired various oil and gas properties which are described
in one or more of the Security Documents (hereinafter defined). The
acquisition of such oil and gas properties was made subject to certain
indebtedness of Texstar Petroleum, L.L.C. ("Texstar L.L.C.") to Lender,
including, without limitation, the indebtedness pursuant to that certain
$750,000.00 Promissory Note dated July 3, 1996, executed by Texstar L.L.C.
and payable to the order of Lender. A portion of the principal of this Note
represents funds which will be used to repay the indebtedness of Texstar
L.L.C. secured by the existing liens on such oil and gas properties of
Borrower, including the indebtedness pursuant to the above-described
$750,000.00 Promissory Note, and the liens securing the payment of such note,
which burden the interests acquired by Borrower, are not released, but are
hereby ratified and hereby carried forward to secure this Note.
This Note is the Revolving Note referred to in, is subject to, and is
entitled to the benefits of and security afforded by the following documents
(the "Security Documents"):
(a) that certain letter loan agreement of even date herewith between
Borrower and Lender, as that letter loan agreement may be amended,
modified or supplemented from time to time (the "Loan Agreement");
(b) those certain Mortgages, Deeds of Trust, Assignments of
Production, Security Agreements and Financing Statements of even date
herewith, executed by Borrower for the benefit of Lender and covering
certain oil and gas properties in Jefferson Davis and Jones Counties,
Mississippi;
(c) Those certain Mortgages, Collateral Assignments, Security
Agreements and Financing Statements of even date herewith, executed by
Borrower for the benefit of Lender and covering certain oil and gas
properties in Ascension and Iberville Parishes, Louisiana;
(d) that certain Mortgage, Collateral Assignment, Security
Agreement and Financing Statement dated
- ---------------
Initials -4-
<PAGE>
September 14, 1995, executed for the benefit of Lender by Prentis B.
Tomlinson, Jr. (the "Trustee"), Trustee of and on behalf of The Slattery
Trust, The Ruston Trust and The Houston Trust, created by Trust
Agreements dated January 14, 1987, executed by Marjorie J. Tomlinson, as
Grantor, and Prentis B. Tomlinson, Jr., as Trustee, covering certain oil
and gas properties in Iberville Parish, Louisiana, and filed for record
under Mortgage Book 290, Entry 315 of the Mortgage Records of Iberville
Parish, Louisiana, as the same has been amended by that certain
Supplemental Mortgage, Deed of Trust and Modification Agreement dated
July 3, 1996 among the Trustee, Texstar L.L.C., Prentis B. Tomlinson,
Jr. ("Tomlinson") and Lender, filed for record under Mortgage Book 296,
Entry 168 of the Mortgage Records of Iberville Parish, Louisiana, and by
that certain Supplemental Mortgage, Collateral Assignment, Security
Agreement and Financing Statement of even date herewith among the
Trustee, Texstar L.L.C., Borrower and Lender;
(e) that certain Mortgage, Collateral Assignment, Security
Agreement and Financing Statement dated July 3, 1996, executed by
Texstar L.L.C. for the benefit of Lender, covering certain oil and gas
properties in Iberville Parish, Louisiana and filed for record under
Mortgage Book 296, Entry 169 of the Mortgage Records of Iberville Parish,
Louisiana, as the same has been amended by that certain Supplemental
Mortgage, Collateral Assignment, Security Agreement and Financing
Statement dated July 24, 1996 among Texstar L.L.C., Tomlinson and
Lender, filed for record under Mortgage Book 297, Entry 102 of the
Mortgage Records of Iberville Parish, Louisiana, that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement dated August 5, 1996, among Texstar L.L.C.,
Tomlinson and Lender, filed for record under Mortgage Book 297, Entry
103 of the Mortgage Records of Iberville Parish, Louisiana, and that
certain Supplemental Mortgage, Collateral Assignment, Security Agreement
and Financing Statement of even date herewith among Texstar L.L.C.,
Borrower and Lender;
(f) that certain Mortgage, Collateral Assignment, Security
Agreement and Financing Statement dated September 14, 1995, executed by
the Trustee for the benefit of Lender, covering certain oil and gas
properties in Ascension Parish, Louisiana, and filed for record under
Clerk's File No. 363153 of the Real Property Records of Ascension
Parish, Louisiana, as the same has been amended by that certain
Supplemental Mortgage, Deed of Trust and Modification Agreement dated
July 3, 1996 among the Trustee, Texstar L.L.C., Tomlinson and Lender,
- --------
Initials -5-
<PAGE>
filed for record under Clerk's File No. 375873 of the Real Property
Records of Ascension Parish, Louisiana, that certain Supplemental
Mortgage, Collateral Assignment, Security Agreement and Financing
Statement dated August 5, 1996, among Texstar L.L.C., Tomlinson and
Lender, filed for record under Clerk's File No. 377497 of the Real
Property Records of Ascension Parish, Louisiana, and by that certain
Supplemental Mortgage, Collateral Assignment, Security Agreement and
Financing Statement of even date herewith among the Trustee, Texstar
L.L.C., Borrower and Lender;
(g) that certain Guaranty Agreement of even date herewith,
executed by Benz Energy Ltd. for the benefit of Lender;
(h) that certain Guaranty Agreement of even date herewith,
executed by Tomlinson for the benefit of Lender;
(i) that certain Guaranty Agreement of even date herewith, for the
benefit of Lender, executed by Prentis B. Tomlinson, Jr., Trustee of and
on behalf of The Slattery Trust, The Ruston Trust and The Houston Trust,
created by Trust Agreements dated January 14, 1987, executed by Marjorie
J. Tomlinson, as Grantor, and Prentis B. Tomlinson, Jr., as Trustee; and
(j) that certain Guaranty Agreement of even date herewith,
executed by Heather M. Tomlinson, as Trustee of and on behalf of The
Starbucks Trust, created by Trust Agreement dated January 17, 1996,
executed by Karen Rae Halver, as Grantor, and Heather M. Tomlinson, as
Trustee, for the benefit of Lender.
This Note is subject to the provisions contained in the Security Documents
which, among other things, provide for the acceleration of the maturity
hereof upon the occurrence of certain events.
Borrower represents and warrants that this loan is for business,
commercial, investment or other similar purpose and not primarily for
personal, family, household or agricultural use.
TEXSTAR PETROLEUM, INC.
By:
-----------------------------------
Name:
----------------------------
Title:
----------------------------
-6-
<PAGE>
Exhibit 10.20
ESCROW AGREEMENT
THIS AGREEMENT made the 15th day of September, 1997.
AMONG:
TEXSTAR PETROLEUM, L.L.C, of 1000 Louisiana, Suite 5500, Houston,
Texas 77002
SLATTERY TRUST, of P.O. Box 61268, Houston, Texas 77002-1268
RUSTON TRUST, of P.O. Box 61268, Houston, Texas 77002-1268
HOUSTON TRUST, of P.O. Box 61268, Houston, Texas 77002-1268
STARBUCKS TRUST, of P.O. Box 61268, Houston, Texas 77002-1268
BOONE PETROLEUM INC., c/o 1305 - 1090 West Georgia Street,
Vancouver, British Columbia V6E 3V7
C'EST LA VIE ENTERPRISES, c/o 1305 - 1090 West Georgia Street,
Vancouver, British Columbia V6E 3V7
(hereinafter jointly and severally called the "Security Holders")
OF THE FIRST PART
AND:
MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated
under the laws of Canada authorized to carry on business in all
provinces of Canada
(hereinafter called the "Trustee")
OF THE SECOND PART
AND:
BENZ ENERGY LTD., a corporation continued under the laws of the
Yukon Territory and having an office at Suite 1305 - 1090 West
Georgia Street, Vancouver, British Columbia V6E 3V7
(hereinafter called the "Issuer")
OF THE THIRD PART
WHEREAS the Security Holders presently own or are about to receive
securities of the Issuer;
AND WHEREAS in furtherance of complying with the requirements of
the Ontario Securities Commission (the "Commission"), the Security Holders
are desirous of depositing in escrow certain securities of the Issuer owned
or to be received by them;
AND WHEREAS the Trustee has agreed to undertake and perform its
duties according to the terms and conditions hereof;
NOW THEREFORE this Agreement witnesseth that in consideration of
the aforesaid agreements, and of the sum of one dollar ($1.00) now paid by
the parties hereto, each to the other (receipt of which sum the parties do
hereby respectively acknowledge each to the other) the Security Holders
jointly and severally covenant and agree with each other and with the Issuer
and the Trustee as follows:
<PAGE>
-2-
1. For the purposes of this agreement the following terms shall have the
following meanings:
(a) "acceptance date" means the date of the receipt issued by the
Director of the Commission pursuant to Section 61 of the SECURITIES
ACT (Ontario) for the final prospectus of the Issuer dated on or
about September 16, 1997 qualifying the issuance of securities upon
the exercise of previously issued special warrants; and
(b) "Commission" means the Ontario Securities Commission.
2. Each of the Security Holders hereby places and deposits in escrow with
the Trustee those of its securities of the Issuer which are represented by
the certificates described or referred to in Schedule "A" hereto (the
"Escrowed Shares") and hereby undertakes and agrees forthwith to deliver
those certificates (including any replacement securities or certificates if
and when such are issued or allotted) to the Trustee for deposit in escrow.
3. The parties hereby agree that except as otherwise set out herein, the
Escrowed Shares and the beneficial ownership of or any interest in them and
the certificates representing them (including any replacement securities or
certificates) shall not be sold, assigned, hypothecated, pledges, charged,
alienated, released from escrow, transferred within escrow, or otherwise in
any manner dealt with, without the express prior consent in writing of the
Commission. The foregoing shall not prevent any transfer or assignment which
may be required by reason of the death or bankruptcy of any Security Holder,
in which case the Trustee shall hold the said securities and certificates in
escrow subject to provisions of this agreement, for whatever person or
company shall be legally entitled to be or become the registered owner
thereof. Notwithstanding the foregoing, in circumstances where one or more
persons or companies, each being at arm's length (as such term is defined in
the Income Tax Act (Canada)) to the Security Holder, (the "Offeror") makes
either (i) a bona fide take-over bid by way of circular (as contemplated by
the Ontario or British Columbia Securities Acts) or (ii) a bona fide take-over
bid (as contemplated under the rules of The Toronto Stock Exchange or the
Vancouver Stock Exchange) through the facilities of The Toronto Stock
Exchange or Vancouver Stock Exchange, to acquire all the common shares of the
Issuer and to all holders of common shares of the Issuer on the same terms,
the Trustee may, upon receiving written direction from the Security Holder,
tender to any such take-over bid the share certificates representing the
number of Escrowed Shares the Security Holder desires to have deposited under
such take-over bid (the "Deposited Escrowed Shares") provided that the
Trustee receives from the Offeror either before or concurrently with the
tendering of the Deposited Escrowed Shares a certificate of an authorized
signing officer of the Offeror to the effect that the terms and conditions of
the take-over bid have been met or satisfied and that the Offeror is
irrevocably obligated to, and will, take up and pay for all securities
deposited under the take-over bid; however, for greater certainty, the
Trustee shall take appropriate steps to ensure that if all the terms and
conditions of the take-over bid are not met or satisfied or all the
securities duly deposited thereunder are not taken up and paid for, the
Deposited Escrowed Shares shall not be taken up or paid for and shall remain in
escrow subject to the terms and provisions of this Agreement.
4. It is agreed that the Escrowed Shares will be released from escrow from
time to time in accordance with the provisions of Article six of Ontario
Securities Commission Policy 5.2 ("Policy 5.2"), with the following
additional qualifications:
(a) all automatic share releases (ie releases based upon expiry of
time) pursuant to Section 6.5 of Policy 5.2 will be made in
accordance with Schedule "B" hereto. The consent of the
Commission is not required for automatic releases in accordance
with Schedule "B" hereto and the Trustee is hereby authorized to
release the certificates representing the Escrowed Shares to the
Security Holders in the amounts and at the times set out in
Schedule "B" hereto; and
(b) all earned share releases pursuant to Sections 6.6 and 6.7 of
Policy 5.2 will be made to the Security Holders other than Boone
Petroleum Inc. and C'est La Vie Enterprises, pro rata in
accordance with the number of securities deposited in escrow as
shown on Schedule "A" hereto.
5. The Security Holders hereby direct the Trustee to retain their
respective securities and the certificates (including any replacement
securities or certificates) representing the same and not to do or cause
anything to be done to release the same from escrow or to allow any sale,
assignment, hypothecation, pledge, charge or alienation
<PAGE>
- 3 -
thereof except with the prior written consent of the Commission. The Trustee
accepts the responsibilities placed on it hereby and agrees to perform the
same in accordance with the terms hereof.
6. If during the period in which any of the said securities are retained
in escrow pursuant hereto, any cash dividend is received by the Trustee in
respect of the escrowed securities, any such cash dividend shall be forthwith
paid or transferred to the respective Security Holders entitled thereto. If
during the period in which any of the said securities are retained in escrow
pursuant hereto, any share dividend or other distribution of securities is
received by the Trustee in respect of the escrowed securities, subject to
Policy 5.2, any certificates representing such share dividend or securities
must be held by the Trustee on and subject to the terms of this agreement. If
during the period in which any of the said securities are retained in escrow
pursuant hereto, any share dividend or other distribution of securities is
received by a Security Holder in respect of the escrowed securities, any
certificates representing such share dividend or securities must be forthwith
deposited with the Trustee to be held by the Trustee on and subject to the
terms of this agreement.
7. All voting rights attached to the escrowed securities shall at all
times be exercised by the respective registered owners thereof and the
Trustee shall take all necessary steps from time to time to permit the
registered holders to exercise such rights.
8. The Security Holders hereby agree that any escrowed securities of the
Issuer remaining in escrow on the day which is the tenth anniversary of the
acceptance date, shall be donated to and cancelled by the Issuer without
payment by the Issuer of any consideration therefor. In order to effect such
donation and cancellation, the Security Holders do hereby nominate,
constitute and appoint the president of the Issuer from time to time as their
true and lawful attorney with full power of substitution to execute in the
name of and on behalf of the Security Holders such deeds, documents and other
instruments as may be necessary or desirable to give full force and effect to
the provisions of this agreement insofar as it relates to the cancellation of
escrowed securities as aforesaid. This power of attorney shall be coupled
with an interest and shall survive the death or incapacity of the Security
Holders. Where an application is made by the Issuer or the Security Holders
to the Commission for an extension of the time by which the escrowed
securities are subject to donation and cancellation then this power of
attorney shall be suspended while such application is being processed but
shall be immediately reinstated for use upon a decision being rendered by the
Commission in respect of such application and only in accordance with the
decision of the Commission.
9. The Security Holders and the Issuer hereby jointly and severally agree
to and do hereby release and indemnify and save harmless the Trustee from and
against all claims, suits, demands, costs, damages and expenses which may be
occasioned by reason of the Trustee's compliance in good faith with the terms
hereof.
10. The Issuer hereby acknowledges the terms and conditions of this
agreement and agrees to take all reasonable steps to facilitate its
performance.
11. If the Trustee should wish to resign, it shall give at least six months
notice to the Issuer and the Commission whereupon the Issuer may, with the
written consent of the Commission, by writing appoint another Trustee in its
place and such appointment shall be binding on the Security Holders and the
new Trustee shall assume and be bound by the obligations of the Trustee
hereunder.
12. The written consent of the Commission to a release from escrow of all
or any part of the escrowed securities shall terminate this agreement only in
respect of those securities so released. For greater certainty, this clause
does not apply to securities transferred within escrow.
13. Any Security Holder may hypothecate, pledge or charge any or all
securities owned by it and deposited in escrow hereunder to a financial
institution, provided that prior to such hypothecation, pledge or charge,
such financial institution enters into an agreement with the Trustee and the
Issuer whereby it agrees to be bound by the provisions of this agreement and
acknowledges that the securities so hypothecated, pledged or charged may
not be sold, transferred or otherwise dealt with except in accordance with
the provisions of this agreement.
14. This agreement may be executed in several parts in the same form and
such parts as so executed shall together form one original agreement, and
such parts if more than one shall be read together and construed as if all
the signing parties hereto had executed one copy of this agreement.
<PAGE>
- 4 -
15. Wherever the singular or masculine are used throughout this agreement,
the same shall be construed as being the plural or feminine or neuter where
the context so requires.
16. This agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the Province of
Ontario. Each of the parties hereto irrevocably attorns to the jurisdiction
of the courts of the Province of Ontario.
17. This agreement shall enure to the benefit of and be binding upon the
parties hereto, their and each of their heirs, executors, administrators,
successors and assigns.
IN WITNESS whereof the parties hereto have executed these presents the
day and year first above written.
The Corporate Seal of TEXSTAR PETROLEUM, )
L.L.C. was hereunto affixed in the presence of: )
)
)
)
/s/ [ILLEGIBLE], President )
- ------------------------------------------------- )
Authorized Signatory )
)
)
/s/ [ILLEGIBLE], Treasurer )
- ------------------------------------------------- )
Authorized Signatory )
)
)
)
SLATTERY TRUST
Per:
/s/ [ILLEGIBLE], Trustee
- -------------------------------------------------
Authorized Signatory
RUSTON TRUST
Per:
/s/ [ILLEGIBLE], Trustee
- -------------------------------------------------
Authorized Signatory
HOUSTON TRUST
Per:
/s/ [ILLEGIBLE], Trustee
- -------------------------------------------------
Authorized Signatory
STARBUCKS TRUST
Per:
/s/ HEATHER J. TOMLINSON, Trustee
- -------------------------------------------------
Authorized Signatory
<PAGE>
- 5 -
The Corporate Seal of BOONE PETROLEUM INC. )
was hereunto affixed in the presence of: )
)
/s/ [ILLEGIBLE] )
- ------------------------------------------------- )
Authorized Signatory )
)
)
- ------------------------------------------------- )
Authorized Signatory )
)
The Corporate Seal of C'EST LA VIE )
ENTERPRISES was hereunto affixed in the presence )
of: )
)
/s/ [ILLEGIBLE] )
- ------------------------------------------------- )
Authorized Signatory )
)
)
- ------------------------------------------------- )
Authorized Signatory )
)
The Corporate Seal of BENZ ENERGY LTD. was )
hereunto affixed in the presence of: )
)
/s/ [ILLEGIBLE] )
- ------------------------------------------------- )
Authorized Signatory )
)
)
- ------------------------------------------------- )
Authorized Signatory )
)
The Corporate Seal of MONTREAL TRUST )
COMPANY OF CANADA was hereunto affixed in the )
presence of: )
)
/s/ [ILLEGIBLE] )
- ------------------------------------------------- )
Authorized Signatory )
)
)
/s/ [ILLEGIBLE] )
- ------------------------------------------------- )
Authorized Signatory )
)
<PAGE>
SCHEDULE "A"
<TABLE>
<CAPTION>
NUMBER OF CERTIFICATE
NAME OF SECURITY HOLDER BENEFICIAL OWNER SECURITIES NUMBER
- ------------------------- ------------------------ ---------- -----------
<S> <C> <C> <C>
Texstar Petroleum, L.L.C. Prentis Tomlinson 361,304 5012
174,217 N/A(2)
Slattery Trust Prentis Tomlinso 4,972,500 4337
552,500 4336
Ruston Trust Prentis Tomlinson Family 765,000 4335
Member 85,000 4334
Houston Trust Prentis Tomlinson Family 343,000 4217
Member 765,000 4333
85,000 4332
Starbucks Trust Prentis Tomlinson Family 765,000 4331
Member 85,000 4330
Boone Petroleum Inc. Donald Busby 1,600,000 4046
1,601,681 N/A(2)
1,222,988 N/A(1)(2)
C'est La Vie Enterprises Donald Busby Family
Member 127,590 N/A(1)
----------
TOTAL: 13,505,780
----------
----------
</TABLE>
- --------------------
(1) A total of 1,350,578 shares will be released from escrow on the
acceptance date as shown on Schedule "B" herein. These 1,350,578 shares
are comprised of 127,590 shares held by C'est La Vie Enterprises and
1,222,988 shares held by Boone Petroleum Inc.
(2) Maintained in book certificate form by Montreal Trust Company of Canada.
No certificate will be issued.
<PAGE>
SCHEDULE "B"
AUTOMATIC RELEASES
<TABLE>
<CAPTION>
NUMBER RELEASED
NUMBER OF ---------------------------------------------
NAME OF SECURITY HOLDER BENEFICIAL OWNER SECURITIES YEAR 0(1) YEAR 1(2) YEAR 2(3) YEAR 3(4) BALANCE
- ------------------------- ------------------------------ ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Texstar Petroleum, L.L.C. Prentis Tomlinson 535,521 160,757 374,764
Slattery Trust Prentis Tomlinson 5,523,000 675,289 299,475 4,550,236
Ruston Trust Prentis Tomlinson Family Trust 850,000 187,110 662,890
Houston Trust Prentis Tomlinson Family Trust 1,193,000 428,000 765,000
Starbucks Trust Prentis Tomlinson Family Trust 850,000 450,000 400,000
Boone Petroleum Inc. Donald Busby 4,424,669 1,222,988 675,289 1,726,392 800,000
C'est La Vie Enterprises Donald Busby Family Member 127,590 127,590
---------- --------- --------- --------- --------- ---------
TOTAL: 13,503,780 1,350,578 1,350,578 2,025,867 2,025,867 6,752,890
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</TABLE>
- --------------------
(1) Refer to acceptance date.
(2) Refer to first anniversary of acceptance date.
(3) Refer to second anniversary of acceptance date.
(4) Refer to third anniversary of acceptance date.
<PAGE>
Exhibit 10.21
VOLUNTARY POOLING AGREEMENT
THIS AGREEMENT DATED FOR REFERENCE THE 18th DAY OF APRIL, 1997.
BETWEEN:
BENZ EQUITIES LTD., a Yukon company having an office at
1305-1090 West Georgia Street;
(the "Issuer")
AND:
C.M. OLIVER & COMPANY LIMITED 2nd Floor, 750 West
Georgia Street, Vancouver, B.C.;
(the "Agent")
AND:
THE UNDERSIGNED SECURITYHOLDERS of BENZ EQUITIES LTD.,
(the "Pooled Securityholders")
AND.
MONTREAL TRUST COMPANY OF CANADA, having an office at
510 Burrard Street, Vancouver, British Colombia, V6C 3B9;
(the "Trustee")
WHEREAS the Pooled Securityholders are the legal and beneficial owners of
certain common shares of the Issuer presently owned by them or to be acquired by
them upon exercise of special warrants, and are desirous of placing in a pool
the number of shares set opposite their names in Schedule "A" hereto attached
(the "Shares"), upon and subject to the terms and conditions hereinafter more
particularly set out;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and
in consideration of the sum of Ten Dollars ($10) now paid by the parties hereto,
each to the other, the receipt and sufficiency of which is hereby acknowledged,
and in further consideration of the mutual covenants and conditions hereinafter
contained, the parties hereto agree (the "Agreement") as follows:
1. In this Agreement:
(a) "Agency Agreement" means the agreement dated March 5, 1997 whereby the
Issuer appointed C.M. Oliver & Company Limited as its agent to offer
1,910,000 special warrants;
<PAGE>
(b) "Closing Date" means the date of the final closing of the private
placement of special warrants offered pursuant to the Agency Agreement;
(c) "Market Price" means at any date the weighted average price at which
the Issuer's common shares have traded during 20 trading days at a
daily volume of not less than 50,000 shares during a period of 30
consecutive trading days ending on the fifth trading day before such
date, on the Vancouver Stock Exchange, or if the Issuer's common
shares are listed on the Toronto Stock Exchange, then on the Toronto
Stock-Exchange. The weighted average price per share shall be
determined by dividing the aggregate sale price of all such shares
sold on the applicable exchange during the 20 trading days by the
total number of shares sold; and
(d) "Offering Price" means the price at which the special warrants of the
Issuer are sold pursuant to the Agency Agreement-,
2. The Pooled Securityholders hereby severally agree each with the other and
with the Trustee that they will respectively deliver or cause to be delivered
to the Trustee certificates for their securities of the Issuer as set out in
the said Schedule "A" to be held by the Trustee and released pro rata to the
Pooled Securityholders, subject to paragraphs 3 and 5, on the basis set forth
in Schedule "B".
3. With respect to those securities pooled hereunder which are convertible or
exercisable for shares of the Company (the "Convertible Securities"), the
Trustee is hereby authorized to release from pool any of such Convertible
Securities against delivery, for deposit hereunder, of the common shares of
the Company issued upon the conversion or exercise of the released
Convertible Securities.
4. Prentis B. Tomlinson, Jr. ("Tomlinson") confirms that 2,400,000 of the
shares and of the warrants which are being deposited hereunder by Boone
Petroleum Inc. ("Boone") and DNG Capital Corp. ("DNG") are subject to option
to Tomlinson until October 31, 1998 and will remain in pool after exercise of
all or any portion of such option by him until release on the basis of the
schedule set forth in Schedule "B". In the event of exercise of all or a
portion of the option by Tomlinson, written notice of such exercise will be
delivered to the Trustee by Boone, DNG and Tomlinson together with an amended
Schedule "B".
5. If at any time prior to three years after the Closing Date, the Market
Price of the Issuer's Shares equals at least twice the Offering Price (a
"Triggering Event"), the release schedule in paragraph 2 will be accelerated
by one year. After the first acceleration of the release schedule, a
Triggering Event for any further one year accelerations will be the Market
Price equalling at least twice the Market Price on which the previous
acceleration was based. The Trustee will be provided with written
notification from the Company and the Agent of any Triggering Event.
6. Each of the Pooled Securityholders are entitled to a letter or receipt from
the Trustee stating the number of Shares represented by certificates held for
him by the Trustee subject to the terms of this Agreement, but such letter or
receipt shall not be assignable.
7. Except with the written consent of the Agent and the Company:
(a) the Pooled Securityholders will not sell, deal in, assign, or
transfer in any manner whatsoever or agree to sell, deal in, assign
or transfer in any manner whatsoever any of the Shares or beneficial
ownership of or any interest in them; and
-2-
<PAGE>
(b) the Trustee shall not accept or acknowledge any transfer, assignment,
declaration of trust or any other document evidencing a change in
legal and beneficial ownership or of interest in the Shares, except
as may be required by reason of the death or bankruptcy of any one or
more of the Pooled Securityholders, subject to this Agreement for
whatever person or persons, firm or corporation may thus become
legally entitled thereto.
8. This Agreement shall enure to the benefit of and be binding upon the parties
hereto and each of their heirs, executors, administrators, successors and
permitted assigns.
9. This Agreement may be executed in several parts in the same form and such
part as so executed shall together constitute one original agreement, and such
parts, if more than one, shall be read together and construed as if all the
signing parties hereto had executed one copy of this Agreement.
10. The parties hereto agree that in consideration of the Trustee agreeing to
act as Trustee as aforesaid, the Pooled Securityholders do hereby covenant and
agree from time to time and at all times hereinafter well and truly to save,
defend, and keep harmless and fully indemnify the Trustee, its successors and
assigns, from and against all loss, costs, charges, damages and expenses which
the Trustee, its successors or assigns, may at any time or times hereafter bear,
sustain. suffer or be put to for or by reason or on account of its acting as
Trustee pursuant to this Agreement.
11. It is further agreed by and between the parties hereto and, without
restricting the foregoing indemnity, that in case proceedings should hereafter
be taken in any Court respecting the shares hereby pooled, the Trustee shall not
be obliged to defend any such action or submit its rights to the Court until it
shall have been indemnified by other good and sufficient security in addition to
the indemnity hereinbefore given against costs of such proceedings.
12. It is further agreed by and between the parties hereto that this Agreement
shall be construed in accordance with the laws of the Province of British
Columbia. The parties hereby attorn to the jurisdiction of the courts of
competent jurisdiction of the Province of British Columbia.
IN WITNESS WHEREOF the Pooled Securityholders and the Trustee have executed the
presents as from the day and year first above written.
THE CORPORATE SEAL of BENZ )
EQUITIES LTD. was hereunto affixed in the )
presence of: )
)
/s/ Nick DeMare ) c/s
- ----------------------------------------- )
)
- ----------------------------------------- )
C.M. OLIVER & COMPANY LIMITED
Per:
/s/ C. N. O'Brian
- -----------------------------------------
-3-
<PAGE>
THE CORPORATE SEAL of MONTREAL )
TRUST COMPANY OF CANADA was )
hereunto affixed in the presence of: )
) c/s
/s/ [ILLEGIBLE] )
- ------------------------------------ )
)
/s/ [ILLEGIBLE] )
- ------------------------------------ )
THE CORPORATE SEAL of TEXSTAR )
PETROLEUM, L.L.C. was hereunto affixed )
in the presence of: )
) c/s
)
- ------------------------------------ )
)
)
- ------------------------------------ )
THE CORPORTE SEAL of CALIBRE )
ENERGY, L.L.C. was hereunto affixed )
in the presence of: )
) c/s
)
- ------------------------------------ )
)
)
- ------------------------------------ )
THE CORPORATE SEAL of BOONE )
PETROLEUM INC. was hereunto affixed )
in the presence of: )
) c/s
)
- ------------------------------------ )
)
)
- ------------------------------------ )
THE CORPORATE SEAL of DNG )
CAPITAL CORP. was hereunto affixed )
in the presence of: )
) c/s
)
- ------------------------------------ )
)
)
- ------------------------------------ )
-4-
<PAGE>
SIGNED, SEALED & DELIVERED )
by PRENTIS B. TOMLINSON, JR. )
in the presence of: )
)
/s/ Nick DeMare ) /s/ Prentis B. Tomlinson, Jr.
- ---------------------------------- ) ---------------------------------
Signature of Witness ) PRENTIS B. TOMLINSON, JR.
)
Name of Witness: Nick Demare )
----------------- )
)
Address of Witness: )
-------------- )
)
- ---------------------------------- )
)
Occupation of Witness: CA )
------------- )
SIGNED, SEALED & DELIVERED )
by TODD GRABOIS in the presence of: )
)
/s/ Lynn Ganey ) /s/ Todd Grabois
- ---------------------------------- ) ---------------------------------
Signature of Witness ) TODD GRABOIS
)
Name of Witness: Lynn Ganey )
------------------ )
)
- ---------------------------------- )
)
Occupation of Witness: )
------------ )
-5-
<PAGE>
SIGNED, SEALED & DELIVERED )
by PRENTIS TOMLINSON, TRUSTEE )
OF THE SLATTERY TRUST in the )
presence of: )
)
/s/ Nick DeMare ) /s/ Prentis Tomlinson
- ---------------------------------- ) ---------------------------------
Signature of Witness ) TRUSTEE OF THE SLATTERY TRUST
)
Name of Witness: Nick Demare )
------------------ )
)
Address of Witness: )
--------------- )
)
Occupation of Witness: CA )
------------ )
SIGNED, SEALED & DELIVERED
by PRENTIS TOMLINSON, TRUSTEE
OF THE RUSTON TRUST in the presence
of:
/s/ Nick DeMare ) /s/ Prentis Tomlinson
- ---------------------------------- ) ---------------------------------
Signature of Witness ) TRUSTEE OF THE RUSTON TRUST
)
Name of Witness: Nick DeMare )
------------------ )
)
Address of witness: )
--------------- )
)
- ---------------------------------- )
)
Occupation of Witness: CA )
------------ )
-6-
<PAGE>
SIGNED, SEALED & DELIVERED
by PRENTIS TOMLINSON, TRUSTEE
OF THE HOUSTON TRUST in the
presence of:
/s/ Nick DeMare ) /s/ Prentis Tomlinson
- ---------------------------------- ) ---------------------------------
Signature of Witness ) TRUSTEE OF THE HOUSTON TRUST
)
Name of Witness: Nick DeMare )
------------------ )
)
Address of Witness: )
--------------- )
)
- ---------------------------------- )
)
Occupation of Witness: CA )
------------ )
SIGNED, SEALED & DELIVERED
by HEATHER TOMLINSON, TRUSTEE
OF THE STARBUCKS TRUST in the
presence of.
/s/ Lynn Ganey ) /s/ Heather Tomlinson
- ---------------------------------- ) ---------------------------------
Signature of Witness ) TRUSTEE OF THE STARBUCKS TRUST
)
Name of Witness: Lynn Ganey )
------------------ )
)
Address of Witness: )
--------------- )
)
- ---------------------------------- )
)
Occupation of Witness: )
------------ )
-7-
<PAGE>
SIGNED, SEALED & PELIVERED )
by ROBERT NOVAK in the presence of: )
)
/s/ Lynn Ganey ) /s/ Robert Novak
- ----------------------------------- ) ---------------------------------
Signature of Witness ) ROBERT NOVAK
)
Name of Witness: Lynn Ganey )
------------------- )
)
Address of Witness: )
---------------- )
)
- ----------------------------------- )
)
Occupation of Witness: )
------------- )
)
-8-
<PAGE>
SCHEDULE"A"
<TABLE>
<CAPTION>
FULL NAME AND ADDRESS NUMBER OF SIGNATURE OF
OF SECURITYHOLDER SECURITIES SECURITYHOLDER
- --------------------- ---------------- -----------------------------
<S> <C> <C>
Texstar Petroleum, L.L.C. 361,304 Texstar Petroleum, L.L.C.
1000 Louisiana, Ste 5500 shares Per:
Houston, Texas 77002 /s/ Prentis B. Tomlinson, Jr.
-----------------------------
Prentis B. Tomlinson, Jr.
Calibre Energy, L.L.C. 331,193(1) Calibre Energy, L.L.C.
1000 Louisiana, Ste 3900 special warrants Per:
Houston, Texas 77002 /s/ Prentis B. Tomlinson, Jr.
-----------------------------
Prentis B. Tomlinson, Jr.
Boone Petroleum Inc. 3,200,000(2)(3) Boone Petroleum Inc.
1305-1090 West Georgia shares/warrants Per:
Vancouver, B.C. V6E 3V7 /s/ Donald Busby
-----------------------------
Donald Busby
DNG Capital Corp. 800,000(4)(5) DNG Capital Corp.
1305-1090 West Georgia shares/warrants Per:
Vancouver, B.C. V6E 3V7 /s/ Nick Demare
-----------------------------
Nick DeMare
Todd Grabois 267,750
9919 Ashridge Park, shares
Spring, Texas 77379 /s/ Todd Grabois
-----------------------------
Todd Grabois
Slattery Trust 4,972,500 Trustee of the Slattery Trust
P.O. Box 61268 shares /s/ Prentis B. Tomlinson, Jr.
Houston, Texas 77208-1268 -----------------------------
Prentis B. Tomlinson, Jr.
Ruston Trust 765,000 Trustee of the Ruston Trust
P.O. Box 61268 shares /s/ Prentis B. Tomlinson, Jr.
Houston, Texas 77208-1268 -----------------------------
Prentis B. Tomlinson, Jr.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Houston Trust 765,000 Trustee of the Houston Trust
P.O. Box 61268 shares /s/ Prentis B. Tomlinson, Jr.
Houston, Texas 77208-1268 -----------------------------
Prentis B. Tomlinson, Jr.
Starbucks Trust 765,000 Trustee of the Starbucks Trust
P.O. Box 61268 shares /s/ Heather Tomlinson
Houston, Texas 77208-1268 -----------------------------
Heather Tomlinson
Robert Novak 114,750
6326 Willgus Trail shares /s/ Robert Novak
Lane, Texas 77066 ---------- -----------------------------
Robert Novak
TOTAL: 12,342,497
----------
----------
</TABLE>
- --------------------
(1) Convertible into 331,193 shares on the earlier of the 5th business day
following receipt of the Company's prospectus qualifying the securities
issuable on exercise of the special warrants and February 11, 1998.
(2) Comprised of 1,600,000 shares and 1,600,000 warrants exercisable for
1,600,000 shares on or before July 29, 1998.
(3) 1,600,000 shares and 300,000 warrants exercisable for 300,000 shares on
or before July 29, 1998 are subject to option to Prentis Tomlinson, Jr.
as per paragraph 4 of the Voluntary Pooling Agreement.
(4) Comprised of 400,000 shares and 400,000 warrants exercisable for 400,000
shares on or before July 29, 1998.
(5) 400,000 shares and 100,000 warrants exercisable for 100,000 shares on or
before July 29, 1998 are subject to option to Prentis Tomlinson, Jr. as
per paragraph 4 of the Voluntary Pooling Agreement.
-10-
<PAGE>
SCHEDULE"B"
<TABLE>
<CAPTION>
RELEASE DATES(1)
----------------------------------------------------------------
NAME OF SECURITYHOLDER APRIL 18,1998 APRIL 18,1999 APRIL 18, 2000
- -------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Texstar Petroleum, L.L.C. 0 0 361,304
Calibre Energy, L.L.C. 99,224 99,224 132,745
Boone Petroleum Inc.(2) 390,000 390,000 520,000
Boone Petroleum Inc.(2)(3) 570,000 570,000 760,000
DNG Capital Corp.(2) 90,000 90,000 120,000
DNG Capital Corp.(2)(3) 150,000 150,000 200,000
Todd Grabois 80,325 80,325 107,100
Slattery Trust 723,779 1,975,725 2,272,996
Ruston Trust 229,500 229,500 306,000
Houston Trust 229,500 229,500 306,000
Starbucks Trust 229,500 229,500 306,000
Robert Novak 34,425 34,425 45,900
------------- ------------- --------------
TOTAL 2,826,253 4,078,199 5,438,045
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
- --------------------
(1) Subject to acceleration pursuant to paragraph 5 of the Voluntary Pooling
Agreement.
(2) All shares pooled by this securityholder to be released prior to release
of any warrants.
(3) Subject to option to Prentis Tomlinson, Jr. as per paragraph 4
of this Voluntary Pooling Agreement.
-11-
<PAGE>
Exhibit 10.22
AMENDMENT TO VOLUNTARY POOLING AGREEMENT
THIS AGREEMENT DATED FOR REFERENCE THE 11th DAY OF SEPTEMBER, 1997.
BETWEEN:
BENZ ENERGY LTD., a Yukon company having an office at 1305-1090
West Georgia Street;
(the "Issuer")
AND:
C.M. OLIVER & COMPANY LIMITED, 2nd Floor, 750 West Georgia Street,
Vancouver, B.C.;
(the "Agent")
AND:
THE UNDERSIGNED SECURITYHOLDERS OF BENZ ENERGY LTD.,
(the "Pooled Securityholders")
AND:
MONTREAL TRUST COMPANY OF CANADA, having an office at 510 Burrard
Street, Vancouver, British Columbia, V6C 3B9;
(the "Trustee")
WHEREAS:
A. The Pooled Securityholders agreed to place in pool a total of 12,342,497
shares of the Issuer (the "Securities"), presently owned or to be acquired
upon exercise of warrants, pursuant to a voluntary pooling agreement dated
for reference April 18, 1997 (the "Voluntary Pooling Agreement");
B. Certain of the Pooled Securityholders have since been required by the
Ontario Securities Commission ("OSC") to place some of the Securities into
escrow pursuant to an escrow agreement to be administered by the OSC (the
"OSC Escrow Agreement");
C. The Agent and the Issuer have agreed to release from the Voluntary
Pooling Agreement certain of the Shares in order to facilitate the OSC Escrow
Agreement and to amend the Voluntary Pooling Agreement accordingly;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises
and in consideration of the sum of Ten Dollars ($10) now paid by the parties
hereto, each to the other, the receipt and sufficiency of which is hereby
acknowledged, and in further consideration of the mutual
<PAGE>
covenants and conditions hereinafter contained, the parties hereto agree
(the "Amendment") to amend the Voluntary Pooling Agreement as follows:
1. The following Securities held by the following Pooled Securityholders
shall be released from the Voluntary Pooling Agreement and the Trustee is
hereby authorized and directed to return the certificates representing
such securities to the respective Pooled Securityholders:
<TABLE>
<CAPTION>
POOLED SECURITYHOLDER SECURITIES
--------------------- ----------
<S> <C>
Texstar Petroleum, L.L.C. 361,304 shares
Calibre Energy, L.L.C. 331,193 special warrants
Boone Petroleum Inc. 1,600,000 shares and 1,600,000 warrants
DNG Capital Corp. 400,000 warrants
Slattery Trust 4,972,500 shares
Ruston Trust 765,000 shares
Houston Trust 765,000 shares
Starbuck's Trust 765,000 shares
</TABLE>
2. Schedules A and B of the Voluntary Pooling Agreement are replaced in
their entirety with the Schedules A and B attached to this Amendment.
3. With respect to 400,000 warrants and 1,600,000 warrants (the "Warrants")
held by DNG Capital Corp ("DNG") and Boone Petroleum ("Boone"),
respectively, DNG and Boone each agree that:
(a) any shares issued to them upon the exercise of such warrants (the
"Warrant Shares") will not be sold by them for a period of 90 days
from the date that the last of the receipts is issued by the
applicable Securities Commissions for the Company's final prospectus
(the "Receipt Date").
(b) on the dates which are 30, 60 and 90 days from the Receipt Date, DNG
and Boone will provide to the Issuer and the Agent confirmation from
the member firms at which their Warrants and/or Warrant Shares are
lodged, that the Warrants and/or Warrant Shares have not been sold.
-2-
<PAGE>
4. The parties hereto agree that except as specifically amended herein, the
Voluntary Pooling Agreement remains in full force and effect.
IN WITNESS WHEREOF the Pooled Securityholders and the Trustee have executed
the presents as from the day and year first above written.
THE CORPORATE SEAL of BENZ )
ENERGY LTD. was hereunto affixed in the )
presence of: )
) c/s
/s/ Nick DeMare )
- ---------------------------------------- )
)
)
- ---------------------------------------- )
C.M. OLIVER & COMPANY LIMITED
Per:
- ----------------------------------------
THE CORPORATE SEAL of MONTREAL )
TRUST COMPANY OF CANADA was )
hereunto affixed in the presence of: )
) c/s
)
- ---------------------------------------- )
)
)
- ---------------------------------------- )
THE CORPORATE SEAL of TEXSTAR )
PETROLEUM, L.L.C. was hereunto affixed )
in the presence of: )
) c/s
)
- --------------------------------------- )
)
/s/ Todd Grabois, Treasurer )
- --------------------------------------- )
THE CORPORATE SEAL of CALIBRE )
ENERGY, L.L.C. was hereunto affixed in )
the presence of: )
) c/s
)
- ---------------------------------------- )
)
/s/ Todd Grabois, Treasurer )
- --------------------------------------- )
-3-
<PAGE>
THE CORPORATE SEAL of BOONE )
PETROLEUM INC. was hereunto affixed in )
the presence of: )
) c/s
/s/ Donald Busby )
- ---------------------------------------- )
)
)
- ---------------------------------------- )
THE CORPORATE SEAL of DNG )
CAPITAL CORP. was hereunto affixed in )
the presence of: )
) c/s
/s/ Nick DeMare )
- ---------------------------------------- )
)
)
- ---------------------------------------- )
SIGNED, SEALED & DELIVERED )
by PRENTIS B. TOMLINSON, JR. )
in the presence of: )
)
Lorraine N. Howard ) /s/ Prentis B. Tomlinson, Jr.
- --------------------------------------- ) -----------------------------
Signature of Witness ) PRENTIS B. TOMLINSON, JR
)
Name of Witness: Lorraine N. Howard )
------------------------ )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
----------------- )
SIGNED, SEALED & DELIVERED )
by TODD GRABOIS in the presence of: )
)
Lorraine N. Howard )
- ---------------------------------------- ) /s/ Todd Grabois
Signature of Witness ) -----------------------------
) TODD GRABOIS
Name of Witness: Lorraine N. Howard )
----------------------- )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
----------------- )
-4-
<PAGE>
SIGNED, SEALED & DELIVERED )
by PRENTIS TOMLINSON, TRUSTEE )
OF THE SLATTERY TRUST in the )
presence of: )
) /s/ Prentis Tomlinson
Lorraine N. Howard ) -----------------------------
- ---------------------------------------- ) TRUSTEE OF THE SLATTERY TRUST
Signature of Witness )
)
Name of Witness: Lorraine N. Howard )
------------------------ )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
----------------- )
SIGNED, SEALED & DELIVERED )
by PRENTIS TOMLINSON, TRUSTEE )
OF THE RUSTON TRUST in the presence )
of: )
) /s/ Prentis Tomlinson
Lorraine N. Howard ) -----------------------------
- ---------------------------------------- ) TRUSTEE OF THE RUSTON TRUST
Signature of Witness )
)
Name of Witness: Lorraine N. Howard )
------------------------ )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
----------------- )
-5-
<PAGE>
SIGNED, SEALED & DELIVERED )
by PRENTIS TOMLINSON, TRUSTEE )
OF THE HOUSTON TRUST in the )
presence of: )
) /s/ Prentis Tomlinson
Lorraine N. Howard ) ----------------------------
- ---------------------------------------- ) TRUSTEE OF THE HOUSTON TRUST
Signature of Witness )
)
Name of Witness: Lorraine N. Howard )
------------------------ )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
----------------- )
SIGNED, SEALED & DELIVERED )
by HEATHER TOMLINSON, TRUSTEE )
OF THE STARBUCKS TRUST in the )
presence of: )
) /s/ Heather J. Tomlinson
Lorraine N. Howard ) ----------------------------
- ---------------------------------------- ) TRUSTEE OF THE STARBUCKS
Signature of Witness ) TRUST
)
Name of Witness: Lorraine N. Howard )
------------------------ )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
------------------ )
-6-
<PAGE>
SIGNED, SEALED & DELIVERED )
by ROBERT NOVAK in the presence of: ) /s/ Robert Novak
) ----------------------------
Lorraine N. Howard ) ROBERT NOVAK
- ---------------------------------------- )
Signature of Witness )
)
Name of Witness: Lorraine N. Howard )
------------------------ )
)
Address of Witness: 1000 Louisiana St. )
--------------------- )
)
Ste. 3950, Houston, TX 77002 )
- ---------------------------------------- )
)
Occupation of Witness: Receptionist )
------------------ )
-7-
<PAGE>
SCHEDULE "A" TO AMENDMENT EFFECTIVE SEPTEMBER 11, 1997
<TABLE>
<CAPTION>
FULL NAME & ADDRESS NUMBER OF SIGNATURE OF
OF SECURITYHOLDER SECURITIES SECURITYHOLDER
- ----------------------- -------------- --------------------
<S> <C> <C>
DNG Capital Corp. DNG Capital Corp.
1305-1090 West Georgia Per:
Vancouver, B.C. V6E 3V7
/s/ Nick DeMare
400,000 shares --------------------
Nick DeMare
Todd Grabois
8919 Ashridge Park /s/ Todd Grabois
Spring, Texas 77379 267,750 shares --------------------
Todd Grabois
Robert Novak
6326 Willgus Trail /s/ Robert Novak
Lane, Texas 77066 114,750 shares --------------------
Robert Novak
--------------
TOTAL 782,500 shares
--------------
--------------
</TABLE>
-8-
<PAGE>
SCHEDULE "B" TO AMENDMENT EFFECTIVE SEPTEMBER 11, 1997
<TABLE>
<CAPTION>
RELEASE DATES(1)
----------------------------------------------------
NAME OF SECURITYHOLDER APRIL 18, 1998 APRIL 18, 1999 APRIL 18, 2000
- ---------------------- -------------- -------------- --------------
<S> <C> <C> <C>
DNG Capital Corp. 120,000 120,000 160,000
Todd Grabois 80,325 80,325 107,100
Robert Novak 34,425 34,425 45,900
------- ------- -------
TOTAL 234,750 234,750 313,000
------- ------- -------
------- ------- -------
</TABLE>
- --------------------
(1) Subject to acceleration pursuant to paragraph 5 of the Voluntary Pooling
Agreement.
-9-
<PAGE>
Exhibit 10.23
THIS MANAGEMENT AGREEMENT dated as of September 26, 1997.
BETWEEN:
CHASE MANAGEMENT LTD., a body corporate, duly incorporated under
the laws of the Province of British Columbia, and having in place
of business at #1305-1090 West Georgia Street, in the City of
Vancouver, in the Province of British Columbia;
(hereinafter called the "Manager")
OF THE FIRST PART
AND:
BENZ ENERGY LTD., a body corporate, duly incorporated under the
laws of the Yukon Territory and having its place of business at
#1305-1090 West Georgia Street in the City of Vancouver, in the
Province of British Columbia;
(hereinafter called the "Company")
OF THE SECOND PART
WHEREAS:
A. The Manager provides turn-key office management facilities including
secretarial services, receptionist facilities, secretarial equipment, general
office supplies and telephone services ("Turn-key Services") as hereinafter
specified, at #1305-1090 West Georgia Street in the City of Vancouver, in the
Province of British Columbia ("Office Location");
B. The Company requires Turn-key Services.
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
covenants and agreements hereinafter reserved and contained on the part of the
Company to be paid, observed and performed, the Manager hereby agrees to
provide Turn-key Services for an initial period of one year commencing on he
first day of October, 1997 and terminating on the last day of September,
1998. Thereafter, this agreement shall continue in effect from year to year
unless terminated by either party upon sixty (60) days notice in writing.
AND IT IS FURTHER UNDERSTOOD AND AGREED that the Manager and the Company
hereby covenants and agree as follows:
MANAGER COVENANTS
- -----------------
1. The Manager covenants to provide the following Turn-key Services to the
Company at the Office Location as hereinafter set
(a) general legal assistance including routine securities filings;
(b) daily accounting services as required;
<PAGE>
-2-
(c) access as available to the "Boardroom";
(d) secretarial/receptionist services;
(e) office electronic equipment inclusive of typewriters and computers;
(f) preparation and mailing of quarterly reports;
(g) general office supplies;
(h) telephone equipment; and
(i) telephone answering during business hours.
COMPANY COVENANTS
- -----------------
2. The Company covenants and agrees to pay to the Manager for the Turn-key
Services a monthly fee of Five Thousand ($5,000.00) Dollars on the first day
of each and every month commencing on the first day of October, 1997 to and
including the first day of the last month of this contract.
3. The Company hereby covenants and agrees to pay to the Manager all costs
and disbursements incurred by the Manager for or on behalf of the Company
including long distance charges, courier charges, photocopier and telefax
charges, mail services and any such other charges annually associated
directly and indirectly with the operation of the Company's business at a
cost equal to the actual cost of the disbursements.
4. The Disbursement Costs shall be paid by the Company to the Manager within
five (5) business days of presentation of an invoice from the Manager.
GENERAL COVENANTS
- -----------------
5. The Manager and the Company hereby agree that this Agreement shall accrue
to the benefits of and be binding upon their respective heirs, executors,
administrators, successors and assigns.
6. The Manager shall use its best efforts to carry out the proper
performance of its obligations hereunder, provided however that neither the
manager nor its services shall be held liable or accountable for any act or
deed or failure to perform any act or deed whether as a result of negligence
or otherwise.
7. The Manager acknowledges that all employees of the Manager who perform
work for the Company under this Agreement or any other agreement are in fact
employees of the Manager and will not represent themselves as employees of
the Company.
8. The Company hereby covenants to pay to the Manager a non-refundable
security deposit in the sum of Five Thousand Dollars ($5,000.00).
9. The Manager will provide additional management functions including
preparation for annual audits, non-routine securities filings and legal
assistance, SEDAR filings, corporate representations, property acquisitions
and public relations. These services are separate and are not included in the
Turn-key package and will be billed to the Company at the current hourly
charge-cut rate for the Manager's employees.
<PAGE>
-3-
NOTICES
- -------
10. Any notices to be given by either party to the other shall be well and
sufficiently given if delivered personally or if sent by registered mail,
postage prepaid, to the parties hereto as follows:
If to the Company: BENZ ENERGY LTD
#1305-1090 West Georgia Street
Vancouver, BC
V6E 3V7
If to the Manager:
CHASE MANAGEMENT LTD.
#1305-1090 West Georgia Street
Vancouver, BC
V6E 3V7
or to such other address or addresses as the parties hereto may notify to the
other from time to time in writing. Such notice shall be deemed to have been
given at the time of delivery, if delivered in person, or forty-eight (48)
hours from the date of posting in a post office in Vancouver, British
Columbia.
The Corporate Seal of )
CHASE MANAGEMENT LTD. )
was hereto affixed in )
the presence of: )
) c/s
/s/ Nick DeMare )
- -------------------------------- )
)
Nick DeMare )
- -------------------------------- )
President
The Corporate Seal of )
BENZ ENERGY LTD. )
was hereunto affixed in )
the presence of: )
)
/s/ Prentis Tomlinson ) c/s
- -------------------------------- )
)
Prentis Tomlinson )
- -------------------------------- )
Chairman & CEO )
<PAGE>
Exhibit 10.24
STANDSTILL AGREEMENT
WHEREAS, Benz Energy, Ltd. ("Benz") entered into that certain Purchase
and Sale Agreement dated as of November 17, 1998 for the purchase of certain
oil and gas interests from, INTER ALIA, Prentis B. Tomlinson, Jr.
("Tomlinson") and The Starbucks Trust (the "Purchase Agreement"); and
WHEREAS, Benz has paid part, but not all, of the Purchase Price to
Tomlinson and The Starbucks Trust pursuant to the Purchase Agreement; and
WHEREAS, BENZ has now conveyed the oil and gas interests to its wholly
owned subsidiary, Texstar Petroleum, Inc. ("Texstar") for and in
consideration of the payment of the Purchase Price to The Starbucks Trust and
Tomlinson; and
WHEREAS, one or more of the Benz Entities owe certain indebtedness to
Tomlinson and The Starbucks Trust; and
WHEREAS, certain of the Benz Entities, including Tomlinson, The Starbucks
Trust, Texstar Holdings, L.L.C. and Security Oil, L.L.C. owe certain
indebtedness to one or more of the Benz Entities; and
WHEREAS, as a part of certain transactions by and between Benz, Texstar
and Shell Capital Inc. (the "Shell Transaction"), Benz and Texstar are
required to deliver an agreement whereby The Starbucks Trust and Tomlinson
agree to a deferment of payment of any amounts owing to them from Benz,
Texstar or any Affiliate (the "Benz Entities") until after the Termination
Date, as that term is defined in the Conveyance of Overriding Royalty
Interest (Terminable) dated December 28, 1998 by and between Texstar and
Shell (the "Deferment Period") and further agree not to pursue collection of
any such amounts from the Benz Entities during the Deferment Period; and
WHEREAS, Tomlinson and The Starbucks Trust are agreeable to the deferment
of payment of amounts owed to them by the Benz Entities and agree not to
pursue collection from the Benz Entities during the Deferment Period in
consideration of a mutual deferment by the Benz Entities to collect or risk
payment of amounts owed to them by Tomlinson, The Starbucks Trust, Texstar
Holdings L.L.C. ("Holdings") and Security Oil, L.L.C. ("Security").
NOW THEREFORE, for and in consideration of the mutual promises contained
herein and other good and valuable consideration which each undersigned party
hereby acknowledges receipt and acknowledges the sufficiency thereof, the
parties agree as follows:
-1-
<PAGE>
1.
Tomlinson and The Starbucks Trust agree to defer, suspend and waive
collection of the amounts owed to them by the Benz Entities, including an
agreement not to make demand for payment and an agreement not to file suit to
collect any such amounts, whether arising out of the Purchase Agreement or
otherwise, for a period of time ending upon the Termination Date (as that
term is defined in the Conveyance of Overriding Royalty Interest (Terminable)
dated December 28, 1998 by and between Texstar and Shell).
2.
The Benz Entities agree to defer, suspend and waive collection of the
amounts owed to them by Tomlinson, The Starbucks Trust, Holdings and
Security, including an agreement not to make demand for payment and an
agreement not to file suit to collect any such amounts, whether arising out
of the Purchase Agreement or otherwise, for a period of time ending upon the
Termination Date (as that term is defined in the Conveyance of Overriding
Royalty Interest (Terminable) dated December 28, 1998 by and between Texstar
and Shell).
3.
Each of the parties agree to suspend the running of the applicable
statutes of limitation for collection of the amounts owed for a period which
is the EARLIER of the Termination Date or December 31, 2003.
4.
The parties represent and warrant to each of the other parties as follows:
A. Benz is a corporation duly organized and validly existing under the
laws of the Yukon Territory; Texstar is a corporation duly organized and
validly existing under the laws of the State of Texas; Tomlinson is a
resident of Harris County, Texas; The Starbucks Trust is a trust created and
validly existing under the laws of the State of Texas; and Security is a
limited liability company duly organized and validly existing under the laws
of the State of Texas.
B. The execution, delivery and performance of this Agreement have been
duly and validly authorized by all requisite action on the part of each party.
C. The making and performance of this Agreement are within the powers of
each of the undersigned parties and do not and will not (i) violate any
provision of law or any rule, regulation, order, writ, judgment, decree, or
determination currently in effect having applicability to each party's
certificate of incorporation, bylaws, or trust indenture, as the case may be,
(ii) result in a breach of or constitute a default under any indenture, bank
loan, or credit agreement or instrument to which
-2-
<PAGE>
any of the undersigned parties are a party or by which such party may be
currently bound or affected, or (iii) result in or require the execution or
imposition of any mortgage, loan, pledge, annuity interest charge, or other
encumbrance upon any of the properties or assets of such party, and each of
the undersigned parties is not in default under any such order, writ,
judgment, decree, determination, indenture, agreement or instrument in any
way that now or in the future will materially adversely affect the ability of
such party to perform its obligations hereunder.
D. The Agreement has been duly executed and delivered on behalf of much
of the undersigned parties and this Agreement constitutes the legal, valid
and binding obligations of each of the undersigned parties enforceable
against it in accordance with the terms, subject, however, to bankruptcy,
insolvency, recapitalization and other laws affecting creditors's rights
generally and with regard to any equitable remedies, to the discoveries of
the court before which proceedings to obtain such remedies may be pending.
EXECUTED THIS 20 DAY OF DECEMBER, 1998.
BENZ ENERGY, LTD.
By: /s/ Todd Grabois
-------------------------------
Name: Todd Grabois
-------------------------------
Title: Vice President
-------------------------------
TEXSTAR PETROLEUM, INC.
By: /s/ Todd Grabois
-------------------------------
Name: Todd Grabois
-------------------------------
Title: Vice President
-------------------------------
/s/ Prentis B. Tomlinson, Jr.
--------------------------------------
PRENTIS B. TOMLINSON, JR.
-3-
<PAGE>
THE STARBUCKS TRUST
By: /s/ Heather J. Tomlinson
-------------------------------
Name: Heather J. Tomlinson
-------------------------------
Title: Trustee
-------------------------------
TEXSTAR HOLDINGS, L.L.C.
By: /s/ Todd Grabois
-------------------------------
Name: Todd Grabois
-------------------------------
Title: Treasurer
-------------------------------
SECURITY OIL, L.L.C.
By: /s/ Heather J. Tomlinson
-------------------------------
Name: Heather J. Tomlinson
-------------------------------
Title: Manager
-------------------------------
-4-
<PAGE>
Exhibit 10.25
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* * * * *
FIRST INTERSTATE BANK PLAZA
OFFICE LEASE AGREEMENT
BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND
METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD,
AND
CALIBRE ENERGY, L.P.,
AS TENANT
DATED DECEMBER 28, 1995
* * * * *
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
OFFICE LEASE AGREEMENT
BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD
AND
CALIBRE ENERGY, L.P.,
AS TENANT
SECTION PAGE
- ------- ----
1. Definitions........................................................... 1
(a) "Building"....................................................... 1
(b) "Premises"....................................................... 1
(c) "Base Rental".................................................... 1
(d) "Commencement Date".............................................. 1
(e) "Lease Term"..................................................... 1
(f) "Security Deposit"............................................... 1
(g) "Expense Stop"................................................... 1
(h) "Allowance"...................................................... 1
(i) "Shell Improvements"............................................. 1
(j) "Common Areas"................................................... 1
(k) "Service Areas".................................................. 1
(l) "Rentable Area".................................................. 1
(m) "Normal Business Hours".......................................... 1
(n) "Initial Improvements"........................................... 1
(o) "Building Grade"................................................. 1
(p) "Basic Costs".................................................... 1
(q) "Ready for Occupancy"............................................ 2
2. Lease Grant........................................................... 2
3. Lease Term............................................................ 2
4. Use................................................................... 2
5. Base Rental........................................................... 2
6. Services to be Furnished by Landlord.................................. 2
7. Improvements to be Made by Landlord................................... 3
8. Maintenance and Repair of Premises by Landlord........................ 3
9. Graphics.............................................................. 3
10. Care of the Premises by Tenant........................................ 3
11. Repairs and Alterations by Tenant..................................... 3
12. Use of Electrical Services by Tenant.................................. 3
13. Laws and Regulations.................................................. 4
14. Building Rules........................................................ 4
15. Entry by Landlord..................................................... 4
16. Assignment and Subletting............................................. 4
17. Mechanic's Liens...................................................... 5
18. Property Insurance.................................................... 5
19. Liability Insurance................................................... 5
20. Indemnity............................................................. 5
21. Waiver of Subrogation Rights.......................................... 5
22. Casualty Damage....................................................... 5
23. Condemnation.......................................................... 6
24. Damages from Certain Causes........................................... 6
25. Events of Default/Remedies............................................ 6
26. Peaceful Enjoyment.................................................... 8
27. Holding Over.......................................................... 8
28. Subordination to Mortgage............................................. 8
29. Estoppel Certificates................................................. 8
i
<PAGE>
30. Landlord's Lien....................................................... 8
31. Attorney's Fees....................................................... 8
32. No Implied Waiver..................................................... 8
33. Personal Liability.................................................... 8
34. Security Deposit...................................................... 9
35. Notice................................................................ 9
36. Severability.......................................................... 9
37. Recordation........................................................... 9
38. Governing Law......................................................... 9
39. Force Majeure......................................................... 9
40. Time of Performance................................................... 9
41. Transfers by Landlord................................................. 9
42. Transfers by Tenant................................................... 9
43. Commissions........................................................... 9
44. Effect of Delivery of This Lease...................................... 9
45. Entire Agreement...................................................... 9
46. Receipt of Premises................................................... 9
47. Merger of Estates..................................................... 10
48. Waste Management...................................................... 10
49. Americans with Disabilities Act and Texas Architectural Barriers Act.. 10
50. Temporary Space....................................................... 10
51. Exhibits.............................................................. 10
ii
<PAGE>
FIRST INTERSTATE BANK PLAZA
OFFICE LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease"), made and entered into on this the 20th
day of December, 1995, between METROPOLITAN LIFE INSURANCE COMPANY, a New
York corporation and METROPOLITAN TOWER REALTY COMPANY, INC., a Delaware
corporation (collectively, "Landlord"), and CALIBRE ENERGY, L.P., a Texas
limited partnership ("Tenant").
W I T N E S S E T H :
1. Definitions:
(a) The "Building" shall mean the office building located upon
the real property ("Property") described in EXHIBIT "A" attached hereto and
incorporated herein. The address of the "Building" is 1000 Louisiana,
Houston, Texas 77002.
(b) "Premises" shall mean the suite of offices, known as Suite
5500, located within the Building and outlined on the floor plans attached to
this Lease as EXHIBIT "B", and incorporated herein. The Premises are
stipulated for all purposes to contain approximately 5,164 square feet of
"Rentable Area" (as defined below), being approximately 4,167 square feet of
"Usable Area" (as defined below).
(c) "Base Rental" shall mean the sum of $14.00 per square foot of
Rentable Area within the Premises per annum as adjusted pursuant to EXHIBIT "C",
attached hereto and incorporated herein. The Base Rental due for the first
three (3) months during the "Lease Term" (hereinafter defined) has been
deposited with Landlord by Tenant contemporaneously with the execution
hereof. "Rent" shall mean, collectively, the Base Rental and other sums of
money becoming due and payable to Landlord hereunder.
(d) "Commencement Date" shall mean the earlier of the date that
tenant actually occupies the Premises or February 1, 1996 (except as the same
may be delayed pursuant to Paragraph 3(c) hereof).
(e) "Lease Term" shall mean a term commencing on the Commencement
Date and continuing for sixty (60) full calendar months (plus any partial
calendar month in which the Commencement Date falls).
(f) "Security Deposit" shall mean the sum of $6,024.67.
(g) "Expense Stop" shall mean the sum of Basic Costs (as defined
in Paragraph 1(b) of EXHIBIT "C" attached hereto) per square foot of Rentable
Area in the Building for the calendar year 1996.
(h) "Allowance" shall mean an amount equal to the product of
$1.00 times the number of square feet of Rentable Area included in the
Premises, unless (i) a Turn Key Work Letter is attached hereto as EXHIBIT
"E", in which event the Allowance exists and Tenant is taking the Premises
"as is" in its current condition and without benefit of further improvements.
(i) "Shell Improvements" shall mean (i) lay-in acoustical ceiling
grid with acoustical ceiling tile inventory stored on the floor on which the
Premises are located; (ii) central air conditioning and heating ducts and
diffusers in a placement deemed typical by Landlord; (iii) lay-in fluorescent
light fixtures in a placement deemed typical by Landlord; and (iv) sprinkler
heads in a placement deemed typical by Landlord.
(j) "Common Areas" shall mean those areas devoted to corridors,
elevator foyers, restrooms, mechanical rooms, elevator mechanical rooms,
janitorial closets, electrical and telephone closets, vending areas, and
lobby areas (whether at ground level or otherwise), and other similar
facilities provided for the common use or benefit of tenants generally and/or
the public.
(k) "Service Areas" shall mean those areas within the outside
walls used for building stairs, elevator shafts, flues, vents, stacks, pipe
shafts and other vertical penetrations (but shall not include any such areas
for the exclusive use of a particular tenant).
(l) "Rentable Area" of the Premises shall mean (1) the "Usable
Area" within the Premises (i.e., the gross area enclosed by the surface of
the exterior glass walls, the mid-point of any walls separating portions of
the Premises from those of adjacent tenants, the slab penetration line of all
walls separating the Premises from Service Areas and the corridor side of
walls separating the Premises from Common Areas) plus (2) a pro rata part of
the Common Areas within the Building, such proration based upon the ratio of
the Usable Area within the Premises to the total Usable Area within the
Building existing as of the date of this Lease, and/or the Building. Rentable
Area shall not include any Service Areas. The Rentable Area in the Building
existing as of the date of this Lease is 1,721,242 square feet. The
stipulated number of square feet of Rentable Area of the Premises, as set
forth in Paragraph 1(b), and of the Building, as set forth above, are
Landlord's current estimates of such Rentable Areas and such figures may be
revised, at Landlord's election, if Landlord's architect determines either or
both of such estimates to be inaccurate in any material degree, and the Base
Rental shall be adjusted accordingly, based upon the rate per square foot of
Rentable Area specified in Paragraph 1(c) hereof.
(m) "Normal Business Hours" for the Building shall mean 7 a.m. to
7 p.m. Mondays through Fridays, and 8 a.m. to 1 p.m. on Saturdays, exclusive of
normal business holidays.
(n) "Initial improvements", when used herein, shall mean those
improvements or remodeling to the Premises, if any, which Landlord shall
agree to provide according to the Work Letter attached hereto as EXHIBIT "E"
and incorporated herein for all purposes. If no Work Letter is attached
hereto, no initial improvements are being provided; and Tenant is taking the
Premises "as is".
(o) "Building Grade" shall mean the type, brand and/or quantity
of materials Landlord designates from time to time the minimum quality to be
used in the Building or the exclusive type, grade or quality of material to
be used in the Building.
(p) "Basic Costs" shall mean all direct and indirect costs and
expenses of operating, maintaining, repairing, managing, and owning the
Building and the Property, as well as the "Exterior Common Area" (as defined
in EXHIBIT "C" hereto), which are incurred by Landlord in each calendar year.
Basic Costs
OFFICE LEASE AGREEMENT - Page 1
<PAGE>
are more fully described in EXHIBIT "C" hereto.
(q) "Ready for Occupancy" shall mean that either (i) a
Certificate of Occupancy (or its equivalent has been issued for the Premises
if initial improvements are to be provided, or (ii) if no initial
improvements are to be provided the Premises are unoccupied.
2. LEASE GRANT. Subject to and upon the terms herein set forth,
Landlord leases to Tenant and Tenant leases from Landlord the Premises.
3. LEASE TERM.
(a) This Lease shall continue in force during a period beginning
on the Commencement Date and continuing until the expiration of the Lease
Term, unless this Lease is sooner terminated or extended to a later date
under any other term or provision hereof.
(b) If the Premises are not available and Ready for Occupancy by
the date specified in Paragraph 1(d) hereof due to omission, delay or
default by Tenant or anyone acting under or for Tenant, Landlord shall have
no liability; and the obligations of Tenant under this Lease (including,
without limitation, the obligation to pay Rent) shall nonetheless commence as
of the Commencement Date.
(c) If, however, this Lease is executed before the Premises
become vacant or otherwise available and Ready for Occupancy and/or any
present tenant or occupant of the Premises holds over and/or Landlord cannot
deliver possession of the Premises prior to the date specified in Paragraph
1(d) hereof due to default on the part of Landlord, then, as Tenant's sole
remedy for the delay in Tenant's occupancy of the Premises, the Commencement
Date shall be delayed and the Rent herein provided shall not commence until
the earlier to occur of the date of actual occupancy by Tenant or the date on
which the Premises are available and Ready for Occupancy.
4. USE. The Premises shall be used for office purposes and for no
other purpose. Tenant agrees not to use or permit the use of the Premises for
any purpose which is illegal, dangerous to life, limb or property or which,
in Landlord's opinion, creates a nuisance or which would increase the cost
of insurance coverage with respect to the Building.
5. BASE RENTAL.
(a) Tenant agrees to pay the Rent to Landlord during the Lease
Term, without any setoff or deduction whatsoever, for the nonpayment of which
Landlord shall be entitled to exercise all such rights and remedies as are
herein provided in the case of the non-payment of Base Rental. Except as
otherwise provided herein, the annual Base Rental for each calendar year or
portion thereof during the Lease Term, together with any estimated adjustment
thereto pursuant to EXHIBIT "C" hereof then in effect, shall be due and
payable in advance in twelve (12) equal installments on the first day of each
calendar month during the Lease Term; and Tenant hereby agrees to pay such
Base Rental and any adjustments thereto to Landlord at Landlord's address
provided herein (or such other address as may be designated by Landlord in
writing from time to time) monthly, in advance, and without demand. If the
Lease Term commences on a day other than the first day of a month or
terminates on a day other than the last day of a month, then (i) the
installments of Base Rental for such month or months shall be prorated, based
on the number of days in such month, and (ii) Tenant's share of Basic Costs
shall be prorated as specified in EXHIBIT "C" hereto.
(b) All installments of Rent not paid when due and payable shall
bear interest at the maximum lawful rate until paid.
(c) The Base Rental payable hereunder shall be adjusted from time
to time in accordance with the provisions of EXHIBIT "C" attached hereto and
incorporated herein for all purposes.
6. SERVICES TO BE FURNISHED BY LANDLORD. Landlord agrees to furnish
Tenant the following:
(a) Facilities for hot and cold water at those points of supply
provided for general use of other tenants in the Building, central heat and
air conditioning in season, at such temperatures and in such amounts as are
reasonably considered by Landlord to be standard or as required by
governmental authority; provided, however, heating and air conditioning
service at times other than for Normal Business Hours for the Building shall
be furnished only upon the request of Tenant delivered to Landlord at any
time pursuant to the Building's computerized system for such purposes. Tenant
shall bear the entire cost of additional service, as such costs are
determined by Landlord from time to time, and shall pay the same as
additional Rent upon presentation of a statement therefor by Landlord. The
additional air conditioning or chilled water consumption shall be determined
as measured by BTU meters and submeters installed and maintained in good
order and repair at Tenant's expense.
(b) Routine maintenance and electric lighting service for all
Common Areas and Service Areas of the Building in the manner and to the
extent deemed by Landlord to be standard.
(c) Janitor service, five (5) days per week, exclusive of normal
business holidays; provided, however, if Tenant's floor covering or other
improvements require special treatment, Tenant shall pay the additional
cleaning cost attributable thereto as additional Rent upon presentation of a
statement therefor by Landlord.
(d) Subject to the provisions of Paragraph 12, facilities to
provide all electrical current required by Tenant in its use and occupancy of
the Premises.
(e) All Building Grade fluorescent bulb replacements in the
Premises necessary to maintain the lighting provided as a part of the Shell
Improvements and fluorescent and incandescent bulb replacement in the Common
Areas and Service Areas.
(f) Landlord shall provide limited access to the Building before
and after Normal Business Hours in the form of special limited access entry
cards ("Entry Cards") for Tenant and its employees. An Entry Card shall not
automatically qualify Tenant or any of its employees for an access card to
the "Parking Garage" as defined in and pursuant to the terms of EXHIBIT "F".
Landlord agrees to provide Tenant with up to, but not in excess of, six (6)
Entry Cards. However, Tenant shall pay Landlord for any additional or
replacement cards, in such amount as Landlord shall, from time to time,
determine. The current cost required for a replacement card is $10.00 per
card. Landlord shall be entitled to cancel (by computer entry) any lost or
stolen cards of which it becomes aware. Tenant shall promptly notify Landlord
of any lost or stolen cards. Landlord shall have no liability to Tenant, its
employees, agents, invitees, or licensees for losses due to theft or
burglary, or for damages committed by unauthorized persons on the Premises;
and neither shall Landlord be required to insure
OFFICE LEASE AGREEMENT - Page 2
<PAGE>
against any such losses. Tenant shall cooperate fully in Landlord's efforts to
maintain security in the Building and shall follow all regulations
promulgated by Landlord with respect thereto. Tenant further agrees to
surrender all Entry Cards in its possession upon the expiration or earlier
termination of this Lease.
No interruption or malfunction of any utility service shall
constitute an eviction or disturbance of Tenant's use or possession of the
Premises or a breach by Landlord of any of Landlord's obligations hereunder
or render Landlord liable or responsible to Tenant for any loss or damage
which Tenant may sustain or incur if either the quantity or character of any
utility service is changed or is no longer available to or is no longer
suitable for Tenant's requirements or entitle Tenant to be relieved from any
of Tenant's obligations hereunder, including, without limitation, the
obligation to pay Rent, or grant Tenant any right to set-off, abatement or
recoupment. At any time when Landlord is making such facilities for such
utility services available to the Premises, Landlord may, at Landlord's
option, upon not less than thirty (30) days prior written notice to Tenant,
discontinue the availability of any such utility service. If Landlord gives
any such notice of discontinuance, Landlord shall make all the necessary
arrangements with the public utility service supplying the utility to the
area in which the Building is located with respect to obtaining such utility
service to the Premises; but Tenant will contract directly with such public
utility service for the supplying of such utility services to the Premises.
Failure to any extent to make available, or any slowdown, stoppage, or
interruption of, the specified utility services resulting from any cause,
including, without limitation, Landlord's compliance with any voluntary or
similar governmental or business guidelines now or hereafter published or any
requirements now or hereafter established by any governmental agency, board,
or bureau having jurisdiction over the operation of the Building shall not
render Landlord liable in any respect for damages to either persons,
property, or business, nor be construed as an eviction of Tenant or work an
abatement of Rent, nor relieve Tenant of Tenant's obligations for fulfillment
of any covenant or agreement hereof. Should any equipment or machinery
furnished by Landlord breakdown or for any cause cease to function properly,
Landlord shall use reasonable diligence to repair same promptly, but Tenant
shall have no claim for abatement of Rent or damages on account of any
interruption of service occasioned thereby or resulting therefrom.
7. IMPROVEMENTS TO BE MADE BY LANDLORD. Except as otherwise provided
in the Work Letter attached hereto as EXHIBIT "E", all installations and
improvements now or hereafter placed on the Premises, other than shell
improvements, shall be for Tenant's account and at Tenant's cost (and
Tenant shall pay ad valorem taxes and increased insurance thereon or
attributable thereto), which cost shall be payable by Tenant to Landlord upon
demand as additional Rent.
8. MAINTENANCE AND REPAIR OF PREMISES BY LANDLORD. Except as
otherwise expressly provided herein, Landlord shall not be required to make
any repairs to the Premises other than repairs to exterior and load-bearing
walls, floors (but not floor coverings) and the roof of the Building, which
may be required from time to time but only after such required repairs have
been requested by Tenant in writing. In no event shall Landlord be
responsible for the maintenance or repair of Improvements which are not
composed of Building Grade materials.
9. GRAPHICS. Landlord shall provide and install, at Tenant's cost,
all letters or numerals on doors in the Premises, identification graphics on
the exterior of the Premises, and all signage related to Tenant's occupancy
in the Building. All such letters and numerals shall be in the standard
graphics for the Building and no others shall be used or permitted on the
Premises without Landlord's prior written consent.
10. CARE OF THE PREMISES BY TENANT. Tenant shall, at its own cost and
expense, reasonably maintain and repair the Premises, and shall not commit or
allow any waste to be committed on any portion of the Premises, and at the
termination of this Lease to deliver up the Premises to Landlord in as good
condition as at the date of the commencement of the term of this Lease,
ordinary wear and tear excepted.
11. REPAIRS AND ALTERATIONS BY TENANT. Landlord shall have the right,
at its option, at Tenant's own cost and expense, to repair or replace any
damage done to the Building, or any part thereof, caused by tenant or
Tenant's agents, employees, invitees, or visitors, and Tenant shall pay the
cost thereof to the Landlord on demand as additional Rent. Tenant agrees with
Landlord not to make or allow to be made any alterations to the Premises,
install any vending machines on the Premises, or place signs on the Premises
which are visible from outside the Premises, without first obtaining the
prior written consent of Landlord in each such instance, which consent may be
given or withheld on such conditions as Landlord may elect. Any and all
alterations to the Premises shall become the property of Landlord upon
termination of this Lease (except for movable equipment or furniture owned by
Tenant). Landlord may, nonetheless, require Tenant to remove any and all
fixtures, equipment and other improvements installed on the Premises or the
Building ("Additional Improvements") beyond the shell improvements. Tenant
shall be responsible for repairing any damage to the Premises or the Building
resulting from the removal of any Additional Improvements or Tenant's personal
property and for restoring the Premises or the Building, as applicable, to
Building Grade condition. In the event that Landlord so elects, and Tenant
fails to remove the Additional Improvements, Landlord may remove the
Additional Improvements at Tenant's cost, and Tenant shall pay Landlord on
demand all costs incurred in removing the Additional Improvements.
12. USE OF ELECTRICAL SERVICES BY TENANT. Proper facilities so as to
enable appropriate utility company to furnish electrical facilities for a
total connected load of 2.0 watts per square foot of Rentable Area of power
for high voltage (277/480v) electrical requirements ("Tenant's High Voltage
Power Load") and 3.0 watts per square foot of Rentable Area for low voltage
(120/208v single phase) electrical requirements ("Tenant's Low Voltage Power
Load") (Tenant's Low Voltage Power Load and Tenant's High Voltage Power Load
collectively shall mean "Tenant Standard Electrical Power"). All Tenant
Standard Electrical Power shall be supplied by Landlord and paid for by
Tenant as a part of its proportionate share of Building Operating Costs (as
hereinafter defined in Paragraph 13, of this Lease); provided, however, any
Low Voltage Power consumed in the Premises in excess of .34 kilowatt hours
per square foot of Rentable Area within the Premises per month and any
electricity for any item that requires a voltage other than 120/208v single
phase will be considered to be in excess of Tenant's Low Voltage Power Load
and will be separately metered and billed to Tenant on a monthly basis.
Notwithstanding the above, high voltage power used for Building standard
lighting will not be metered unless the Building standard allowance for
lighting (defined as one (1) 2x2 parabolic lighting fixture for each eighty
(80) square feet of Rentable Area within the Premises) is exceeded.
In the event Tenant's requirements for a connected load exceed those set
forth in the preceding paragraph, Landlord, at Tenant's sole expense, will
make reasonable efforts to supply such additional service through the existing
electrical system serving the Building. Any additional electrical equipment
required to meet Tenant's excess electrical requirements will be installed by
Landlord at the sole cost and expense of Tenant (if, in Landlord's sole
judgment, the same are necessary and will not cause damage or injury to the
Building or the Premises or cause or create a dangerous or hazardous
condition or entail excessive or unreasonable alterations, repairs or expense
or unreasonably interfere with or disturb other tenants or occupants).
OFFICE LEASE AGREEMENT - Page 3
<PAGE>
In the event Tenant's Premises is not initially metered as set forth
above, any 277/480v or 120/208v lighting or equipment requirements installed
at a later date or any other special situations that create a demand for
additional electrical usage exceeding the Tenant Standard Electrical Power
will be metered and/or measured by Landlord's engineers and billed to Tenant
on a monthly basis. All installations of non-standard electrical fixtures
such as appliances and equipment (other than ordinary office appliances and
equipment such as typewriters, personal computers, word processors,
voicewriters, calculators, lamps, clocks and other similar type low
electrical consumption appliances and equipment) within the Premises will be
subject to prior notice to Landlord, and, in the event any such installation
will, either directly or indirectly, adversely affect the base electrical or
mechanical systems, Landlord's prior approval will be required. Tenant
covenants and agrees that at all times its use of electrical current will
never intentionally exceed the capacity of existing feeders to the Building
or the risers or wiring installations.
Landlord will not be liable in any way to Tenant for any failure or
defect in the supply or character of electrical energy furnished to the
Premises by reason of any requirement, act or omission of the public utility
serving the Building with electricity. The obligations of Landlord to furnish
electrical service will be subject to the rules and regulations of the
supplier of such electricity and of any municipal or other governmental
authority regulating the business of providing electrical utility service.
13. LAWS AND REGULATIONS. Tenant agrees to comply with all applicable
laws, ordinances, rules, and regulations of any government entity or agency
having jurisdiction with respect to the Premises.
14. BUILDING RULES. Tenant will comply with the rules and regulations of
the Building as adopted and altered by Landlord from time to time and will
cause all of its agents, employees, invitees and visitors to do so. All
changes to such rules will be sent by Landlord to Tenant in writing. The
current rules and regulations for the Building are attached hereto as EXHIBIT
"D".
15. ENTRY BY LANDLORD. Tenant agrees to permit Landlord or its
employees, agents or representatives to enter into and upon any part of the
Premises at all reasonable hours (and in emergencies at all times) to inspect
the same, or to show the Premises to prospective purchasers, mortgagees,
tenants or insurers, to clean or make repairs, alterations or additions
thereto, and Tenant shall not be entitled to any abatement or reduction of
Rent by reason thereof.
16. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not (i) assign this Lease or any interest
therein, or (ii) sublease the Premises or any portion thereof without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld. Any attempted assignment or sublease by Tenant in violation of the
terms and covenants of this paragraph shall be void. If Tenant is not a
natural person, the acquisition of a controlling interest in Tenant shall be
deemed to be an assignment for purposes hereof. As used herein, the phrase
"controlling interest" shall mean ownership of in excess of forty-nine
percent (49%) of the voting interest in Tenant. Notwithstanding the
foregoing, Tenant may, upon notice to Landlord but without the necessity of
obtaining Landlord's prior consent thereto, assign this Lease or sublet the
Premises to an "Affiliate." As used herein, the term "Affiliate" shall mean
any entity under the common control of a person or entity which controls
Tenant or which is controlled by Tenant. With respect to a request for
Landlord's consent to any assignment or sublease the following reasons for
denial shall, without limitation, be deemed to be reasonable:
i) the proposed assignee or subtenant does not have adequate
financial ability to fulfill the monetary obligations related to such
space; or
ii) the proposed assignee or subtenant is a tenant in the
Building or a prospective tenant in the Building (a prospective tenant
shall be any entity which has directly or indirectly contacted Landlord
about space in the Building; or
iii) the space to be sublet is less than 2,000 square feet
of Rentable Area; or
iv) if prior subleases have been consented to by Landlord,
such proposed sublease space is not contiguous to all space on a single
floor under such prior subleases; or
v) any proposed assignment appears to be an assignment of
less than the entire Lease or less than Tenant's entire interest herein;
or
vi) any proposed assignee or subtenant whose use of the
Premises in Landlord's opinion might violate the Use clause of the
Lease; or
vii) the proposed assignee or subtenant is either a
governmental agency, a school or similar operation or a medical-related
practice; or
viii) in Landlord's judgment, the proposed assignee or
subtenant would diminish the value or reputation of the Building; or
ix) the occupancy of the Premises by the proposed subtenant
or assignee would require substantial alterations to the Premises or the
applicable portion thereof; or
x) the proposed subtenant's or assignee's use of the
Premises would conflict with any other Building tenants' exclusive
rights; or
xi) the occupancy of the Premises by the proposed subtenant
or assignee would cause Landlord's fire and extended coverage insurance
to be canceled or the rate therefor to be increased; or
xii) an event of default at such time exists; or
xiii) the proposed assignment or sublease is for any period
other than any period during the Initial Term hereof.
(b) If Tenant requests Landlord's consent to an assignment of
the Lease or subletting of all or part of the Premises, Landlord shall either
(i) approve such sublease or assignment (but no approval of an assignment or
sublease shall relieve Tenant of any liability hereunder), or (ii) negotiate
directly with the proposed subtenant or assignee and (in the event Landlord is
able to reach agreement with such proposed subtenant or assignee) upon
execution of a lease with such proposed subtenant or assignee, terminate this
Lease (in part or in whole, as appropriate) upon thirty (30) days' notice, or
(iii) if Landlord shall fail to notify Tenant in writing of its decision
within a thirty (30) day period after Landlord is notified in writing of the
OFFICE LEASE AGREEMENT - Page 4
<PAGE>
proposed assignment or sublease, Landlord shall be deemed to have refused to
consent to such assignment or subleasing, and to have elected to keep this
Lease in full force and effect.
(c) All cash or other proceeds of any assignment, sale or sublease
of Tenant's interest in the Lease and/or the Premises, whether consented to
by Landlord or not, shall be paid to Landlord notwithstanding the fact that
such proceeds exceed the Base Rental called for hereunder, unless Landlord
agrees to the contrary in writing, and Tenant hereby assigns all rights it
might have or ever acquire in any such proceeds to Landlord. This covenant
and assignment shall benefit Landlord and its successors in ownership of the
Building and shall bind Tenant and Tenant's heirs, executors, administrators,
personal representatives, successors and assigns. Any assignee, sublessee or
purchaser of Tenant's interest in this Lease (all such assignees, sublessees
or purchasers being hereinafter referred to as "Successors"), by occupying
the Premises and/or assuming Tenant's obligations hereunder, shall be deemed
to have assumed liability to Landlord for all amounts paid to persons other
than Landlord by such Successor in consideration of any such sale, assignment
or subletting, in violation of the provision hereof. No assignment or
subletting, whether or not with Landlord's consent, shall ever relieve Tenant
of any liability hereunder.
17. MECHANIC'S LIENS. Tenant will not permit any mechanic's liens or
other liens to be placed upon the Premises or the Building and nothing in
this Lease shall be deemed or construed in any way as constituting the
consent or request of Landlord, express or implied, by inference or
otherwise, to any person for the performance of any labor or the furnishing
of any materials to the Premises, or any part thereof, nor as giving Tenant
any right, power, or authority to contract for or permit the rendering of any
services or the furnishing of any materials that would give rise to any
mechanic's or other liens against the Premises. In the event any such lien is
attached to the Premises, then, in addition to any other right or remedy of
Landlord, Landlord may, but shall not be obligated to, discharge the same.
Any amount paid by Landlord for any of the aforesaid purposes shall be paid
by Tenant to Landlord on demand as additional Rent.
18. PROPERTY INSURANCE. In the event that Landlord has placed or
hereafter places a mortgage, deed of trust or other lien on the Building,
then during the existence thereof, Landlord shall maintain such fire and
extended coverage insurance on the Building and the Premises as Landlord's
mortgagees shall require thereunder, and in all other instances Landlord
shall maintain such fire and extended coverage insurance on the Building and
the Premises as Landlord desires in its sole discretion. Such insurance shall
be maintained at the expense of Landlord (as a part of the Basic Costs), and
payments for losses thereunder shall be made solely to Landlord or the
mortgagees of Landlord as their interests shall appear. Tenant shall maintain
at its expense, in an amount equal to full replacement cost, fire and
extended coverage insurance on all of its personal property, including
removable trade fixtures, located on the Premises and in such additional
amounts as are required to meet Tenant's obligations pursuant to Paragraph 22
hereof. Tenant shall, at Landlord's request from time to time, provide
Landlord with a current certificate of insurance evidencing Tenant's
compliance with this Paragraph 18 and Paragraphs 19 and 21 hereof. Tenant
shall obtain the agreement of Tenant's insurers to notify Landlord that a
policy is due to expire at least thirty (30) days prior to such expiration.
19. LIABILITY INSURANCE. Tenant and Landlord shall (Landlord as a part
of Basic Costs and Tenant at its own expense) maintain a policy or policies
of comprehensive general liability insurance with respect to the respective
activities of each in the Building and on the Property, with the premiums
thereon fully paid on or before the due date, issued by and binding upon an
insurance company approved by Landlord, such insurance to afford minimum
protection of not less than $1,000,000 combined single limit coverage of
bodily injury, property damage or combination thereof. In addition, Tenant
agrees to obtain a fire legal liability endorsement, or other coverage
satisfactory to Landlord which removes the "leased or occupied" property
exclusion from Tenant's liability policy. Landlord shall not be required to
maintain insurance against thefts within the Premises or the Building or the
Property. Tenant's insurance shall contain a provision naming Landlord as an
additional insured and include coverage for the contractual liability of
Tenant to indemnify Landlord pursuant to Paragraph 20 below. Tenant shall
obtain the agreement of Tenant's insurers to notify Landlord that a policy is
due to expire at least thirty (30) days prior to such expiration.
20. INDEMNITY. Landlord shall not be liable to Tenant, or to Tenant's
agents, servants, employees, customers, or invitees for any injury to person
or damage to property caused by any act, omission, or neglect of Tenant, its
agents, servants, employees, invitees, licensees or any other person entering
the Building under the invitation of Tenant or arising out of the use of the
Premises by Tenant and the conduct of its business or out of a default by
Tenant in the performance of its obligations hereunder. Tenant hereby
indemnifies and holds Landlord harmless from all liability and claims for any
such damage or injury.
21. WAIVER OF SUBROGATION RIGHTS. Subject to the conditions hereinafter
specified in this Paragraph 21 and only to the extent that and so long as the
same is permitted under the laws and regulations governing the writing of
insurance within the State of Texas with respect to the respective insurance
that is to be carried by either Landlord or Tenant covering losses arising
out of the destruction or damage to the Premises or its contents or to other
portions of the Building or to Tenant's occupancy and operation of the
Premises without invalidating or nullifying any such policy, or providing a
defense to the applicable insurance carrier with respect to the coverage of
any such policy, all such insurance carried by either Landlord or Tenant
shall provide for a waiver of rights of subrogation against Landlord and
Tenant on the part of the insurance carrier. Notwithstanding the foregoing,
nothing contained herein shall require either party to obtain the inclusion
of such a waiver of rights of subrogation in the event that, because of the
cost or premium attributable to such waiver, the obtaining of such waiver is
not feasible and reasonable. Unless such waivers contemplated by this
sentence will invalidate, nullify, or provide a defense to coverage under any
such insurance policy or are not obtainable for the reasons described in this
paragraph 21, Landlord and Tenant each hereby waive any and all rights of
recovery, claims, actions or causes of action against the other, its agents,
officers, or employees, for any loss or damage that may occur to the Premises
or the Building, or any improvements thereto, which loss or damage is covered
by valid and collectible insurance policies, to the extent that such loss and
damage is actually recovered under such insurance policy. The waivers set
forth in the immediately preceding sentence shall be in addition to, and not
substitution for, any other waivers, indemnities, or exclusions of
liabilities as set forth in this Lease. Notwithstanding the foregoing, the
failure of Tenant to take out or maintain any insurance policy required under
paragraph 18 hereof shall be a defense to any claim asserted by Tenant
against Landlord by reason of any loss sustained by Tenant that would have
been covered by any such required policy.
22. CASUALTY DAMAGE. If the Premises or any part thereof shall be
damaged by fire or other casualty, Tenant shall give prompt written notice
thereof to Landlord. In case the Building shall be damaged such that
substantial alteration or reconstruction of the Building shell, in Landlord's
sole opinion, is required (whether or not the Premises shall have been
damaged by such casualty) or in the event any mortgagee of Landlord's should
require that the insurance proceeds payable as a result of a casualty be
applied to the payment of the mortgage debt or in the event of any material
uninsured loss to the Building, Landlord may, at its option, terminate this
Lease by notifying Tenant in writing of such termination within ninety (90)
days after the date of such casualty. If Landlord does not thus elect to
terminate this Lease, Landlord shall
OFFICE LEASE AGREEMENT - Page 5
<PAGE>
commence and proceed with reasonable diligence to restore the Building shell
and Shell Improvements located on the Premises; except that Landlord's
obligation to restore shall not require Landlord to spend for such work an
amount in excess of the insurance proceeds actually received by Landlord as a
result of the casualty. When the repairs described in the preceding sentence
have been completed by Landlord, Landlord shall then complete the restoration
of all improvements in excess of the Shell Improvements which are necessary
to permit Tenant's reoccupancy of the Premises (including the installation of
acoustical ceiling tile) pursuant to the final working drawings and
specifications approved by Landlord pursuant to the Work Letter ("Improvements
Restoration"). Landlord shall not be obligated to expend for the completion
of the Improvements Restoration a sum in excess of a dollar amount equal to
the dollar amount, if any, of the "Allowance" ("Reconstruction Allowance").
Except for the Reconstruction Allowance, all cost and expense of completing
the Improvements Restoration shall be borne by Tenant and the amount of such
excess, as determined by Landlord, is herein referred to as the
"Reconstruction Excess". Fifty percent (50%) of the Reconstruction Excess (as
then estimated by Landlord) shall be paid by Tenant to Landlord, in cash,
prior to commencement of the Improvements Restoration. After substantial
completion of the Improvements Restoration, but prior to reoccupancy of the
Premises by Tenant, Tenant shall pay Landlord, in cash, an amount equal to
ninety percent (90%) of the then unpaid balance of the Reconstruction Excess
(as then estimated by Landlord). As soon as a final accounting can be
prepared and submitted to Tenant, Tenant shall pay Landlord, in cash, the
entire unpaid balance of the Reconstruction Excess, based on Landlord's final
cost. Each increment of the Reconstruction Excess payable by Tenant to
Landlord shall be paid by Tenant within ten (10) days after a written request
therefore by Landlord to Tenant. Tenant shall not be entitled to receive any
credit or payment with respect to any portion of the Reconstruction Allowance
not actually spent upon restoration of the Premises. Landlord shall not be
liable for any inconvenience or annoyance to Tenant or injury to the business
of Tenant resulting in any way from such damage or the repair thereof, except
that, subject to the provisions of the next sentence, and provided that cash
in the amount of each increment of the Reconstruction Excess shall have been
paid to Landlord by Tenant within ten (10) days after a written request
therefor by Landlord to Tenant, Landlord shall allow Tenant a fair diminution
of Rent during the time and to the extent the Premises are unfit for
occupancy (based upon that portion of Base Rental applicable to the portion
of the Premises subject to such casualty); provided, however, the Premises
shall not be considered unfit for occupancy at any time that (i) such of the
Improvements Restoration has been completed so as to permit occupancy as
evidenced by the issuance of a Certificate of Occupancy or its equivalent for
the Premises by the appropriate governmental entity having jurisdiction over
the Premises for the purpose of issuing such certificate, or (ii) if no such
certificate can be issued by any appropriate governmental entity under
applicable laws, ordinances, or regulations, at such time as the Improvements
Restoration have been substantially completed and tendered to Tenant.
23. CONDEMNATION. If the whole or substantially the whole of the
Building or the Premises should be taken for any public or quasi-public use,
by right of eminent domain or otherwise or should be sold in lieu of
condemnation, then this Lease shall terminate as of the date when physical
possession of the Building or the Premises are taken by the condemning
authority. If less than the whole or substantially the whole of the Building
or the Premises are thus taken or sold, Landlord (whether or not the Premises
are affected thereby) may terminate this Lease by giving written notice
thereof to Tenant; in which event this Lease shall terminate as of the date
when physical possession of such portion of the Building or Premises are
taken by the condemning authority. If this Lease is not so terminated upon
any such taking or sale, the Base Rental payable hereunder shall be
diminished by an amount representing that portion of Base Rental applicable
to the portion of the Premises subject to such taking or sale, and Landlord
shall, to the extent Landlord deems feasible, restore the Building and the
Premises to substantially their former condition, but such work shall not
exceed the scope of the work done by Landlord in originally constructing the
Building and installing Shell Improvements and Initial Improvements in the
Premises, nor shall Landlord in any event be required to spend for such work
an amount in excess of the amount received by Landlord as compensation for
such taking. All amounts awarded upon a taking of any part or all of the
Property, Building or the Premises shall belong to Landlord, and Tenant shall
not be entitled to and expressly waives all claims to any such compensation.
24. DAMAGES FROM CERTAIN CAUSES. Landlord shall not be liable to Tenant
for any loss or damage to any property or person occasioned by theft, fire,
act of God, public enemy, injunction, riot, strike, insurrection, war, court
order, requisition, or order of governmental body or authority or by any other
cause, except as specifically provided in Paragraph 33 hereof. Nor shall
Landlord be liable for any damage or inconvenience which may arise through
(a) the leasing of other space within the Building to whomsoever Landlord
chooses for whatever use is allowed by Landlord or (b) repair or alteration
of any part of the Building or Premises or to the construction of Leasehold
Improvements for other tenants in the Building, it being specifically
acknowledged and agreed by Tenant that Tenant is leasing space in a Building
which is not fully occupied and that Landlord will, as a part of Landlord's
leasing of other space within the Building, be conducting construction work
in order to prepare other space in the Building, from time to time, for other
tenants.
25. EVENTS OF DEFAULT/REMEDIES.
(a) The following events shall be deemed to be events of default
by Tenant under this Lease: (i) Tenant shall fail to pay any Rent or other
sum of money due hereunder and such failure shall continue for a period of
five (5) days after the date such sum is due; (ii) Tenant shall fail to
comply with any provision of this Lease or any other agreement between
Landlord and Tenant (including the Work Letter) not requiring the payment of
money, all of which terms, provisions and covenants shall be deemed material
and such failure shall continue for a period of ten (10) days after written
notice of such default is delivered to Tenant; (iii) the Leasehold hereunder
demised shall be taken on execution or other process of law in any action
against Tenant; (iv) Tenant notifies Landlord, at any time prior to the
Commencement Date, that Tenant does not intend to take occupancy of the
Premises upon the commencement of the Lease Term; or Tenant shall fail to
promptly move into and take possession of the Premises when the Premises are
Ready for Occupancy or shall cease to do business in or abandon any portion
of the Premises; (v) Tenant shall become insolvent or unable to pay its debts
as they become due, or Tenant notifies Landlord that it anticipates either
condition; (vi) Tenant takes any action to, or notifies Landlord that Tenant
intends to file a petition under any section or chapter of the Bankruptcy
Code, as amended from time to time, or under any similar law or statute of
the United States or any State thereof; or a petition shall be filed against
Tenant under any such statute; or Tenant or any creditor of Tenant notifies
Landlord that it knows such a petition will be filed; or Tenant notifies
Landlord that it expects such a petition to be filed; or (vii) a receiver or
trustee shall be appointed for Tenant's Leasehold Interest in the Premises or
for all or a substantial part of the assets of Tenant.
(b) Upon the occurrence of any event or events of default by
Tenant, whether enumerated in this Paragraph or not, Landlord shall have the
option to pursue any one or more of the following remedies without any notice
[except for such notice expressly required by Subparagraph 25(a)(ii)] or
demand for possession whatsoever (and without limiting the generality of the
foregoing, Tenant hereby specifically waives notice and demand for payment of
Rent or other obligations due and waives any and all other notices or demand
requirements imposed by applicable law): (i) terminate this Lease in which
event Tenant shall immediately surrender the Premises to Landlord; (ii)
terminate Tenant's right to occupy the Premises and re-enter and take
possession of the Premises (without terminating this Lease); (iii) enter upon
the Premises and do whatever
OFFICE LEASE AGREEMENT - Page 6
<PAGE>
Tenant is obligated to do under the terms of this Lease; and Tenant agrees to
reimburse Landlord on demand for any expenses which Landlord may incur in
effecting compliance with Tenant's obligations under this Lease, and Tenant
further agrees that Landlord shall not be liable for any damages resulting to
the Tenant from such action; and (iv) exercise all other remedies available
to Landlord at law or in equity, including, without limitation, injunctive
relief of all varieties.
(c) In the event Landlord elects to re-enter or take possession
of the Premises after Tenant's default, Tenant hereby waives notice of such
re-entry or repossession and of Landlord's intent to re-enter or retake
possession. Landlord may, without prejudice to any other remedy which it may
have for possession or arrearages in or future Rent, expel or remove Tenant
and any other person who may be occupying said Premises or any part thereof.
In addition, the provisions of Paragraph 27 hereof shall apply with respect
to the period from and after the giving of notice of such repossession by
Landlord. In addition, Landlord may change or alter the locks and other
security devices on the doors to the Premises and/or remove Tenant's; master
entry cards from the security and master entry card system; and Tenant hereby
waives, to the fullest extent allowed by law, any requirement that notice be
posted on the Premises as to the location of a key to such new locks and any
right to obtain such a key. All Landlord's remedies shall be cumulative and
not exclusive. Forbearance by Landlord to enforce one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of such default. Tenant hereby expressly waives all
rights under Section 93.002 of the Taxes Property Code (Commercial Lockout
Statute).
(d) In the event that Landlord elects to terminate this Lease,
then, notwithstanding such termination, Tenant shall be liable for and shall
pay to Landlord the sum of all Rents and other indebtedness accrued to the
date of such termination, plus, as damages, an amount equal to the total of
(i) the cost of recovering the Premises, (ii) the cost of removing and
storing Tenant's and other occupant's property located therein, (iii) the
costs of reletting the Premises, or portion thereof (including, without
limitation, brokerage commissions), (iv) the cost of decorations, repairs,
changes, alterations, and additions to the Premises whether accomplished in
one or more steps or phases, (v) the cost of collecting such amounts from
Tenant hereunder, and (vi) any other sums of money or damages that may be
owed to Landlord as the result of default by Tenant or the exercise of
Landlord's rights at law or in equity.
(e) In the event that Landlord elects to take possession of the
Premises and terminate Tenant's right to occupy the Premises without
terminating this Lease, Tenant shall remain liable, and shall pay to
Landlord, from time to time, on demand, any deficiency between the total Base
Rental due under this Lease for the remainder of the Lease Term and rents, if
any, which Landlord is able to collect from another tenant(s) for the
Premises, or portion thereof, during the remainder of the Lease Term ("Rental
Deficiency"). In addition, Tenant shall be liable for and shall pay to
Landlord, on demand, an amount equal to (i) the cost of recovering possession
of the Premises, (ii) the cost of removing and storing Tenant's or any other
occupant's property located therein, (iii) the costs of relating the
Premises, or applicable portion thereof, and whether accomplished in one or
more phases (including, without limitation, brokerage commissions), (iv) the
cost of decorations, changes, alterations, and additions to the Premises, or
applicable portion thereof, and whether accomplished in one or more phases,
(v) the cost of collection of the rent accruing from any such reletting, (vi)
the cost of collecting any sums billable to Tenant by Landlord hereunder, and
(vii) any other sum of money or damages that may owed to Landlord as a result
of Tenant's default or the exercise of Landlord's rights at law or in equity.
Landlord may file suit to recover any sums falling due under the terms hereof
from time to time, and no delivery to or recovery by Landlord of any portion
of the sums due Landlord hereunder shall be any defense in any action to
recover any amount not heretofore reduced to judgment in favor of Landlord.
Nothing contained herein shall be deemed to require Landlord to relet the
Premises. Any sums received by Landlord through reletting shall reduce the
sums owing by Tenant to Landlord hereunder, but in an event shall Tenant be
entitled to any excess of any sums obtained by reletting over and above the
Base Rental provided in this Lease to be paid by Tenant to Landlord. For the
purpose of such reletting, Landlord is authorized to decorate or to make any
repairs, changes, alterations, or additions in and to the Premises or
applicable portion thereof, that Landlord may deem necessary or advisable. No
reletting shall be construed as an election on the part of Landlord to
terminate this Lease unless a written notice of such intention is given to
Tenant by Landlord. Notwithstanding any such reletting without termination,
Landlord may at any time thereafter elect to terminate this Lease for such
previous default. In the alternative (but only in the event that Tenant's
default constitutes a material breach), Landlord may elect to terminate
Tenant's right to occupy the Premises and to immediately recover as damages,
in lieu of the Rental Deficiency, a sum equal to the difference between (i)
the total Base Rental due under this Lease for the remainder of the Lease
Term and (ii) the then fair market rental value of the Premises during such
period, discounted to present value at a rate determined by Landlord, in its
sole discretion ("Discounted Future Rent"). In such event, Landlord shall
have no responsibility to attempt to relet the Premises or to apply any
rentals received by Landlord as a result of any such reletting to Tenant's
obligations hereunder; and the aggregate amount of all damages due to
Landlord, including the Discounted Future Rent hereunder, shall be
immediately due and payable to Landlord upon demand. To the extent Landlord
is obligated by law to mitigate its damages, mitigation for these purposes
shall only mean that Landlord agrees to list or advertise the Premises for
rent in accordance with Landlord's standard advertising and rental policies,
and to rent the Premises to prospective tenants only if there are no other
comparable available leasehold premises in the Building or in other projects
of Landlord or its affiliates in the vicinity of the Building.
(f) In addition to the remedies set forth in Paragraph 25(b) of
the Lease, upon the occurrence of any event or events of default by Tenant
under the Lease with respect to which Landlord elects to either terminate the
Lease, or without terminating the Lease, to terminate Tenant's possession of
the Premises, Landlord shall be entitled to (i) receive a cash payment from
Tenant on demand in an amount equal to all "Reimbursable Costs" (as defined
below) which have not yet vested in Tenant, (ii) terminate any remaining
lease concessions which have not yet accrued under the Lease, and (iii)
terminate all of Tenant's parking and signage rights under the Lease. As used
herein, the term "Reimbursable Costs" shall mean the total of (i) the
difference between the average monthly Base Rental payable by Tenant over the
entire Lease Term and the average monthly Base Rental payable by Tenant from
the Commencement Date to the date of default MULTIPLIED BY the number of
months from the Commencement Date through the date of default; and (ii) the
aggregate dollar amount which has been paid and/or is payable by Landlord to
or on behalf of Tenant under the Lease, including, without limitation, (a)
any brokerage commissions in connection with the execution of the Lease, and
(y) any allowances (for leasehold improvements or otherwise). Since the
Reimbursable Costs were incurred by Landlord in reliance upon Tenant fully
performing Tenant's obligations under the Lease. Tenant hereby acknowledges
that Landlord will be damaged, upon a default by Tenant, in an amount equal
to the aggregate dollar value of the Reimbursable Costs which have not yet
vested in Tenant. Reimbursable Costs shall be deemed to be vested in Tenant
on a pro rata bases for each calendar month during the Lease Term for which
Tenant has paid rent and is not otherwise in default hereunder. No vesting
shall occur with respect to any month for which Tenant has not paid rent or
in which Tenant is otherwise in default hereunder.
(g) This Paragraph 25 shall be enforceable to the maximum extent
not prohibited by applicable law, and the unenforceability of any portion
thereof shall not thereby render unenforceable any other portion. No act or
thing done by Landlord or its agents during the Lease Term shall be deemed an
acceptance
OFFICE LEASE AGREEMENT - Page 7
<PAGE>
of an attempted surrender of the Premises, and no agreement to accept a
surrender of the Premises shall be valid unless made in writing and signed
by Landlord. No re-entry or taking of possession of the Premises by Landlord
shall be construed as an election on Landlord's part to terminate this Lease
unless a written notice of such termination is given to Tenant.
(h) Landlord shall be in default hereunder in the event Landlord
has not begun and pursued with reasonable diligence the cure of any failure
of Landlord to meet its obligations hereunder within thirty (30) days of the
receipt by Landlord of written notice from Tenant of the alleged failure to
perform. In no event shall Tenant have the right to terminate or rescind this
Lease as a result of Landlord's default as to any covenant or agreement
contained in this Lease. Tenant hereby waives such remedies of termination
and rescission and hereby agrees that Tenant's remedies for default hereunder
any for breach of any promise or inducement shall be limited to a suit for
damages and/or injunction. In addition, Tenant hereby covenants that, prior
to the exercise of any such remedies, it will give the mortgagees holding
mortgages on the Building notice and a reasonable time to cure any default
by Landlord.
26. PEACEFUL ENJOYMENT. Tenant shall, and may peacefully have, hold, and
enjoy the Premises, subject to the other terms hereof, provided that Tenant
pays the Rent and other sums herein recited to be paid by Tenant and
performs all of Tenant's covenants and agreements herein contained. This
covenant and any and all other covenants of Landlord shall be binding upon
Landlord and its successors only with respect to breaches occurring during its
or their respective periods of ownership of the Landlord's interest
hereunder. Landlord shall be entitled to cause Tenant to relocate from the
Premises to a comparable space (a "Relocation Space") within the Building at
any time upon reasonable written notice to Tenant (which notice shall not be
given in excess of one hundred twenty (120) days prior to such relocation).
Landlord or the third party tenant replacing Tenant in the Premises shall
pay all reasonable costs of accomplishing such relocation. Such a relocation
shall not terminate or otherwise effect or modify this Lease except that from
and after the date of such relocation, "Premises" shall refer to the
Relocation Space into which Tenant has been moved, rather than the original
Premises as herein defined.
27. HOLDING OVER. In the event of holding over by Tenant after
expiration or other termination of this Lease or in the event Tenant
continues to occupy the Premises after the termination of Tenant's right of
possession pursuant to Paragraph 25(b) hereof, Tenant shall, throughout the
entire holdover period, pay Rent equal to one hundred fifty percent (150%) of
the Base Rental and additional Base Rental which would have been applicable
had the term of this Lease continued through the period of such holding over
by Tenant. No holding over by Tenant after the expiration of the term of
this Lease shall be construed to extend the term of this Lease.
28. SUBORDINATION TO MORTGAGE. Tenant accepts this Lease subject and
subordinate to any mortgage, deed of trust or other lien presently existing
or hereafter arising upon the Premises, or upon the Building and/or the
Property and to any renewals, modifications, consolidations, refinancing, and
extensions thereof, but Tenant agrees that any such mortgagee shall have the
right at any time to subordinate such mortgage, deed of trust or other lien
to this Lease on such terms and subject to such conditions as such mortgagee
may deem appropriate in its discretion. Landlord is hereby irrevocably vested
with full power and authority to subordinate this Lease to any mortgage, deed
of trust or other lien now existing or hereafter placed upon the Premises, or
the Building and/or the Property and Tenant agrees upon demand to execute
such further instruments subordinating this Lease or attorning to the holder
of any such liens as Landlord may request. The terms of this Lease are
subject to approval by the Landlord's permanent lender(s), and such approval
is a condition precedent to Landlord's obligations hereunder. In the event
that Tenant should fail to execute any subordination or other agreement
required by this Paragraph promptly as requested, Tenant hereby irrevocably
constitutes Landlord as its attorney-in-fact to execute such instrument in
Tenant's name, place and stead, it being agreed that such power is one
coupled with an interest. Tenant agrees that it will from time to time upon
request by Landlord execute and deliver to such persons as Landlord shall
request a statement in recordable form certifying that this Lease is
unmodified and in full force and effect (or, if there have been
modifications, that the same is in full force and effect as so modified),
stating the dates to which Rent and other charges payable under this Lease
have been paid, stating the Landlord is not in default hereunder (or if
Tenant alleges a default stating the nature of such alleged default) and
further stating such other matters as Landlord shall reasonably require.
29. ESTOPPEL CERTIFICATES. Tenant agrees that it will from time to time
upon request by Landlord execute and deliver to such persons as Landlord
shall request a statement in recordable form certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as so modified), stating the date
to which rental and other charges payable under this Lease have been paid,
stating that the Landlord is not in default hereunder (or, if Tenant alleges
a default stating the nature of such alleged default in particularity) and
further stating such other matters as Landlord shall reasonably require.
Tenant agrees to deliver such statement within ten (10) days after written
request from Landlord. Failure to timely deliver such estoppel certificate
shall be a default under this Lease and shall entitle Landlord to pursue any
and all remedies it deems appropriate.
30. LANDLORD'S LIEN. Tenant hereby grants to Landlord a lien and
security interest on all property of Tenant now or hereafter placed in or
upon the Premises and such property shall be and remain subject to such lien
and security interest of Landlord for payment of all Rent and other sums
agreed to be paid by Tenant herein. The provisions of this Paragraph relating
to such lien and security interest shall constitute a security agreement
under and subject to the Texas Business and Commerce Code so that Landlord
shall have and may enforce a security interest on all property of Tenant now
or hereafter placed in or on the Premises, in addition to and cumulative of
the Landlord's liens and rights provided by law or by other terms and
provisions of this Lease. Tenant agrees to execute as debtor such financing
statement or statements as Landlord may now or hereafter request. Landlord
may at its election at any time file a copy of this Lease as a financing
statement. Notwithstanding the above, Landlord shall neither sell nor
withhold from Tenant, Tenant's business records. Tenant hereby waives its
lien rights under Section 91.004 of the Texas Property Code.
31. ATTORNEY'S FEES. In the event either party files suit to enforce the
performance of or obtain damages caused by a default under any of the terms
of this Lease, the party against whom a judgment is rendered shall pay the
prevailing party's reasonable costs and attorneys' fees. The reasonableness
of such costs and attorneys' fees shall be determined by the court and not
the jury, with respect to any monetary claim, in order for a party to
prevail, such party must be award at least fifty percent (50%) of the highest
amount which such party claimed at any time in such suit.
32. NO IMPLIED WAIVER. The failure of Landlord to insist at any time upon
the strict performance of any covenant or agreement herein or to exercise any
option, right, power or remedy contained in this Lease shall not be construed
as a waiver or a relinquishment thereof for the future. No payment by Tenant
or receipt by Landlord of a lesser amount than the monthly installment of Rent
due under this Lease shall be deemed to be other than on account of the
earliest Rent due hereunder, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as Rent be deemed an
accord and satisfaction, and Landlord may
OFFICE LEASE AGREEMENT - Page 8
<PAGE>
accept such check or payment without prejudice to Landlord's right to recover
the balance of such Rent or pursue any other remedy in this Lease provided.
33. PERSONAL LIABILITY. In no event shall Landlord be liable to Tenant
either for (a) any loss or damage that may be occasioned by or through the
acts or omissions of other tenants of the Building or of any other persons
whomever or (b) any consequential damages regardless of causation. With
respect to tort claims against Landlord, Landlord shall not be liable to
Tenant or to any other person for any act or omission of Landlord or of its
agents or employees, negligent or otherwise, except for actual damages or
costs incurred as a direct result of and caused directly by the willful
misconduct or gross negligence of Landlord (or of Landlord's agents or
employees) in circumstances in which Landlord is deemed to be liable at law
for such acts or omissions and such liability cannot be waived by Tenant.
Nothing contained in the immediately preceding sentence shall ever be
construed as creating liability in excess of that existing at law or, in any
event, increasing the liability of Landlord, under any theory or cause of
action, however denominated, from that existing at law, further, the
liability of Landlord to Tenant for (a) any default by Landlord under the
terms of this Lease, (b) for any tort liability of Landlord to Tenant, or (c)
in any other circumstance in which Landlord is judicially determined to have
some liability to Tenant, for whatever reason, shall, in each such instance,
be limited to the interest of Landlord in the Building and Property and
Tenant agrees to look solely to Landlord's interest in the Building and the
Property for the recovery of any judgment from the Landlord, if being
intended that Landlord shall never be personally liable for any judgment or
deficiency.
34. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord
without liability for interest and as security for the performance by Tenant
of Tenant's covenants and obligations under this Lease, it being expressly
understood that the Security Deposit shall not be considered an advance
payment of Rental or a measure of Tenant's liability for damages in case of
default by Tenant. Landlord may commingle the Security Deposit with
Landlord's other funds. Landlord may, from time to time, without prejudice to
any other remedy, use the Security Deposit to the extent necessary to make
good any arrearages of Rent or to satisfy any other covenant or obligation of
Tenant hereunder. Following any such application of the Security Deposit,
Tenant shall pay to Landlord on demand the amount so applied in order to
restore the Security Deposit to its original amount. If Tenant is not in
default at the termination of this Lease, the balance of the Security Deposit
remaining after any such application shall be returned by Landlord to Tenant.
If Landlord transfers its interest in the Premises during the term of this
Lease, Landlord may assign the Security Deposit to the transferee and
thereafter shall have no further liability for the return of such Security
Deposit.
35. NOTICE. Any notice in the Lease provided for must, unless otherwise
expressly provided herein, be in writing, and may, unless otherwise in this
Lease expressly provided, be given or be served by depositing the same in the
United States mail, postage prepaid and certified and addressed to the party
to be notified, with return receipt requested, or by prepaid telegram, or by
overnight courier (such as Federal Express or similar company) or by hand
delivery, with evidence in either event of delivery to addressee, when
appropriate, addressed to the party to be notified at the address stated in
this Lease or such other address notice of which has been given to the other
party. Notice deposited in the mail in the manner hereinabove described shall
be effective from and after the expiration of three (3) calendar days after
it is so deposited. Notice by overnight courier shall be effective on the
next business day after being sent. Notice by personal delivery shall be
effective on the day of receipt.
36. SEVERABILITY. If any term or provision of this Lease, or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Lease shall be valid and enforced to the
fullest extent permitted by law.
37. RECORDATION. Tenant agrees not to record this Lease or any
memorandum hereof.
38. GOVERNING LAW. This Lease and the rights and obligations of the
parties hereto shall be interpreted, construed, and enforced in accordance
with the laws of the State of Texas.
39. FORCE MAJEURE. Whenever a period of time is herein prescribed for
the taking of any action by Landlord, Landlord shall not be liable or
responsible for, and there shall be excluded from the computation of such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations or restrictions,
litigation brought by third parties to enjoin Landlord's activities at the
Building, or any other cause whatsoever beyond the control of Landlord.
40. TIME OF PERFORMANCE. Except as expressly otherwise herein provided,
with respect to all required acts of Tenant, time is of the essence of this
Lease.
41. TRANSFERS BY LANDLORD. Landlord shall have the right to transfer
and assign, in whole or in part, all its rights and obligations hereunder and
in the Building and Property referred to herein, and in such events and upon
such transfer Landlord shall be released from any further obligations
hereunder, and Tenant agrees to look solely to such successor in interest of
Landlord for the performance of such obligations.
42. TRANSFERS BY TENANT. Tenant shall not transfer, convey, mortgage,
pledge, hypothecate, or encumber Tenant's leasehold interest hereunder or
grant any license, concession, or other right to occupancy of any portion of
the Premises without the prior written consent of Landlord, which may be
granted or withheld in Landlord's sole discretion. The prohibitions specified
in this Paragraph 42 shall be in addition to, and independent of, the
provisions of Paragraph 13 hereof and shall be construed to include, without
limitation, any such prohibited transfers occurring by operation of law. Any
attempt by Tenant to accomplish a transfer prohibited by the provisions of
this Lease, without having obtained the prior written consent of Landlord
thereto shall be void and of no force or effect any may, at the option of
Landlord, constitute a material default hereunder.
43. COMMISSIONS. Tenant represents and warrants that no broker has
represented it in this lease transaction and that no broker is owed a
commission or fee in connection with the consummation of this lease
transaction. Tenant hereby indemnifies and holds Landlord harmless against
any loss, claim, expense or liability with respect to any commissions or
brokerage fees claimed on account of the execution and/or renewal of this
Lease or the expansion of the Premises hereunder, if applicable, due to any
action by Tenant. The provisions of this paragraph shall survive the
termination of this Lease.
44. EFFECT OF DELIVERY OF THIS LEASE. Landlord has delivered a copy of
this Lease to Tenant for Tenant's review only, and the delivery hereof does
not constitute an offer to Tenant or option. This Lease shall not be effective
until a copy executed by both Landlord and Tenant is delivered to and
accepted by Landlord, and this Lease has been approved by Landlord's
mortgagee.
45. ENTIRE AGREEMENT. This Lease embodies the entire agreement between
the parties hereto with
OFFICE LEASE AGREEMENT - Page 9
<PAGE>
relation to the transaction contemplated hereby, and there have been and are
no covenants, agreements, representations, warranties or restrictions between
the parties hereto with regard thereto other than those specifically set forth
herein.
46. RECEIPT OF PREMISES. The occupancy of the Premises by Tenant shall
constitute the acknowledgment and agreement of Tenant that Tenant is fully
familiar with the physical condition of the Premises, that Tenant has received
the same in good order and condition, and that the Premises comply in all
respects with the requirements of this Lease and are suitable for the purposes
for which the Premises are hereby leased. In that regard, Landlord hereby
disclaims, and Tenant hereby waives, any warranty of suitability with respect
to the Premises.
47. MERGER OF ESTATES. The voluntary or other surrender of this Lease by
Tenant or a mutual cancellation thereof, shall not constitute a merger; and
upon such surrender or cancellation of this Lease, Landlord shall have the
option, in Landlord's sole discretion, to (i) either terminate all or any
existing subleases or subtenancies, or (ii) assume Tenant's interest in any
or all subleases or subtenancies.
48. WASTE MANAGEMENT. Without limiting its obligations under Paragraph
14 (and the rules and regulations attached to this Lease as EXHIBIT "D"),
Tenant covenants and agrees to comply with all laws, rules, regulations and
guidelines now or hereafter made applicable to the Premises respecting the
disposal of waste, trash, garbage and other matter (liquid or solid),
generated by Tenant, the disposal of which is not otherwise the express
obligation of Landlord under this Lease (it is expressly understood that the
provision of janitorial services by Landlord is not an express obligation of
Landlord under this Lease for the purpose of this Paragraph 48), including,
but not limited to, laws, rules, regulations and guidelines respecting
recycling and other forms of reclamation (all of which are herein
collectively referred to as "Waste Management Requirements"). Tenant
covenants and agrees to comply with Waste Management Requirements applicable
to Landlord (i) as owner of the Premises and (ii) in performing Landlord's
obligations under this Lease, if any. Tenant further covenants and agrees to
comply with all rules and regulations established by Landlord to enable
Landlord from time to time to avail itself of the lowest rate available for
the disposal of waste, trash, garbage and other matter (liquid or solid),
generated by Tenant. Tenant covenants and agrees to indemnify, defend,
protect and hold Landlord harmless (in accordance with Paragraph 20) from and
against all liability (including costs, expenses and attorney fees) that
Landlord may sustain by reason of Tenant's breach of its obligations under
this paragraph 48. Tenant's obligations under this paragraph 48 shall survive
the termination of this Lease.
49. AMERICANS WITH DISABILITIES ACT AND TEXAS ARCHITECTURAL BARRIERS
ACT. Tenant agrees to comply with all requirements of the Americans with
Disabilities Act (Public Law 101-336 (July 26, 1990)) and the Texas
Architectural Barriers Act (Article 9102, Tex. Rev. Civ. St. (1991))
applicable to the Premises and applicable to the Building and Property to
accommodate its employees, invitees and customers. Tenant acknowledges that
it shall be wholly responsible for any accommodations or alterations which
need to be made to the Premises to accommodate Tenant's employees, customers
and invitees and for making any additional accommodations or alterations
which need to be made to the Building or the Property to accommodate Tenant's
employees, invitees and customers. Tenant agrees to indemnify and hold
Landlord harmless from any and all expenses, liabilities, costs or damages
suffered by Landlord as a result of Tenant's failure to fulfill its aforesaid
responsibilities regarding making such accommodations and alterations
referenced in the preceding sentence. No provision in this Lease should be
construed in any manner as permitting, consenting to or authorizing Tenant to
violate requirements under either such Act and any provision of the Lease
which could arguably be construed as authorizing a violation of either Act
shall be interpreted in a manner which permits compliance with such Act and
is hereby amended to permit such compliance.
50. TEMPORARY SPACE. The parties acknowledge that from the date of
execution of this Lease through the Commencement Date (the "Temporary Space
Term"), Tenant shall have the right to occupy that certain space as shown on
EXHIBIT "H" attached hereto ("Temporary Space") of the Building at no charge.
During the Temporary Space Term, all terms and provisions of this Lease other
than those with respect to Rent, the Allowance and the Lease Term shall apply
with respect to the Temporary Space. Further, nothing contained herein shall
be construed as releasing Tenant from any obligations of Tenant arising under
Paragraph 20, Indemnity, of this Lease or with respect to any physical damage
to the Temporary Space, which shall survive the Temporary Space Term.
51. EXHIBITS. The following numbered exhibits are attached hereto and
incorporated herein and made a part of this Lease for all purposes:
Exhibit "A" - Legal Description
Exhibit "B" - Floor Plan
Exhibit "C" - Payment of Excess Basic Costs
Exhibit "D" - Rules and Regulations
Exhibit "E" - Work Letter
Exhibit "F" - Parking
Exhibit "G" - Right of First Refusal
Exhibit "H" - Temporary Space Floor Plan
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS LEASE HEREBY ACKNOWLEDGE AND
AGREE THAT THIS LEASE (AND ATTACHED EXHIBITS) CONTAINS CERTAIN
INDEMNIFICATION PROVISIONS.
OFFICE LEASE AGREEMENT - Page 10
<PAGE>
LANDLORD:
Address: METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
1000 Louisiana
Suite 500
Houston, Texas 77002
Attn: Property Manager By: /s/ David G. Rogers
----------------------------------
David G. Rogers,
Assistant Vice-President
With a copies to:
METROPOLITAN TOWER REALTY COMPANY, INC.
Metropolitan Life Insurance Company a Delaware corporation
5420 LBJ Freeway, Suite 1310
Dallas, Texas 75240
Attention: Assistant Vice-President
Real Estate Investments By: /s/ David G. Rogers,
----------------------------------
and David G. Rogers,
Vice-President
Metropolitan Life Insurance Company
303 Perimeter Center North, Suite 600
Atlanta, Georgia 30346
Attention: Territorial Vice-President
Real Estate Investments
TENANT:
Address Prior to CALIBRE ENERGY, L.P.,
Commencement Date: a Texas limited partnership
1201 Louisiana By: /s/ Todd Grabois
Suite 3350 ----------------------------------
Houston, TX 77002 Name: Todd Grabois
Attn: Todd Grabois ---------------------------------
Title: General Partner - Treasurer
--------------------------------
Calibre Oil & Gas Corp.
Address Subsequent to
Commencement Date:
1000 Louisiana
Suite 5500
Houston, Texas 77002
Attn: Todd Grabois
OFFICE LEASE AGREEMENT - Page 11
<PAGE>
EXHIBIT "A"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
LEGAL DESCRIPTION
Being a tract or parcel containing 62,472 square feet of land situated in
Harris County, Texas, being all of Block 144, City of Houston, South Side
Buffalo Bayou (S.S.B.B.), being more particularly described as follows:
COMMENCING at City of Houston Monument 5457,0109-B same being City Rod 27,
located at the intersection of the centerlines of McKinney Avenue (80 feet
wide) and Louisiana Street (80 feet wide);
THENCE, North 55"00'00" West, 40.00 feet along the centerline of said
McKinney Avenue;
THENCE, departing said centerline at a right angle, South 35"00'00" West
along a line that is parallel with and 40.00 feet west of the centerline of
Said Louisiana Street, 40.00 feet to the northeast corner of said Block 144
and the POINT OF BEGINNING;
THENCE, continuing along the westerly right-of-way line of said Louisiana
Street, South 35"00'00" West, 249.89 feet to the southeast corner of said
Block 144;
THENCE, North 55"00'00" West, 250.00 feet along the northerly right-of-way
line of Lamar Avenue (80 feet wide) to the southwest corner of said Block 144;
THENCE, North 35"00'00" East, 249.89 feet along the easterly right-of-way
line of Smith Street (80 feet wide) to the northwest corner of said Block 144;
THENCE, South 55"00'00" East, 250.00 feet along the southerly right-of-way
line of said McKinney Avenue to the POINT OF BEGINNING, containing a computed
area of 62,472 square feet of land.
EXHIBIT "A" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "B"
-----------
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
FLOOR PLAN
----------
(FLOORPLAN)
EXHIBIT "B" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "C"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY,
AND METROPOLITAN TOWER REALTY COMPANY, INC.
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
PAYMENT OF EXCESS BASIC COSTS
1. BASIC COSTS. The Base Rental payable hereunder shall be adjusted
from time to time in accordance with the following provisions:
(a) Tenant's Base Rental is based, in part, upon the estimate
that annual "Basic Costs" (as hereinafter defined) will be equal to the
"Expense Stop". During the Lease Term, Tenant shall pay as an adjustment
to Base Rental hereunder an amount (per each square foot of Rentable
Area within the Premises) equal to the excess ("Excess") from time to
time of Basic Costs per square foot of Rentable Area in the Building
over the Expense Stop. Landlord may collect such additional Base Rental
in arrears on a yearly basis. Landlord shall also have the option to
make a good faith estimate of the Excess from time to time for each
upcoming calendar year (or remainder thereof, if applicable) and, upon
thirty (30) days' written notice to Tenant, may require the monthly
payment of Base Rental to be adjusted in accordance with such estimate.
Any amounts paid based on such an estimate shall be subject to
adjustment pursuant to Paragraph 2 below when Basic Costs are available
for such calendar year.
(b) "Basic Costs" shall mean all direct and indirect costs and
expenses in each calendar year of operating, maintaining, repairing,
managing and owning the Building and the Property plus all operating
costs of the Exterior Common Area (below defined). Basic Costs shall not
include the cost of capital improvements, depreciation, interest, lease
commissions, and principal payments on mortgage and other non-operating
debts of Landlord. Basic Costs shall, however, include the amortization
of capital improvements which are primarily for the purpose of reducing
Basic Costs, or which are required by governmental authorities.
"Exterior Common Areas" shall mean that portion of the Property (and
other tracts of real property comprising the multi-building project in
the event the Building is located in such a project) which are not
located within the Building (or other building in a multi-building
project) and which are provided and maintained for the common use and
benefit of Landlord and tenants of the Building (or multi-building
project) generally and the employees, invitees and licensees of Landlord
and such tenants; including without limitation, all parking areas
(enclosed or otherwise, including, without limitation, the parking areas
beneath the Building and those in the 1400 Louisiana Garage) and all
streets, sidewalks, walkways, pedestrian tunnels and landscaped areas.
2. PROCEDURE. The following additional provisions shall apply to
Paragraph 1 of this EXHIBIT "C":
(a) By April 1 of each calendar year during Tenant's occupancy, or
as soon thereafter as practical, Landlord shall furnish to Tenant a
statement of Landlord's Basic Costs for the previous calendar year. If
for any calendar year additional Base Rental was collected for the prior
year, as a result of Landlord's estimate of Basic Costs, in excess of
the additional Base Rental due during such prior year, then Landlord
shall refund to Tenant any over payment (or at Landlord's option, apply
such amount against rentals due or to become due hereunder). Likewise,
Tenant shall pay to Landlord, on demand, any underpayment with respect
to the prior year. In no event shall Basic Costs per square foot of
Rentable Area within the Building be deemed to be less than the Expense
Stop, it being the intent of Landlord and Tenant that Tenant shall at
all times be responsible for the payment of, and shall pay, not less
than the amount of Base Rental for the applicable period (before
adjustment) specified in this Lease.
(b) Notwithstanding any language in the Lease or in this EXHIBIT
"C" seemingly to the contrary, Landlord shall determine and estimate
Basic Costs for any calendar year within the Lease Term by increasing
the variable components of Basic Costs to the amount which Landlord
projects would have been incurred had the Building been occupied to the
extent of ninety-five percent (95%) of the Rentable Area therein during
all of the applicable calendar year. In such event, the term "Basic
Costs", as used in this EXHIBIT "C" and in the Lease, shall include
(i) the actual Basic Cost incurred during any portion of such calendar
year in which the Building is occupied to the extent of ninety-five percent
(95%) or more of the Rentable Area therein plus (ii) the Basic Costs
which would have been incurred had the Building been occupied to the
extent of ninety-five percent (95%) of the Rentable Area thereof during
the portion of that calendar year in which the actual occupancy of the
Building is less than ninety-five percent (95%) of the Rentable Area
therein; and Landlord shall have the option of making such estimate in
advance for any upcoming calendar year.
(c) In the event that the Lease Term commences on a day other
than January 1 or terminates on a day other than December 31, the Excess
for that part of the first (1st) calendar year or last calendar year
during the Lease Term shall be determined as follows:
(i) The Expense Stop shall be prorated based upon the
number of months in such partial calendar year. With respect to any
partial calendar month occurring during such partial calendar year, the
Expense Stop shall also be prorated based upon the number of days in
that partial calendar month.
(ii) The Excess, if any, for the applicable partial
calendar year shall then be the amount by which (A) actual Basic Costs
per square foot of Rentable Area in the Building for such calendar year,
prorated based upon the number of months and days in the applicable
partial calendar year, exceed (B) the Expense Stop, as prorated pursuant
to the provisions of this Subparagraph 2(c).
(iii) With respect to a proration for the first (1st)
calendar year and in the event that Landlord's estimate of the Basic
Costs to be incurred during such partial calendar year exceeds the
Expense Stop, as prorated pursuant to the provisions of this
Subparagraph 2(c), Landlord may, upon thirty (30) days prior written
notice to Tenant, require the monthly payments of Base Rental occurring
during such partial calendar year to be adjusted in accordance with such
estimate.
(iv) The provisions of this EXHIBIT "C" shall survive the
termination of the Lease Term.
EXHIBIT "C" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "D"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY,
AND METROPOLITAN TOWER REALTY COMPANY, INC.
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
RULES AND REGULATIONS
1. The sidewalks, halls, passages, exits, entrances, elevators,
escalators and stairways of the Building shall not be obstructed by any of
the tenants or used by them for any purpose other than for ingress to and
egress from their respective premises. The halls, passages, exits, entrances,
elevators, escalators and stairways are not for the use of the general
public, and Landlord shall in all cases retain the right to control and
prevent access thereto of all persons whose presence in the judgment of
Landlord shall be prejudicial to the safety, character, reputation and
interests of the Building and its tenants, provided that nothing herein
contained shall be construed to prevent such access to persons with whom any
tenant normally deals in the ordinary course of its business, unless such
persons are engaged in illegal activities. No tenants and no employee, agent
or invitee of any tenant shall go upon the roof of the Building. The two (2)
emergency stairwells located on each floor of the Building shall not be
obstructed by tenants or used by tenants or tenant's agents, servants,
employees, invitees or contractors or the public in general for any reason or
purpose except as an escape route in the event of an emergency.
2. No sign, placard, picture, name, advertisement or notice, visible
from the exterior of any tenant's premises shall be inscribed, painted,
affixed or otherwise displayed by any tenant on any part of the Building
without the prior written consent of Landlord, and Landlord shall have the
right to remove any such sign, placard, picture, name, advertisement or
notice at the expense of the tenant responsible for same and without notice
to such tenant. If Landlord shall have given such consent at anytime, such
consent shall be deemed to relate only to the particular sign, placard,
picture, name, advertisement or notice so consented to by Landlord and shall
not be construed as dispensing with the necessity of obtaining the specific
written consent of Landlord with respect to each and every other sign,
placard, picture, name, advertisement or notice. Landlord will adopt and
furnish to Tenant uniform rules and regulations relating to signs on the
office floors which shall be applicable to all tenants occupying space on the
office floors of the Building and tenant agrees to conform to such rules and
regulations. All approved signs or lettering on doors of Tenant's Premises
shall be printed, painted, affixed or inscribed at the expense of Tenant by a
person approved by Landlord.
3. The premises shall not be used for the storage of merchandise or for
lodging. No cooking, other than for warming purposes, shall be done or
permitted by any tenant in the Building, except that the preparation of
coffee, tea, hot chocolate and similar items for tenants and their employees
shall be permitted.
4. No tenant shall employ any person or persons other than the janitor
of Landlord for the purpose of cleaning the premises, unless otherwise agreed
to by Landlord in writing. Except with the written consent of Landlord, no
person or persons other than those approved by Landlord shall be permitted to
enter the Building for the purpose of cleaning the same. No tenant shall
cause any unnecessary labor by reason of such tenant's carelessness or
indifference in the preservation of good order and cleanliness. Landlord
shall in no way be responsible to any tenant for any loss of property on the
premises, however occurring, or for any damage done to the furniture or other
effects of any tenant by the janitor or any other employee or any other
person. Janitor service shall include ordinary dusting and cleaning by the
janitor assigned to such work and shall not include shampooing of carpets or
rugs or moving of furniture or other special services. Janitor services will
not be furnished on nights when rooms are occupied after 9:30 p.m.
5. No animals, or birds, or bicycles shall be allowed in the offices,
halls, corridors, elevators or elsewhere in the Building, except for seeing
eye dogs or other service animals for disabled persons.
6. Landlord will furnish each tenant with two (2) keys free of charge.
Landlord may make a reasonable charge for any additional keys. No tenant
shall have any keys made except by Landlord. No tenant shall alter any lock
or install any lock or install a new or additional lock or any bolt on any
door of its premises without prior written consent of Landlord. If Landlord
shall give its consent, the tenant shall in each case furnish Landlord with a
key for any such lock. Each tenant upon the termination of its tenancy, shall
deliver to Landlord all keys to doors in the Building which shall have been
furnished to tenant.
7. No safes, electronic equipment or other objects larger or heavier
than that which the freight elevators of the Building are limited to carry
shall be brought into or installed on any premises without Landlord's prior
written approval, it being agreed that Landlord shall approve the moving in
and installation of tenant's vault. The moving of such equipment shall occur
only between such hours as may be designated by, and only upon previous
notice to, the manager of the Building. No freight, furniture or bulky matter
of any description shall be received into the Building or carried into the
elevators, except during hours and in a manner approved by Landlord. Landlord
shall have the right to prescribe the weight, size and position of all safes
and other heavy equipment brought into the Building. Safes or other heavy
objects shall, if considered necessary by Landlord, stand on wood strips of
such thickness as is necessary to properly distribute the weight. Landlord
will not be responsible for loss of or damage to any such safe or property
from any cause, and all damage done to the Building by moving or maintaining
such safe or other property shall be repaired at the expense of tenant.
8. No tenant shall use or keep in, on or about the premises of the
Building any kerosene, gasoline or inflammable or combustible fluid or
material, or use any method of heating or air conditioning other than that
supplied by Landlord. No tenant shall use, keep or permit to be used or kept
any foul or noxious gas or substance in, on or about the premises, or permit
or suffer the premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of
noise, odors and/or vibrations, or interfere in any way with other tenants or
those having business therein.
9. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name and street address of the
Building.
10. Landlord reserves the right to exclude from the Building between the
hours of 7:00 p.m. and 7:00 a.m. and at all hours on Sundays, legal holidays
and after 1:00 p.m. on Saturdays all persons who do not present a pass to the
Building signed by Landlord. Landlord will furnish passes to persons for whom
any tenant requests the same in writing. Each tenant shall be responsible for
all persons for whom it requests passes and
EXHIBIT "D" OFFICE LEASE AGREEMENT - Page 1
<PAGE>
shall be liable to Landlord for all acts to such person. Landlord shall in no
case be liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. In the case of invasion, mob,
riot, public excitement, or other circumstances rendering such action
advisable in Landlord's opinion, Landlord reserves the right to prevent
access to the Building during the continuance of the same by such actions as
Landlord may deem appropriate, including closing and locking doors.
11. The directory board of the Building will be provided for the
display of the name and location of tenants only, and Landlord reserves the
right to exclude any other names therefrom. Any additional name which tenant
shall desire to place upon said directory board over and above the allowance
set forth in the Lease must first be approved by Landlord, and if so
approved, a charge will be made therefor.
12. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hanging or decorations shall be attached to, hung or placed in, or
used in connection with any window of the Building without the prior written
consent of Landlord. In any event, with the prior written consent of
Landlord, said above items shall be installed inboard of Landlord's standard
window covering and shall in no way be visible from the exterior of the
Building.
13. No tenant shall obtain for use in the premises, ice, drinking
water, food, beverage, towel or other similar services, or accept barbering
or bootblacking services in the premises, except from persons authorized by
Landlord, and at hours and under regulations fixed by Landlord, except as
otherwise set forth in the Lease.
14. At any party where alcoholic beverages are to be consumed on the
First Interstate Bank Plaza premises, tenant is required to have two (2)
off-duty policemen attend the party. One (1) policeman should remain in the
suite during the party, and one (1) should position himself near the proper
elevator bank.
15. Tenant shall see that the doors of its premises are closed and
securely locked and must observe strict care and caution that all water
faucets, water apparatus and utilities are shut off before tenant or tenant's
employees leave the premises, do as to prevent waste or damage. On
multiple-tenancy floors, all tenants shall keep the door or doors to the
Building corridors closed at all times except for ingress and egress.
16. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed. No foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees,
agents or invitees, shall have caused it.
17. Except with the prior written consent of Landlord, no tenant shall
sell, or permit the sale of newspapers, magazines, periodicals, theatre
tickets or any other goods of merchandise in or on the premises, nor shall
any tenant carry on, or permit or allow any employee or other person to carry
on, the business of stenography, typewriting or any similar business in or
from the premises for the services or accommodation of occupants of any other
portion of the Building.
18. No tenant shall install any radio or television antenna,
loudspeaker or other device on the roof or exterior walls of the Building.
19. No hand trucks or dollies, except those equipped with rubber tires
and side guards, shall be used in any space or in public halls of the
Building by any tenant. No other vehicles of any kind shall be brought into
the Building or kept in or about any premises by any tenant, their employees,
agents or invitees.
20. Each tenant shall store all its trash and garbage within its
premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the
ordinary and customary manner of removing and disposing of trash and garbage
in the City of Houston, without being in violation of any law or ordinance
governing such disposal. All garbage and refuse disposal shall be made only
through entryways and elevators provided for such purposes and at such times
as Landlord shall designate.
21. Canvassing, soliciting and peddling in the Building are prohibited
and each tenant shall cooperate to prevent the same.
22. The requirements of the tenants will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties unless under
special instructions from Landlord.
23. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in
favor of any other tenant or tenants, nor prevent Landlord from thereafter
enforcing any such Rules and Regulations against any or all of the tenants of
the Building.
24. These Rules and Regulations are in addition to and shall not be
construed to in any way modify, alter or amend, in whole or in part, the
terms, covenants, agreements and conditions of any lease of premises in the
Building.
25. Landlord reserves the right to make such other and reasonable rules
and regulations as in its judgment may from time to time be needed for the
safety, care and cleanliness of the Building, and for the preservation of
good order therein.
EXHIBIT "D" TO OFFICE LEASE AGREEMENT - Page 2
<PAGE>
SCHEDULE 1
TO
EXHIBIT "D"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
INTERPRETATION OF RULES AND REGULATIONS
1. With respect to Rule No. 6 of EXHIBIT "D", Tenant shall initially be
given eight (8) keys to the premises by Landlord.
2. With respect to Rule No. 11 of EXHIBIT "D", Tenant shall be provided two
(2) names on the Building directory at no charge.
SCHEDULE 1 TO EXHIBIT "D" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "E"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
WORK LETTER
(Minor Refurnishment)
This Work Letter ("Work Letter") describes and specifies the rights and
obligations of Landlord and Tenant with respect to certain remodeling and
refurbishment items to be completed in the Premises.
1. DEFINITIONS. Terms which are defined in the Lease shall have the
same meaning in this Work Letter. Additionally, as used in this Work Letter,
the following terms shall have the following meanings:
(a) ALLOWANCE: An amount equal to but not in excess of $5,164.00
to be used to complete the Refurbishment Items.
(b) COST OF THE WORK: The cost of all materials and labor needed to
complete the installation of the Refurbishment Items.
(c) REFURBISHMENT ITEMS: The items of work to be completed in the
Premises are itemized on Schedule "E-1" attached hereto.
2. COLOR, FINISHES AND MATERIALS. Each of the Refurbishment Items shall
be completed using building standard materials and workmanship. As
applicable, Tenant agrees to select all colors, finishes and building
material types within five (5) days of the execution of this Lease, and if
such selections are not made within such date, Landlord may in its sole
discretion select any building standard materials, colors and finishes
available for such Refurbishment Items. Tenant shall furnish a space plan or
diagram depicting the desired location for the Refurbishment Items within
five (5) days after the execution of this Lease, and if not furnished within
such date, or if the locations so designated are not acceptable to Landlord
for any reason, then Landlord may instead install such items in locations
acceptable to Landlord.
3. PERFORMANCE OF THE WORK AND COSTS. Landlord shall perform as
construction manager to cause the Refurbishment Items to be completed, and
the Cost of the Work shall include a management fee payable to Landlord in
the amount of five percent (5%) of the cost of the materials and labor needed
to complete the installation of the Refurbishment Items. Tenant shall be
obligated to pay the Cost of the Work in excess of the Allowance. Provided,
however, nothing in this Work Letter should be construed as imposing an
obligation on Landlord to complete the Refurbishment Items if the Cost of the
Work is reasonably estimated by Landlord to exceed the Allowance. If the Cost
of the Work is likely to exceed the Allowance, Landlord may, in its
discretion, either complete those items which, in the aggregate, Landlord
determines will not exceed the Allowance, or Landlord may make demand upon
tenant to deposit an amount equal to the estimated excess necessary to
complete the Refurbishment Items, and Tenant's failure to deposit such amount
shall relieve Landlord from any further obligation to complete any of the
Refurbishment Items. Any cost savings achieved after completion of all
Refurbishment Items shall be the property of Landlord, not Tenant, unless the
final Cost of the Work exceeds the Allowance amount and sums are deposited by
Tenant as aforesaid, in which case any surplus monies remaining after
completion of construction shall be the property of Tenant.
4. OTHER. Except for the Refurbishment Items, Tenant is taking the
Premises "As-Is" in its current condition and without benefit of further
improvements. The agreement of Landlord to perform the Refurbishment Items
should not be construed as representing or warranting that such work will
render the Premises in compliance with any applicable laws, including the
Americans with Disabilities Act and the Texas Architectural Barriers Act, and
it shall remain the sole responsibility of Tenant to determine whether the
Premises, with or without completion of the Refurbishment Items, comply with
all applicable laws. Within fifteen (15) days after Landlord advises Tenant
that the Refurbishment Items are completed, Tenant shall give Landlord a
written punchlist specifying any details which remain to be performed by
Landlord with respect to any work described in this Work Letter; and except
for the details contained in such written punchlist from Tenant, all
obligations of Landlord in regard to such work shall be deemed to have been
satisfied. Landlord shall have the right to enter the Premises to complete
any such unfinished details, and entry by Landlord, its agents, servants,
employees or contractors for such purpose shall not relieve Tenant of any of
its obligations under the Lease or impose any liability on Landlord or its
agents, servants, employees or contractors. This Work Letter embodies all
representations, warranties and agreements of Landlord and Tenant with respect
to the matters described herein, and this Work Letter may not be altered or
modified except by an agreement in writing signed by both parties. In the
event of conflict between the terms of this Work Letter and any other
exhibits or addenda to this Lease, this Work Letter shall prevail.
EXHIBIT "E" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
SCHEDULE "E-1"
TO
EXHIBIT "E"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
REFURBISHMENT ITEMS
1. Paint all painted walls utilizing building standard materials.
SCHEDULE 1 TO EXHIBIT "E" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "F"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
PARKING
This EXHIBIT "F" ("Parking Exhibit") describes and specifies Tenant's
non-exclusive right to use zero (O) reserved parking spaces and six (6)
unreserved parking spaces (collectively, "Spaces") located on such levels
inside one or more of the Building's parking garages as set forth on SCHEDULE
1 attached to this Parking Exhibit and incorporated herein by reference, all
upon the terms and conditions set forth below. The parking garage beneath the
Building shall be referred to as the "Building Garage." The parking garage
located at 1400 Louisiana shall be referred to as the "1400 Louisiana
Garage." The parking garage located at 777 Clay shall be referred to as the
"777 Clay Garage." The Building Garage, 1400 Louisiana Garage and 777 Clay
Garage may be hereinafter referred to individually and collectively as the
"Parking Garage."
1. DEFINITIONS. The terms which are defined in the Lease shall have
the same meaning in this Parking Exhibit.
2. GRANT AND RENTAL FEE. Provided no event of default has occurred and
is continuing under the Lease, Tenant shall be permitted the non-exclusive use
of the Spaces during the Lease Term at such monthly rates (together with any
applicable tax thereon) and subject to such terms, conditions, and
regulations as are, from time to time, promulgated by Landlord or the manager
of the Parking Garage, as applicable, and charged or applicable to patrons of
the Parking Garage for spaces similarly situated therein. In the event the
Premises are increased or decreased during the Lease Term, the number of
Spaces available to Tenant shall likewise be increased or decreased so that
the aggregate number of spaces to which Tenant is entitled shall equal one
(1) Space for each 2,700 square feet of Rentable Area within the Premises.
Notwithstanding the foregoing, Landlord reserves the right, in its sole
discretion, to terminate Tenant's use of any or all of the Spaces located in
the 777 Clay Garage on thirty (30) days notice to Tenant.
3. TENANT'S FAILURE TO USE SPACES. In the event that Tenant (after the
Commencement Date and at any time during the Lease Term) fails to utilize all
or any of the Spaces, Landlord shall have no further obligation to make
available to Tenant the Spaces not utilized. The failure, for any reason, of
Landlord to provide or make available such Spaces to Tenant or the inability
of Tenant to utilize all or any portion of the Spaces shall under no
circumstances be deemed a default by Landlord under the Lease so as to permit
Tenant to terminate the Lease, in whole or in part.
4. RISK. All motor vehicles (including all contents thereof) shall be
parked in the Spaces at the sole risk of Tenant, its employees, agents,
invitees and licensees, it being expressly agreed and understood that
Landlord has no duty to insure any of said motor vehicles (including the
contents thereof), and that Landlord is not responsible for the protection
and security of such vehicles. Landlord shall have no liability whatsoever
for any property damage and/or personal injury which might occur as a result
of or in connection with the parking of said motor vehicles in any of the
Spaces, and Tenant hereby agrees to indemnify and hold Landlord harmless from
and against any and all costs, claims, expenses, and/or causes of action
which Landlord may incur in connection with or arising out of Tenant's use of
the Spaces pursuant to this Agreement.
5. NO BAILMENT. It is further agreed that this Parking Exhibit shall
not be deemed to create a bailment between the parties hereto, it being
expressly agreed and understood that the only relationship created between
Landlord and Tenant hereby is that of licensor and licensee, respectively.
6. RULES AND REGULATIONS. In its use of the Spaces, Tenant shall
follow all of the Rules and Regulations of the Building (attached to the
Lease as Exhibit "D") applicable thereto, any rules and regulations
promulgated by Landlord or the manager of the Parking Garage, as applicable,
as the same may be amended from time to time. Upon the occurrence of any
breach of such rules, failure to make parking rental payments due hereunder
or default by Tenant under the Lease, Landlord shall be entitled to terminate
this Parking Exhibit, in which event Tenant's right to utilize the Spaces
shall thereupon automatically cease.
7. ACCESS. Landlord shall be entitled to utilize whatever access
device Landlord deems necessary (including but not limited to the issuance of
parking stickers or access cards), to assure that only those persons who have
contracted to use spaces in the Parking Garage are using the parking spaces
therein. Landlord currently limits access to the Parking Garage through the
use of a parking entry card system, the cards for which shall be provided by
Landlord. These cards are different from and do not, without a specific
request from Tenant, entitle the holder thereof to an after-hours entry card
to the Building (pursuant to the terms of Paragraph 6(f). Landlord agrees to
provide to Tenant five (5) parking entry cards. Tenant further agrees to
surrender all parking entry cards in its possession upon the expiration or
earlier termination of this Lease. Landlord shall be entitled to cancel any
lost or stolen cards of which it becomes aware. Tenant shall promptly notify
Landlord of any lost or stolen cards. Tenant shall pay Landlord for each
additional card(s) or for each replacement card(s) for any card(s) lost by or
stolen from Tenant, in such amount as Landlord shall, from time to time
determine, the present charge for such lost or stolen cards being $10.00 per
card. Tenant acknowledges that the parking entry card may also be the same as
the master entry card used for access to the Building during other than
normal business hours, and to the extent the cards are the same, agrees that
the provisions of Paragraph 6(f) of the Lease shall also be applicable and in
the event of a conflict with the provisions of this Parking Exhibit, the
provisions of Paragraph 6(f) shall control. In the event Tenant, its agents
or employees wrongfully park in any of the Parking Garage's spaces, Landlord
shall be entitled and is hereby authorized to have any such vehicle towed
away, at Tenant's sole risk and expense, and Landlord is further authorized
to impose upon Tenant a penalty of $25.00 for each such occurrence. Tenant
hereby agrees to pay all amounts falling due hereunder upon demand therefor,
and the failure to pay any such amount shall additionally be deemed an event
of default hereunder and under the Lease, entitling Landlord to all of its
rights and remedies hereunder and thereunder.
EXHIBIT "F" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
SCHEDULE 1
TO
EXHIBIT "F"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
BUILDING GARAGE
---------------
RESERVED SPACES
CURRENT MONTHLY
LEVEL NO. OF SPACES PRICE PER SPACE
- ----- ------------- ---------------
-- * $_____
-- * $_____
-- * $_____
-- * $_____
TOTAL RESERVED SPACES 0
---------
---------
UNRESERVED SPACES
TOTAL NO. CURRENT MONTHLY
OF SPACES PRICE PER SPACE
--------- ---------------
0 $______
1400 LOUISIANA GARAGE
---------------------
RESERVED SPACES
CURRENT MONTHLY
LEVEL NO. OF SPACES PRICE PER SPACE
- ----- ------------- ---------------
-- * $_____
-- * $_____
-- * $_____
-- * $_____
TOTAL RESERVED SPACES 0
---------
---------
UNRESERVED SPACES
TOTAL NO. CURRENT MONTHLY
OF SPACES PRICE PER SPACE
--------- ---------------
6 $50.00 (plus taxes)
777 CLAY GARAGE
---------------
RESERVED SPACES
CURRENT MONTHLY
LEVEL NO. OF SPACES PRICE PER SPACE
- ----- ------------- ---------------
-- * $_____
-- * $_____
-- * $_____
-- * $_____
TOTAL RESERVED SPACES 0
---------
---------
UNRESERVED SPACES
TOTAL NO. CURRENT MONTHLY
OF SPACES PRICE PER SPACE
--------- ---------------
0 $______
SCHEDULE 1 TO EXHIBIT "F" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "G"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD AND
CALIBRE ENEROY, L.P.,
AS TENANT
RIGHT OF FIRST REFUSAL
This EXHIBIT "G" ("Refusal Exhibit") describes and specifies the right of
first refusal hereby granted by Landlord to Tenant with respect to the space
within the Building described below, which right of first refusal is being
granted upon the following terms and conditions:
1. DEFINED TERM. For purposes of this Refusal Exhibit, all terms
defined in the Lease will be utilized herein without further definition.
Terms specifically applicable to this Refusal Exhibit shall have the meanings
specified in this Refusal Exhibit and shall be delineated by initial capital
letters.
2. GRANT OF RIGHT OF FIRST REFUSAL. Landlord hereby grants to Tenant a
one time right of first refusal ("Refusal Right") with respect to
approximately 2,000 square feet of Rentable Area located contiguous to the
Premises which is described on SCHEDULE 1 attached hereto and incorporated
herein by reference for all purposes ("Refusal Space") during the period
commencing on the Commencement Date and ending as of the expiration or
termination date of this Lease. Notwithstanding the foregoing, the Refusal
Right shall not be applicable during any time when there is an uncured event
of default under the Lease. Notwithstanding anything to the contrary in the
foregoing, the Refusal Right shall be subject to the rights of any tenants
presently occupying space in the Building.
3. EXERCISE OF REFUSAL RIGHT. In the event that Refusal Space in the
Building becomes available, availability, for purposes hereof, to be at the
sole determination of Landlord, and Landlord receives a bona fide offer from
a third party to lease all or a part of the Refusal Space which Landlord
desires to accept, Landlord shall so notify Tenant and shall include in such
notice the rental rate for the subject Refusal Space, expense stop, term of
the proposed Lease (together with any renewal rights being granted), and any
lease concessions to be granted. Tenant shall have five (5) days from the
receipt of such notice to notify Landlord in writing of the exercise by
Tenant of Tenant's Refusal Right with respect to the subject Refusal Space,
which shall be on the same terms and with respect to the entire space
specified in Landlord's notice. In the event that Tenant fails to so notify
Landlord within such five (5) day period, Tenant shall be deemed to have
irrevocably waived its Refusal Right with respect to the subject Refusal
Space; and Landlord shall have the right to enter into a lease with any party
with respect to that Refusal Space. In the event that Tenant elects to
exercise its Refusal Right with respect to the subject Refusal Space and does
in fact exercise such Refusal Right in the manner and within the time period
specified herein, Landlord and Tenant shall, within thirty (30) days after
Tenant delivers to Landlord notice of its election, enter into a written
amendment modifying and supplementing the Lease and containing such other
terms and provisions as Landlord may deem appropriate. In the event that
Tenant fails to enter into said amendment within such thirty (30) day period,
Tenant shall be deemed to have irrevocably waived its Refusal Right with
respect to the subject Refusal Space; and Landlord shall have the right to
enter into a lease with any party with respect to that Refusal Space. Except
as may be specifically modified in such amendment and except with respect to
the rental, expense stop, lease term, and lease concessions applicable to the
subject Refusal Space, as herein specified, the terms and provisions of the
Lease shall, on the day of delivery of the subject Refusal Space to Tenant,
automatically apply and become applicable to the subject Refusal Space; and
the subject Refusal Space, as of the date of such delivery, shall
automatically and without the necessity of further documentation, become and
be deemed to be a part of the Premises. Effective as of the date of delivery
of the subject Refusal Space to Tenant, the Rentable Area within the subject
Refusal Space shall be included within the determination of Tenant's prorate
of Basic Costs, as provided in EXHIBIT "C" to this Lease.
4. DELIVERY OF REFUSAL SPACE. Any Refusal Space shall be delivered to
Tenant vacant and unoccupied and "as is" without benefit of improvements
(except Shell Improvements, if any) unless the refusal notice specifies that
an allowance is to be granted for the improvement or refurbishment of the
subject Refusal Space, in which event Tenant will receive the allowance
specified in Landlord's notice. In the event that any improvements or
restoration work is to be incorporated into the Premises, the amendment shall
contain provisions reflecting the agreement of Landlord and Tenant with
respect thereto. Landlord shall use reasonable diligence to deliver the
subject Refusal Space on the date specified in Landlord's notice of its
availability, but in no event shall Landlord have any liability for the
failure to deliver the subject Refusal Space to Tenant on such date, nor
shall any such failure impair the validity of the Lease, extend the Lease
Term (except with respect to the subject Refusal Space, which shall be the
term specified in Landlord's notice irrespective of the Lease Term specified
in Paragraph 1 of the Lease), or impair any obligations of Tenant under the
Lease, it being understood that the Rent applicable to the subject Refusal
Space shall be abated until possession is delivered to Tenant in full
settlement of all claims that Tenant might otherwise have against Landlord by
reason of the failure to deliver possession of the subject Refusal Space to
Tenant.
5. TERMINATION OF REFUSAL RIGHT. The Refusal Right shall
automatically terminate upon (a) the termination of the Lease Term, whether by
Landlord upon the occurrence of an Event of Default or otherwise, (b) the
expiration of the time period specified in Paragraph 2 above, (c) the failure
of Tenant to exercise the Refusal Right with respect to any Refusal Space as
and within the time period specified in Paragraph 3 above, but only
with respect to the subject Refusal Space, and (d) upon the assignment,
subletting, or other transfer by Tenant, whether or not with the approval of
Landlord.
EXHIBIT "G" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
SCHEDULE 1
TO
EXHIBIT "C"
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD,
AND
CALIBRE ENERGY, L.P.,
AS TENANT
REFUSAL SPACE
(FLOORPLAN)
SCHEDULE 1 TO EXHIBIT "G" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "H"
-----------
TO
OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
CALIBRE ENERGY, L.P.,
AS TENANT
TEMPORARY SPACE FLOOR PLAN
--------------------------
(FLOORPLAN)
EXHIBIT "H" TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT
This first Amendment to Office Lease Agreement ("Amendment"), by and
between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation and
METROPOLITAN TOWER REALTY COMPANY, a Delaware corporation (collectively,
"Landlord", and TEXSTAR PETROLEUM, L.L.C., a Texas limited liability
corporation ("Tenant"), is dated the 29th day of May, 1996.
W I T N E S S E T H :
WHEREAS, Landlord and Tenant heretofore entered into that certain office
Lease Agreement dated December 28, 1995 ("Lease"), under and pursuant to the
terms of which Tenant has leased from Landlord certain office space known as
Suite 5500 and containing approximately 5,164 square feet of Rentable Area
("Premises") in that certain office building commonly known as "FIRST
INTERSTATE BANK PLAZA" ("Building"), which is located at 1000 Louisiana,
Houston, Texas, as more particularly described in the Leases; and
WHEREAS, the Tenant in the Lease was mistakenly named "Calibre Energy,
L.P.", although should have been named "TEXSTAR Petroleum, L.L.C.", and the
parties desire to correct such mistake;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and in the Lease, the parties hereto do hereby
covenant and agree as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in
the Lease but defined herein will, when delineated with initial capital
letters, have the meanings ascribed thereto in this Amendment. Terms and
phrases which are not delineated by initial capital letters shall have the
meanings commonly ascribed thereto.
2. TENANT. The Tenant under the Lease is hereby deemed to be "TEXSTAR
Petroleum, L.L.C.", a Texas corporation, instead of "Calibre Energy, L.P.".
3. TENENT ESTOPPEL. Tenant hereby confirms and ratifies the Lease, as
amended hereby, acknowledges that Landlord is not in default under said Lease
as of the date this Amendment is executed by Tenant and accepts the Premises
"AS IS", without benefit of further improvements, and without warranty of
suitability or fitness for a particular purpose.
4. COMMISSIONS. Tenant represents and warrants that no broker has
represented it in this Amendment transaction and that no broker is owed a
commission or fee in connection with the consummation of this Amendment
transaction. Tenant hereby indemnifies and holds Landlord harmless against
any loss, claim, expense or liability with respect to any commissions or
brokerage fees claimed on account of the amendment of this Lease or expansion
of the Premises hereunder, if applicable, due to any action of Tenant. The
provisions of this Paragraph 4 shall survive the expiration of the Lease Term
or any renewal or extension thereof.
5. EFFECT OF AMENDMENT. Except as expressly amended by the provisions
hereof, the terms and provisions contained in the Lease shall continue to
govern the rights and obligations of the parties; and all provisions and
covenants in the Lease shall reamin in full force and effect as stated
therein, except to the extent specifically modified by the provisions of this
Amendment. This Amendment and the Lease shall be construed as one instrument.
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS AMENDMENT HEREBY ACKNOWLEDGE
AND AGREE THAT THIS AMENDMENT CONTAINS CERTAIN INDEMNIFICATION PROVISIONS.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment in
multiple counterparts as of the last day and year written below, but this
Amendment is intended to be effective retroactively as of December 28, 1995.
LANDLORD:
METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: /s/ David Q. Rogers
---------------------------------------
David Q. Rogers,
Assistant Vice-President
Date: 5/29/96
---------------------------------------
METROPOLITAN TOWER REALTY COMPANY, INC.,
a Delaware corporation
By: /s/ David G. Rogers
----------------------------------------
David G. Rogers
Vice-President
Date: 5-29-96
----------------------------------------
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 1
<PAGE>
TENANT:
TEXSTAR PETROLEUM, L.L.C.,
a Texas limited liability corporation
By: /s/ Todd Grabois
---------------------------------
Name: Todd Grabois
-------------------------------
Title: Treasurer
------------------------------
Date: 5-21-96
-------------------------------
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT - Page 2
<PAGE>
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT
------------------------------------------
This Second Amendment to Office Lease Agreement ("Second Amendment"), by
and between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation, and
METROPOLITAN TOWER REALTY COMPANY, INC., a Delaware corporation (collectively
"Landlord"), and TEXSTAR PETROLEUM, L.L.C., a Delaware corporation
("Tenant"), is dated the 25th day of October, 1996.
W I T N E S S E T H :
WHEREAS, Landlord and Tenant's predecessor in interest heretofore entered
into that certain Office Lease Agreement dated December 28, 1995 ("Original
Lease"), as amended by that certain Fist Amendment to Office Lease Agreement
dated May 29, 1996 ("First Amendment"), the Original Lease and the First
Amendment being hereinafter collectively referred to as the "Lease"; and
WHEREAS, under and pursuant to the terms of the Lease, Tenant has leased
from Landlord certain office space known as Suite 5500 and containing
approximately 5,164 square feet of Rentable Area ("Existing Premises") in
that certain office building commonly known as "FIRST INTERSTATE BANK PLAZA"
("Building"), which is located at 1000 Louisiana, Houston, Texas, as more
particularly described in the Lease; and
WHEREAS, Paragraph 26 of the Lease permits Landlord upon notice to
relocate Tenant to comparable space within the Building, and having
heretofore sent prior notice to Tenant, Landlord desires to relocate Tenant
to new premises within the Building containing approximately 5,164 square
feet of Rentable Area, commonly known as Suite 3950, located on the
thirty-ninth (39th) floor of the Building ("Relocation Space"), the
approximate configuration of such Relocation Space being depicted on EXHIBIT
"A" attached hereto; and
WHEREAS, Tenant desires to add to the Relocation Premises approximately
4,958 square feet of Rentable Area on the 39th floor ("Expansion Space")
(being approximately 4,003 square feet of Usable Area, which Expansion Space
is outlined on EXHIBIT "B" attached hereto; and
WHEREAS, Landlord and Tenant desire to amend the Lease in order to
evidence their agreements with respect to the relocation of Tenant from the
Existing Space to the Relocation Space and upon the terms and conditions
hereinafter specified; and
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and in the Lease, the parties hereto do hereby
covenant and agree as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in
the Lease but defined herein will, when delineated with initial capital
letters, have the meanings ascribed thereto in this Second Amendment. Terms
and phrases which are not delineated by initial capital letters shall have
the meanings commonly ascribed thereto.
2. RELOCATION COMMENCEMENT DATE. As used herein, the term "Relocation
Commencement Date" shall mean the earlier of the date Tenant occupies the
Relocation Space and the Expansion Space or November 23, 1996.
3. PREMISES. From and after the Relocation Commencement Date, the term
"Premises" (as defined in Paragraph 1(b) of the Lease) shall mean the
Relocation Space and the Expansion Space for all purposes including the
determination of Tenant's share of Basic Costs, and the Premises shall be
deemed to contain 10,122 square feet of Rentable Area.
4. BASE RENTAL. From and after the Relocation Commencement Date,
Paragraph 1(c) of the Lease shall be amended to provide that the Base Rental
payable by Tenant shall accrue and be payable at the rate of $14.53 per
square foot of Rentable Area in the Premises per annum being $12,256.06 per
month, as adjusted pursuant to Exhibit "C" attached to the Lease.
5. LEASE TERM. Landlord and Tenant confirm that the Lease Term is not
changing and that the Lease Term will terminate on January 31, 2001.
6. EXPENSE STOP. Landlord and Tenant confirm that the "Expense Stop"
shall continue to mean the Basic Costs (as defined in the Lease) per square
foot of Rentable Area in the Building for the calendar year 1996.
7. ALLOWANCE. "Allowance" shall mean an amount equal to the product of
$15.00 times the number of square feet of Rentable Area included in the
Premises.
8. PARKING. From and after the Relocation Commencement Date, the
parking agreement attached as Exhibit "F" to the Lease shall be amended by
changing the number of Spaces to "six (6)". Further, Schedule 1 to
Exhibit "F" shall be amended by changing the "No. of Spaces" to "6" in the
1400 Louisiana Garage.
9. COMMISSIONS. Tenant represents and warrants that no broker has
represented it in this Amendment transaction and that no broker is owed a
commission or fee in connection with the consummation of this Amendment
transaction. Tenant hereby indemnifies and holds Landlord harmless against any
loss, claim, expense or liability with respect to any commissions or
brokerage fees claimed on account of the amendment of this Lease or expansion
of the Premises hereunder, if applicable, due to any action of Tenant. The
provisions of this Paragraph 9 shall survive the expiration of the Lease Term
or any renewal or extension thereof.
10. DELETIONS. As of the date hereof, Paragraph 50 and Exhibit "M" of
the Lease, Exhibit "E" of the Lease and Exhibit "G" of the Lease shall be
deleted in their entirety and of no further force and effect.
11. TENANT ESTOPPEL. Tenant hereby confirms and ratifies the Lease, as
amended hereby, acknowledges that Landlord is not in default under said Lease
as of the date this Second Amendment is executed by Tenant and, subject to
the Workletter attached hereto as EXHIBIT "C", accepts the Premises
(including the Expansion Space) "AS IS" and without benefit of further
improvements, and without warranty of suitability or fitness for a particular
purpose.
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page 1
<PAGE>
12. EFFECT OF SECOND AMENDMENT. Except as expressly amended by the
provisions hereof, the terms and provisions contained in the Lease shall
continue to govern the rights and obligations of the parties; and all
provisions and covenants in the Lease shall remain in full force and effect
as stated therein, except to the extent specifically modified by the
provisions of this Second Amendment. This Second Amendment and the Lease
shall be construed as one Instrument.
13. EXHIBITS. The following exhibits are attached hereto and
incorporated herein and made a part of this Lease for all purposes:
Exhibit "A" - Floor Plan for Relocation Space
Exhibit "B" - Floor Plan for Expansion Space
Exhibit "C" - Workletter
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS SECOND AMENDMENT HEREBY
ACKNOWLEDGE AND AGREE THAT THIS SECOND AMENDMENT (AND ATTACHED EXHIBITS)
CONTAINS CERTAIN INDEMNIFICATION PROVISIONS.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Second
Amendment in multiple counterparts as of the last day and year written below.
LANDLORD:
METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: /s/ David G. Rogers
------------------------------------
David G. Rogers
Assistant Vice-President
Date: 10-25-96
----------------------------------
METROPOLITAN TOWER REALTY COMPANY, INC.,
a Delaware corporation
By: /s/ David G. Rogers
------------------------------------
David G. Rogers
Vice-President
Date: 10-25-96
----------------------------------
TENANT:
TEXSTAR PETROLEUM, L.L.C.,
a Texas limited liability corporation
By: /s/ Todd Grabois
------------------------------------
Name: Todd Grabois
----------------------------------
Title: Treasurer
---------------------------------
Date: 10-24-96
----------------------------------
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page 2
<PAGE>
EXHIBIT "A"
-----------
TO
THIRD AMENDMENT TO OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
FLOOR PLAN OF RELOCATION SPACE
------------------------------
(FLOORPLAN)
EXHIBIT "A" TO SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "B"
-----------
TO
THIRD AMENDMENT TO OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
FLOOR PLAN OF RELOCATION SPACE
------------------------------
(FLOORPLAN)
EXHIBIT "B" TO SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page Solo
<PAGE>
EXHIBIT "C"
TO
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, INC.,
AS TENANT
WORKLETTER
(Allowance)
This Workletter ("Workletter") describes and specifies the rights and
obligations of Landlord and Tenant with respect to certain allowances granted
to Tenant hereunder and rights and responsibilities of Landlord and Tenant
with respect to the design, construction and payment for the completion of
the Initial Improvements within the Premises. "Premises" as used herein shall
include the Expansion Space.
1. DEFINITIONS. Terms which are defined in the Lease shall have the
same meaning in this Workletter. Additionally, as used in this Workletter,
the following terms (when delineated with initial capital letters) shall have
the respective meaning indicated for each as follows:
(a) BASIC CONSTRUCTION OF THE BUILDING shall mean the structure
of the Building as built on the date of this Workletter, the Shell
Improvements, and all other improvements, fixtures and facilities
constituting a part of the Building and/or Property, as these exist on
the date of this Workletter if the Building is complete, or as provided
for in Landlord's plans and specifications for the Building if prior to
completion.
(b) LANDLORD'S ARCHITECT shall mean the architect designated by
Landlord as its architect, from time to time, to perform the functions
of Landlord's Architect hereunder.
(c) PLANS AND SPECIFICATIONS shall mean collectively, the plans,
specifications and other information prepared or to be prepared by
Tenant's Architect and, where necessary, by Landlord's electrical,
mechanical and structural engineers, all at Tenant's expense, which
shall detail the Work required by Tenant in the Premises and which
shall be approved in writing by both Tenant and Landlord prior to the
commencement of such Work.
(d) TENANT'S ARCHITECT shall mean Architectural and Engineering
Associates, who is an architect licensed to practice in the State of
Texas.
(e) WORK shall mean all materials and labor to be added to the
Basic Construction of the Building and the Shell Improvements in order
to complete the installation of the Initial Improvements within the
Premises for Tenant in accordance with the Plans and Specifications,
including, without limitation any modification to Basic Construction of
the Building or to the Shell Improvements, any structural modifications
to the Building, any electrical or plumbing work required to meet Tenant's
electrical and plumbing requirements, and any special air conditioning
work required to be performed in the Premises. In addition, "Work" shall
include all reasonable costs associated with relocating Tenant from the
55th floor to the 39th floor.
(f) COST OF THE WORK shall mean the cost of all materials and
labor to be added to the Basic Construction of the Building and the Shell
Improvements in order to complete the installation of the Initial
Improvements within the Premises in accordance with the Plans and
Specifications.
(g) LANDLORD'S COSTS shall mean the sum of (i) the cost of the
Shell Improvements and (ii) that portion of the Cost of the Work up
to, but not in excess of, the aggregate amount of the Allowance.
(h) TENANT'S COSTS shall mean that portion of the Cost of the
Work in excess of Landlord's Costs.
(i) CHANGE COSTS shall mean all costs or expenses attributable to
any change in the Plans and Specifications which, when added to other
costs and expenses incurred in completing the Work, exceed Landlord's
Costs, including, without limitation, (i) any cost caused by direction
of Tenant to omit any item of Work contained in the Plans and
Specifications, (ii) any additional architectural or engineering services,
(iii) any changes to materials in the process of fabrication, (iv) the
cancellation or modification of supply or fabricating contracts, (v) the
removal or alteration of any Work or any plans completed or in process, or
(vi) delays affecting the schedule of the Work.
(j) WORKING DAYS shall mean all days of the week other than
Saturday, Sunday, and legal holidays.
2. PROCEDURE AND SCHEDULES FOR THE COMPLETION OF PLANS AND
SPECIFICATIONS. The Plans and Specifications shall be completed in accordance
with the following procedure and time schedules:
(a) DESIGN DRAWINGS. Within ten (10) Working Days from execution
of the Lease, Tenant shall submit to Landlord four (4) sets of prints of
design drawings, specifying the intended design, character and finishing of
the Initial Improvements within the Premises. Such package shall include
separate drawings for signs in accordance with Landlord's sign criteria. The
design drawings shall set forth the requirements of Tenant with respect to
the installation of the Initial Improvements within the Premises, and such
drawings shall include, without limiting their scope, a Tenant approved space
plan, architectural design of the space, including office front, plans,
elevations, sections, and renderings indicating materials, color selections
and finishes.
(i) After receipt of design drawings, Landlord shall
return to Tenant one set of prints of design drawings with Landlord's
suggested modifications and/or approval.
(ii) If design drawings are returned to Tenant with comments,
but not bearing approval of Landlord, the design drawings shall be
immediately revised by Tenant and resubmitted to Landlord for
approval within ten (10) Working Days of their receipt by Tenant.
Unless such action is taken, Tenant will be deemed to have
accepted and approved all of Landlord's comments on the design
drawings.
EXHIBIT "C" TO SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page 1
<PAGE>
(b) COMPLETION OF PLANS AND SPECIFICATIONS. All Plans and
Specifications shall be prepared in strict compliance with applicable
Building standards and requirements as set forth in the Lease, this
Workletter and otherwise, and shall also adhere to the design drawings
approved by Landlord. In order to assure the compatibility of Tenant's
electrical and mechanical systems and the compatibility of Tenant's
structural requirements with the existing Building and in order to
expedite the preparation of Tenant's electrical, mechanical and
structural drawings, Tenant or Tenant's Architect shall deliver to
Landlord's Architect, not later than ten (10) Working Days from the date
of Landlord's approval of design drawings, a detailed plan setting forth
any and all electrical, mechanical and structural requirements, and
Landlord's Architect shall retain, at Tenant's expense, Landlord's
electrical, mechanical and structural engineers to prepare all necessary
electrical, mechanical and structural construction drawings which shall
be included as a part of the Plans and Specifications. All construction
documents and calculations prepared by Tenant's Architect shall be
submitted by Tenant, in the form of four (4) sets of blueline prints, to
Landlord for approval within ten (10) Working Days after the date of
receipt by Tenant of Landlord's approval of design drawings. If the
Plans and Specifications are returned to Tenant with comments, but not
bearing approval of Landlord, the Plans and Specifications shall be
immediately revised by Tenant and resubmitted to Landlord for approval
within ten (10) Working Days of their receipt by Tenant.
(i) The fees for Tenant's Architect and any consultants or
engineers retained by or on behalf of Tenant or Tenant's Architect
(including, but not limited to, the electrical, mechanical and
structural engineers required to be retained under this paragraph)
shall be paid by Tenant. Tenant shall also pay for any preliminary
drawings by Landlord's Architect for review of the design drawings,
the Plans and Specifications, and any revisions to such documents,
and the fees and expenses of Landlord's Architect for inspection of
the Work, as required by Landlord.
(ii) Tenant shall have the sole responsibility for
compliance of the Plans and Specifications with all applicable
statutes, codes, ordinances and other regulations, and the approval
of the Plans and Specifications or calculations included therein by
Landlord shall not constitute an indication, representation or
certification by Landlord that such Plans and Specifications or
calculations are in compliance with said statutes, codes,
ordinances and other regulations. In instances where several sets
of requirements must be met, the requirements of Landlord's
insurance underwriter or the strictest applicable requirements
shall apply where not prohibited by applicable codes.
(iii) Upon completion of the Initial Improvements, if so
required by Landlord, Tenant shall deliver to Landlord an
"as-built" set of Plans and Specifications for the Premises,
together with such other information required by Landlord to place
the information from the "as-built" Plans and Specifications on to
Landlord's data base; the cost of providing the "as-built" Plans
and Specifications and other information, together with Landlord's
cost to place the information on to Landlord's date base, shall be
born solely by Tenant.
3. PRICING. On or before the date which is ten (10) Working Days after
finalization of the Plans and Specifications, as evidenced by Landlord's
written approval thereof, Landlord shall notify Tenant in writing of the Cost
of the Work. The contract for the Work shall obligate the contractor to
purchase from Landlord all materials and supplies which are held in "stock"
by Landlord and which are required for the Work by the Plans and
Specifications. Within ten (10) Working Days after its receipt of Landlord's
written notice identifying the Cost of the Work, Tenant shall either approve
such Cost of the Work in writing or cause the Plans and Specifications to be
revised and resubmitted to Landlord for Approval. On or before the date which
is ten (10) Working Days from Landlord's receipt of such revised Plans and
Specifications, Landlord shall either approve the revised Plans and
Specifications and give to Tenant a revised Cost of the Work or give to
Tenant Landlord's comments on such revised Plans and Specifications. If for
any reason Landlord and Tenant have not agreed in writing upon final Plans
and Specifications and/or the Tenant has not approved in writing the Cost of
the Work on or before the date which is ten (10) Working Days from the date
hereof, then Landlord shall have the right to terminate the Lease and this
Workletter, without further obligation.
4. PAYMENTS. Tenant may use up to that part of the Allowance up to an
amount equal to one dollar ($1.00) per square foot of Rentable Area of the
Premises for the payment of fees and expenses payable by Tenant under the
terms of Paragraph 2(b)(1) of this Workletter. Tenant shall pay the aggregate
amount of Tenant's Costs to Landlord upon demand. Landlord shall determine
the percentage of the Cost of the Work which is allocable to Landlord and the
percentage of the Cost of the Work which is allocable to Tenant. Landlord
shall also revise its determination of such percentages based on any changes
in the Cost of the Work due to change orders affecting the Plans and
Specifications. Within ten (10) days after Tenant's receipt of an invoice
from Landlord which identifies that portion of the Cost of the Work to be
incurred, respectively, by Landlord and Tenant, Tenant shall pay to Landlord
the percentage of the Cost of the Work allocable to Tenant, as Tenant's
Costs, as determined by Landlord from time to time. Landlord's obligation for
payment with respect to the Work shall not exceed the aggregate amount of
Landlord's Costs; and after Landlord has paid Landlord's Costs, Tenant shall
thereafter pay all Cost of the Work as and when invoiced to Tenant by
Landlord, including, without limitation, any Change Costs. The amounts
payable to Landlord hereunder shall constitute Rent due pursuant to the Lease,
and failure to make any such payment when due shall constitute a default
under the Lease, entitling Landlord to exercise any or all of its remedies
hereunder, as well as all remedies otherwise available to Landlord. Any cost
savings achieved after completion of the Work shall be solely the property of
Landlord, not Tenant.
5. PERFORMANCE OF WORK AND DELAYS. Landlord shall cause the Contractor
to perform the Work in substantial accordance with the Plans and
Specifications. In that regard, Landlord shall perform as construction
manager for the construction of the Initial Improvements in accordance with
the Plans and Specifications. If a delay shall occur in the completion of the
Work by Landlord as the probable result of (i) any failure to furnish when
due Tenant's design drawings, Tenant's electrical, mechanical and/or
structural requirements, Tenant's Plans and Specifications or any revision to
any such documents, (ii) any change by Tenant in any of the Plans and
Specifications, (iii) any state of facts which gives rise to a change
referred to in the definition of Change Costs or any changes resulting in a
Change Cost, (iv) the fact that materials to be incorporated into the Work
which are non-Building Grade require a lead time (not due to Landlord default
or error) to obtain or construction time to perform, in excess of that
required for work which is Building Grade, as determined by Landlord, or (v)
any other act or omission of Tenant, its agents or employees, including any
violation of the provisions of the Lease or any delay in giving
authorizations or approvals pursuant to this Workletter, then any such delay
shall not justify any extension of the Commencement Date of the Lease.
6. CHANGE ORDERS. All changes and modifications in the Work from that
contemplated in the Plans and Specifications, whether or not such change or
modification gives rise to a Change Cost, must be evidenced by a written
Change Order executed by both Landlord and Tenant. In that regard, Tenant
shall submit to Landlord such information as Landlord shall require with
respect to any Change Order requested by Tenant. After receipt
EXHIBIT "C" TO SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page 2
<PAGE>
of requested Change Order, together with such information as Landlord shall
require with respect thereto, Landlord shall return to Tenant either the
executed Change Order, which will evidence Landlord's approval thereof, or
the Plans and Specifications with respect thereto with Landlord's suggested
modification.
7. PUNCHLIST. Within thirty (30) days after the Commencement Date,
Tenant shall give Landlord written notice specifying any details of
construction, decoration or mechanical adjustment which remain to be
performed by Landlord with respect to any Work; and except for the details
contained in such written notice from Tenant, all obligations of Landlord in
regard to the Work shall be deemed to have been satisfied. Landlord shall
have the right to enter the Premises to complete any such unfinished details,
and entry by Landlord, its agents, servants, employees or contractors for
such purpose shall not relieve Tenant of any of its obligations under the
Lease or impose any liability on Landlord or its agents, servants, employees
or contractors.
8. WHOLE AGREEMENT; NO ORAL MODIFICATION. This Workletter embodies all
representations, warranties and agreements of Landlord and Tenant with
respect to the matter described herein, and this Workletter may not be
altered or modified except by an agreement in writing signed by the parties.
9. PARAGRAPH HEADINGS. The paragraph headings contained in this
Workletter are for convenient reference only and shall not in any way affect
the meaning or interpretation of such paragraphs.
10. NOTICES. All notices required or contemplated hereunder shall be
given to the parties in the manner specified for giving notices under the
Lease.
11. BINDING EFFECT. This Workletter shall be construed under the laws of
the State of Texas and shall be binding upon and shall inure to the benefit
of the parties hereto and their respective permitted successors and assigns.
12. CONFLICT. In the event of conflict between this Workletter and any
other exhibits or addenda to this Lease, this Workletter shall prevail.
EXHIBIT "C" TO SECOND AMENDMENT TO OFFICE LEASE AGREEMENT - Page 3
<PAGE>
THIRD AMENDMENT TO OFFICE LEASE
This Third Amendment to Office Lease ("Amendment"), by and between
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation, METROPOLITAN
TOWER REALTY COMPANY, INC., a Delaware corporation (collectively,
"Landlord"), and TEXSTAR PETROLEUM, L.L.C., a Texas limited liability
corporation ("Tenant"), is dated the 27th day of October, 1997 ("Effective
Date").
W I T N E S S E T H :
WHEREAS, Landlord and Tenant's predecessor in interest heretofore entered
into that certain Office Lease Agreement dated December 28, 1995 ("Original
Lease"), as amended by that certain First Amendment to Office Lease Agreement
dated May 29, 1996 ("First Amendment") and as further amended by that certain
Second Amendment to Office Lease Agreement dated October 25, 1996 ("Second
Amendment"), the Original Lease, the First Amendment and the Second Amendment
being hereinafter collectively referred to as the "Lease"; and
WHEREAS, under and pursuant to the terms of the Lease, Tenant has leased
from Landlord certain office space known as Suite 3950 containing
approximately 10,122 square feet of Rentable Area ("Existing Premises") in
that certain office building commonly known as "Wells Fargo Plaza" (formerly
known as "First Interstate Bank Plaza") ("Building"), which is located at
1000 Louisiana, Houston, Texas, as more particularly described in the Lease;
and
WHEREAS, Paragraph 26 of the Lease permits Landlord, upon notice, to
relocate Tenant to comparable space within the Building, Landlord desires to
relocate Tenant to new premises within the Building containing approximately
10,122 square feet of Rentable Area, commonly known as Suite 1500, located on
the fifteenth (15th) floor of the Building ("Relocation Space"), which
Relocation Space is outlined on EXHIBIT "A" attached hereto; and
WHEREAS, Tenant desires to add to the Relocation Space approximately
14,969 square feet of Rentable Area on the fifteenth (15th) floor ("Expansion
Space"), which Expansion Space is outlined on EXHIBIT "B" attached hereto; and
WHEREAS, the Lease Term is scheduled to expire on January 31, 2001, and
Landlord and Tenant desire that the Lease Term be extended as and upon the
terms and conditions hereinafter specified; and
WHEREAS, Landlord and Tenant desire to amend the Lease in order to
evidence their agreements with respect to the relocation of Tenant from the
Existing Premises to the Relocation Space and upon the terms and conditions
hereinafter specified;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and in the Lease, the parties hereto do hereby
covenant and agree as follows:
1. DEFINED TERMS. Terms defined in the Lease and delineated herein by
initial capital letters shall have the same meaning ascribed thereto in the
Lease, except to the extent that the meaning of such term is specifically
modified by the provisions hereof. In addition, other terms not defined in
the Lease but defined herein will, when delineated with initial capital
letters, have the meanings ascribed thereto in this Amendment. Terms and
phrases which are not delineated by initial capital letters shall have the
meanings commonly ascribed thereto.
2. CONDITION PRECEDENT. Tenant understands that Landlord is currently
negotiating another lease with a third party for space on the thirty-ninth
(39) floor of the Building (the "New Lease"). Landlord and Tenant agree that
this Termination Agreement is subject to the condition precedent of Landlord
entering into a valid and effective New Lease with a third party, failing
which this Termination Agreement shall not become effective.
3. RELOCATION AND EXPANSION COMMENCEMENT DATE. As used herein, the term
"Relocation and Expansion Commencement Date" shall mean the earlier of the
date Tenant occupies the Relocation Space and the Expansion Space or
February 1, 1998.
4. PREMISES. From and after the Relocation and Expansion Commencement
Date, the term "Premises" (as defined in Paragraph 1(b) of the Lease, as
amended) shall mean the Relocation Space and the Expansion Space for all
purposes including the determination of Tenant's share of Basic Costs, and
the Premises shall be deemed to contain 25,091 square feet of Rentable Area.
3. EXPANSION SPACE TERM. The term for the Expansion Space shall mean a
term commencing on the Relocation and Expansion Commencement Date and
continuing for approximately sixty (60) full calendar months ("Expansion
Space Term"), but in any event expiring on the same date as the Second Lease
Term (as defined below), which is January 31, 2003.
4. LEASE TERM. The Lease Term is hereby extended by a period beginning
on February 1, 2001 and continuing for approximately twenty-four (24) full
calendar months ("Second Lease Term"), and shall terminate at midnight on
January 31, 2003. The term Lease Term shall be deemed to include the Second
Lease Term.
5. BASE RENTAL. From and after the Relocation and Expansion
Commencement Date, Paragraph 1(c) of the Lease shall be amended to provide
that the Base Rental payable by Tenant shall accrue and be payable at the
rate of $15.79 per square foot of Rentable Area in the Premises per
annum being $33,015.57 per month, as adjusted pursuant to Exhibit "C" attached
to the Lease.
THIRD AMENDMENT TO OFFICE LEASE - Page 1
<PAGE>
6. ALLOWANCE. "Allowance" as more particularly described in the
Workletter attached hereto as EXHIBIT "C", shall mean an amount equal to the
product of $18.00 times the number of square feet of Rentable Area included
in the Premises.
7. PARKING. From and after the Relocation and Expansion Commencement
Date, the parking agreement attached to the Lease as EXHIBIT "F" shall be
deleted in its entirety and replaced with EXHIBIT "D" attached hereto.
8. TELEPHONE SERVICES. All telegraph, telephone, and electric
connections which Tenant may desire shall be first approved by Landlord in
writing, before the same are installed, and the location of all wires and the
work in connection therewith shall be performed by contractors approved by
Landlord and shall be subject to the direction of Landlord. Landlord reserves
the right to designate and control the entity or entities providing telephone
or other communication cable installation, repair and maintenance in the
Building and to restrict and control access to telephone cabinets. In the
event Landlord designates a particular vendor or vendors to provide such
cable installation, repair and maintenance for the Building. Tenant agrees to
abide by and participate in such program. Except for the costs associated
with the relocation of Tenant's phone system from the 39th floor to the 15th
floor which Landlord shall pay. Tenant shall be responsible for and shall pay
all costs incurred in connection with the installation of telephone cables
and related wiring in the Premises, including, without limitation, any
hook-up, access and maintenance fees related to the installation of such
wires and cables in the Premises and the commencement of service therein, and
the maintenance thereafter of such wire and cables; and there shall be
included in Operating Expenses for the Building all installation, hook-up or
maintenance costs incurred by Landlord in connection with telephone cables
and related wiring in the Building which are not allocable to any individual
users of such service but are allocable to the Building generally. If Tenant
fails to maintain all telephone cables and related wiring in the Premises and
such failure affects or interferes with the operation or maintenance of any
other telephone cables or related wiring in the Building, Landlord or any
vendor hired by Landlord may enter into and upon the Premises forthwith and
perform such repairs, restorations or alterations as Landlord deems necessary
in order to eliminate any such interference (and Landlord may recover from
Tenant all of Landlord's costs in connection therewith). Upon the Termination
Date, Tenant agrees to remove all telephone cables and related wiring
installed by Tenant for and during Tenant's occupancy, which Landlord shall
request Tenant to remove. Tenant agrees that neither Landlord nor any of its
agents or employees shall be liable to Tenant, or any of Tenant's employees,
agents, customers or invitees or anyone claiming through, by or under Tenant,
for any damages, injuries, losses, expenses, claims or causes of action
because of any interruption, diminution, delay or discontinuance at any time
for any reason in the furnishing of any telephone service to the Premises and
the Building.
9. COMMISSIONS. Tenant represents and warrants that no broker has
represented it in this Third Amendment transaction and that no broker is owed
a commission or fee in connection with the consummation of this Third
Amendment transaction. Tenant hereby indemnifies and holds Landlord harmless
against any loss, claim, expense or liability with respect to any commissions
or brokerage fees claimed on account of the amendment of this Lease due to
any action of Tenant. The provisions of this Paragraph 8 shall survive the
expiration of the Lease Term or any renewal or extension thereof.
10. EFFECT OF AMENDMENT. Except as expressly amended by the provisions
hereof, the terms and provisions contained in the Lease shall continue to
govern the rights and obligations of the parties; and all provisions and
covenants in the Lease shall remain in full force and effect as stated
therein, except to the extent specifically modified by the provisions of this
Third Amendment. This Third Amendment and the Lease shall be construed as one
instrument.
NOTICE OF INDEMNIFICATION. THE PARTIES TO THIS AMENDMENT HEREBY ACKNOWLEDGE
AND AGREE THAT THIS AMENDMENT AND ATTACHED EXHIBITS CONTAINS CERTAIN
INDEMNIFICATION PROVISIONS.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Third
Amendment in multiple counterparts as of the last day and year written below.
LANDLORD:
METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: /s/ David G. Rogers
--------------------------------
David G. Rogers,
Assistant Vice-President
Date : 10-27-97
-----------------------------
METROPOLITAN TOWER REALTY COMPANY, INC.,
a Delaware corporation
By: /s/ David G. Rogers
--------------------------------
David G. Rogers,
Vice-President
Date : 10-27-97
--------------------------------
THIRD AMENDMENT TO OFFICE LEASE - Page 2
<PAGE>
TENANT:
TEXSTAR PETROLEUM, L.L.C.,
a Texas corporation
By: /s/ Todd Grabois
-------------------------------
Name: Todd Grabois
-----------------------------
Title: Treasurer
----------------------------
Date: 10-14-97
-----------------------------
THIRD AMENDMENT TO OFFICE LEASE - Page 3
<PAGE>
EXHIBIT "A"
-----------
TO
THIRD AMENDMENT TO OFFICE LEASE BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
PLAN OF RELOCATION SPACE
------------------------
(FLOORPLAN)
EXHIBIT "A" TO THIRD AMENDMENT TO OFFICE LEASE - Page Solo
<PAGE>
EXHIBIT "B"
-----------
TO
THIRD AMENDMENT TO OFFICE LEASE BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
PLAN OF EXPANSION SPACE
-----------------------
(FLOORPLAN)
EXHIBIT "B" TO THIRD AMENDMENT TO OFFICE LEASE - Page Solo
<PAGE>
EXHIBIT "C"
TO
THIRD AMENDMENT TO OFFICE LEASE BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
WORKLETTER
(Allowance)
This Workletter ("Workletter") describes and specifies the rights and
obligations of Landlord and Tenant with respect to certain allowances granted
to Tenant hereunder and rights and responsibilities of Landlord and Tenant
with respect to the design, construction and payment for the completion of
the Initial Improvements within the Premises.
1. DEFINITIONS. Terms which are defined in the Lease shall have the
same meaning in this Workletter. Additionally, as used in this Workletter,
the following terms (when delineated with initial capital letters) shall have
the respective meaning indicated for each as follows:
(a) BASIC CONSTRUCTION OF THE BUILDING shall mean the structure of
the Building as built on the date of this Workletter, the Shell
Improvements, and all other improvements, fixtures and facilities
constituting a part of the Building and/or Property, as these exist on the
date of this Workletter if the Building is complete, or as provided for
in Landlord's plans and specifications for the Building if prior to
completion.
(b) LANDLORD'S ARCHITECT shall mean the architect designated by
Landlord as its architect, from time to time, to perform the functions
of Landlord's Architect hereunder.
(c) PLANS AND SPECIFICATIONS shall mean collectively, the plans,
specifications and other information prepared or to be prepared by
Tenant's Architect and, where necessary, by Landlord's electrical,
mechanical and structural engineers, all at Tenant's expense, which shall
detail the Work required by Tenant in the Premises and which shall be
approved in writing by both Tenant and Landlord prior to the commencement
of such Work. The Plans and Specifications shall comply with the minimum
requirements established by Landlord.
(d) TENANT'S ARCHITECT shall mean ______________________________,
who is an architect licensed to practice in the state of Texas.
(e) WORK shall mean all materials and labor to be added to the
Basic Construction of the Building and the Shell Improvements in order
to complete the installation of the Initial Improvements within the
Premises for Tenant in accordance with the Plans and Specifications,
including, without limitation any modification to Basic Construction of
the Building or to the Shell Improvements, any structural modifications
to the Building, any electrical or plumbing work required to meet Tenant's
electrical and plumbing requirements, and any special air conditioning
work required to be performed in the Premises.
(f) COST OF THE WORK shall mean the cost of all materials and
labor to be added to the Basic Construction of the Building and the Shell
Improvements in order to complete the installation of the Initial
Improvements within the Premises in accordance with the Plans and
Specifications.
(g) LANDLORD'S COSTS shall mean the sum of that portion of the
Cost of the Work up to, but not in excess of, the aggregate amount of
the Allowance.
(h) TENANT'S COSTS shall mean that portion of the Cost of the Work
in excess of Landlord's Costs.
(i) CHANGE COSTS shall mean all costs or expenses attributable to
any change in the Plans and Specifications which, when added to other
costs and expenses incurred in completing the Work, exceed Landlord's
Costs, including, without limitation, (i) any cost caused by direction of
Tenant to omit any item of Work contained in the Plans and Specifications,
(ii) any additional architectural or engineering services, (iii) any
changes to materials in the process of fabrication, (iv) the cancellation
or modification of supply or fabricating contracts, (v) the removal or
alteration of any Work or any plans completed or in process, or (vi)
delays affecting the schedule of the Work.
(j) WORKING DAYS shall mean all days of the week other than
Saturday, Sunday, and legal holidays.
(k) CONTRACTOR shall mean the general contractor selected by
Landlord to perform the Work. Landlord reserves the right to replace
the initial Contractor and/or to engage other contractors.
EXHIBIT "C" TO THIRD AMENDMENT TO OFFICE LEASE - Page 1
<PAGE>
2. PROCEDURE AND SCHEDULES FOR THE COMPLETION OF PLANS AND
SPECIFICATIONS. The Plans and Specifications shall be completed in accordance
with the following procedure and time schedules:
(a) DESIGN DRAWINGS. Within ten (10) Working Days from execution
of the Lease, Tenant shall submit to Landlord four (4) sets of prints of
design drawings, specifying the intended design, character and finishing
of the Initial Improvements within the Premises. Such package shall
include separate drawings for signs in accordance with Landlord's sign
criteria. The design drawings shall set forth the requirements of Tenant
with respect to the installation of the Initial Improvements within the
Premises, and such drawings shall include, without limiting their scope,
a Tenant approved space plan, architectural design of the space,
including office front, plans, elevations, sections, and renderings
indicating materials, color selections and finishes.
(i) After receipt of design drawings, Landlord shall return
to Tenant one set of prints of design drawings with Landlord's
suggested modifications and/or approval.
(ii) If design drawings are returned to Tenant with comments,
but not bearing approval of Landlord, the design drawings shall be
immediately revised by Tenant and resubmitted to Landlord for approval
within ten (10) Working Days of their receipt by Tenant. Unless such
action is taken, Tenant will be deemed to have accepted and approved
all of Landlord's comments on the design drawings.
(b) COMPLETION OF PLANS AND SPECIFICATIONS. All Plans and
Specifications shall be prepared in strict compliance with applicable
Building standards and requirements as set forth in the Lease, this
Workletter and otherwise, and shall also adhere to the design drawings
approved by Landlord. In order to assure the compatibility of Tenant's
electrical and mechanical systems and the compatibility of Tenant's
structural requirements with the existing Building and in order to
expedite the preparation of Tenant's electrical, mechanical and
structural drawings, Tenant or Tenant's Architect shall deliver to
Landlord's approval of design drawings, a detailed plan setting forth
any and all electrical, mechanical and structural requirements, and
Landlord's Architect shall retain, at Tenant's expense. Landlord's
electrical, mechanical and structural engineers to prepare all necessary
electrical, mechanical and structural construction drawings which shall
be included as a part of the Plans and Specifications. All construction
documents and calculations prepared by Tenant's Architect shall be
submitted by Tenant, in the form of four (4) sets of blueline prints, to
Landlord for approval within ten (10) Working Days after the date of
receipt by Tenant of Landlord's approval of design drawings. If the
Plans and Specifications are returned to Tenant with comments, but not
bearing approval of Landlord, the Plans and Specifications shall be
immediately revised by Tenant and resubmitted to Landlord for approval
within ten (10) Working Days of their receipt by Tenant.
(i) The fees for Tenant's Architect and any consultants
or engineers retained by or on behalf of Tenant or Tenant's
Architect (including, but not limited to, the electrical,
mechanical and structural engineers required to be retained under
this paragraph) shall be paid by Tenant. Tenant shall also pay for
any preliminary drawings by Landlord's Architect for review of the
design drawings, the Plans and Specifications, and any revisions to
such documents, and the fees and expenses of Landlord's Architect
for inspection of the Work, as required by Landlord.
(ii) Tenant shall have the sole responsibility for
compliance of the Plans and Specifications with all applicable
statutes, codes, ordinances and other regulations, and the approval
of the Plans and Specifications or calculations included therein by
Landlord shall not constitute an indication, representation or
certification by Landlord that such Plans and Specifications or
calculations are in compliance with said statutes, codes, ordinances
and other regulations. In instances where several sets of
requirements must be met, the requirements of Landlord's insurance
underwriter or the strictest applicable requirements shall apply
where not prohibited by applicable codes.
(iii) Upon completion of the Initial Improvements, if so
required by Landlord, Tenant shall deliver to Landlord an
"as-built" set of Plans and Specifications for the Premises,
together with such other information required by Landlord to place
the information from the "as-built" Plans and Specifications on to
Landlord's data base; the cost of providing the "as-built" Plans
and Specifications and other information, together with Landlord's
cost to place the information on to Landlord's data base, shall be
borne solely by Tenant.
3. PRICING. On or before the date which is ten (10) Working Days after
finalization of the Plans and Specifications, as evidenced by Landlord's
written approval thereof, Landlord shall notify Tenant in writing of the Cost
of the Work. The contract for the Work shall obligate the Contractor to
purchase from Landlord all materials and supplies which are held in "stock"
by Landlord and which are required for the Work by the Plans and
Specifications. Within ten (10) Working Days after its receipt of Landlord's
written notice identifying the Cost of the Work, Tenant shall either approve
such Cost of the Work in writing or cause the Plans and Specifications to be
revised and resubmitted to Landlord for Approval. On or before the date which
is ten (10) Working Days from Landlord's receipt of such revised Plans and
Specifications, Landlord shall either (i) notify Tenant that Landlord
approves the revised Plans and
EXHIBIT "C" TO THIRD AMENDMENT TO OFFICE LEASE - Page 2
<PAGE>
Specifications and give to Tenant a revised Cost of the Work or (ii) notify
Tenant of Landlord's comments on such revised Plans and Specifications. If
for any reason Landlord and Tenant have not agreed in writing upon final
Plans and Specifications and/or the Tenant has not approved in writing the
Cost of the Work on or before the date which is ten (10) Working Days from
the date of Landlord's notice referenced in the prior sentence, then Landlord
shall have the right to terminate the Lease and this Workletter, without
further obligation.
4. PAYMENTS. Tenant may use that part of the Allowance up to an amount
equal to One Dollar ($1.00) per square foot of Rentable Area of the Premises
for the payment of fees and expenses payable by Tenant under the terms of
Paragraph 2(b)(i) of this Workletter. Tenant shall pay the aggregate amount
of Tenant's Costs to Landlord upon demand. Landlord shall determine the
percentage of the Cost of the Work which is allocable to Landlord and the
percentage of the Cost of the Work which is allocable to Tenant. Landlord
shall also revise its determination of such percentages based on any changes
in the Cost of the Work due to change orders affecting the Plans and
Specifications. With ten (10) days after Tenant's receipt of an invoice from
Landlord which identifies that portion of the Cost of the Work to be
incurred, respectively, by Landlord and Tenant, Tenant shall pay to Landlord
the percentage of the Cost of the Work allocable to Tenant, as Tenant's
Costs, as determined by Landlord from time to time. Landlord's obligation for
payment with respect to the Work shall not exceed the aggregate amount of
Landlord's Costs; and after Landlord has paid Landlord's Costs. Tenant shall
thereafter pay all Cost of the Work as and when invoiced to Tenant by
Landlord, including, without limitation, any Change Costs. The amounts
payable to Landlord hereunder shall constitute Rent due pursuant to the
Lease, and failure to make any such payment when due shall constitute a
default under the Lease, entitling Landlord to exercise any or all of its
remedies hereunder, as well as all remedies otherwise available to Landlord.
Any cost savings achieved after completion of the Work shall be solely the
property of Landlord, not Tenant.
5. PERFORMANCE OF WORK AND DELAYS. Landlord shall cause the Contractor
to perform the Work in substantial accordance with the Plans and
Specifications. In that regard, Landlord shall perform as construction
manager for the construction of the Initial Improvements in accordance with
the Plans and Specifications. If a delay shall occur in the completion of the
Work by Landlord as the probable result of (i) any failure to furnish when
due Tenant's design drawings, Tenant's electrical, mechanical and/or
structural requirements, Tenant's Plans and Specifications or any revision to
any such documents, (ii) any change by Tenant in any of the Plans and
Specifications, (iii) any state of facts which gives rise to a change
referred to in the definition of Change Costs or any changes resulting in a
Change Cost, (iv) the fact that materials to be incorporated into the Work
which are non-Building Grade require a lead time (not due to Landlord default
or error) to obtain or construction time to perform, in excess of that
required for Work which is Building Grade, as determined by Landlord, or (v)
any other act or omission of Tenant, its agents or employees, including any
violation of the provisions of the Lease or any delay in giving
authorizations or approvals pursuant to this Workletter, then any such delay
shall not justify any extension of the Commencement Date of the Lease.
6. CHANGE ORDERS. All changes and modifications in the Work from that
contemplated in the Plans and Specifications, whether or not such change or
modification gives rise to a Change Cost, must be evidenced by a written
Change Order executed by both Landlord and Tenant. In that regard, Tenant
shall submit to Landlord such information as Landlord shall require with
respect to any Change Order requested by Tenant. After receipt of requested
Change Order, together with such information as Landlord shall require with
respect thereto, Landlord shall return to Tenant either the executed Change
Order, which will evidence Landlord's approval thereof, or the Plans and
Specifications with respect thereto with Landlord's suggested modification.
7. PUNCHLIST. Within thirty (30) days after the Commencement Date,
Tenant shall give Landlord written notice specifying any details of
construction, decoration or mechanical adjustment which remain to be
performed by Landlord with respect to any Work; and except for the details
contained in such written notice from Tenant, all obligations of Landlord in
regard to the Work shall be deemed to have been satisfied. Landlord shall
have the right to enter the Premises to complete any such unfinished details,
and entry by Landlord, its agents, servants, employees or contractors for
such purpose shall not relieve Tenant of any of its obligations under the
Lease or impose any liability on Landlord or its agents, servants, employees
or contractors.
8. WHOLE AGREEMENT; NO ORAL MODIFICATION. This Workletter embodies all
representations, warranties and agreements of Landlord and Tenant with
respect to the matter described herein, and this Workletter may not be
altered or modified except by an agreement in writing signed by the parties.
9. PARAGRAPH HEADINGS. The paragraph headings contained in this
Workletter are for convenient reference only and shall not in any way affect
the meaning or interpretation of such paragraphs.
10. NOTICES. All notices required or contemplated hereunder shall be
given to the parties in the manner specified for giving notices under the
Lease.
11. BINDING EFFECT. This Workletter shall be construed under the laws
of the State of Texas and shall be binding upon and shall inure to the
benefit of the parties hereto and their respective permitted successors and
assigns.
12. CONFLICT. In the event of conflict between this Workletter and any
other exhibits or addenda to this Lease, this Workletter shall prevail.
EXHIBIT "C" TO THIRD AMENDMENT TO OFFICE LEASE - Page 3
<PAGE>
EXHIBIT "C" TO THIRD AMENDMENT TO OFFICE LEASE - Page 4
<PAGE>
EXHIBIT "D"
TO
THIRD AMENDMENT TO OFFICE LEASE BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
PARKING
This EXHIBIT "D" ("Parking Exhibit") describes and specifies Tenant's
non-exclusive right to use seventeen (17) unreserved parking spaces and the
exclusive right to use zero (0) reserved parking space ("Space") located on
such levels inside one or more of the Building's parking garages as set forth
on SCHEDULE 1 attached to this Parking Exhibit and incorporated herein by
reference, all upon the terms and conditions set forth below. The parking
garage beneath the Building shall be referred to as the "Building Garage."
The parking garage located at 1400 Louisiana shall be referred to as the
"1400 Louisiana Garage." The Building Garage and 1400 Louisiana Garage may be
hereinafter referred to individually and collectively as the "Parking Garage."
1. DEFINITIONS. The terms which are defined in the Lease shall have
the same meaning in this Parking Exhibit.
2. GRANT AND RENTAL FEE. Provided no event of default has occurred and
is continuing under the Lease, effective on the Second Expansion Space
Commencement Date. Landlord shall provide and Tenant shall be obligated to
contract and pay for the spaces during the Term at such monthly rates
(together with any applicable tax thereon) and subject to such terms,
conditions, and regulations as are, from time to time, promulgated by
Landlord or the manager of the Parking Garage, as applicable, and charged or
applicable to patrons of the Parking Garage for spaces similarly situated
therein. In the event the Leased Premises are decreased during the Term, the
number of Spaces available to Tenant shall likewise be decreased so that the
aggregate number of Spaces to which Tenant is entitled shall equal one (1)
Space in the Building Garage for each 11,000 square feet of Rentable Area
within the Leased Premises and one (1) Space in the 1400 Louisiana Garage for
each 1,650 square feet of Rentable Area within the Leased Premises.
3. RISK. All motor vehicles (including all contents thereof) shall be
parked in the Spaces at the sole risk of Tenant, its employees, agents,
invitees and licensees, it being expressly agreed and understood that
Landlord has no duty to insure any of said motor vehicles (including the
contents thereof), and that Landlord is not responsible for the protection
and security of such vehicles. Landlord shall have no liability whatsoever
for any property damage and/or personal injury which might occur as a result
of or in connection with the parking of said motor vehicles in any of the
Spaces, and Tenant hereby agrees to indemnify and hold Landlord harmless from
and against any and all costs, claims, expenses, and/or causes of action
which Landlord may incur in connection with or arising out of Tenant's use of
the Spaces pursuant to this Agreement.
4. NO BAILMENT. It is further agreed that this Parking Exhibit shall
not be deemed to create a bailment between the parties hereto, it being
expressly agreed and understood that the only relationship created between
Landlord and Tenant hereby is that of licensor and licensee, respectively.
5. RULES AND REGULATIONS. In its use of the Spaces, Tenant shall
follow all of the Rules and Regulations of the Building (attached to the
Lease as EXHIBIT "D") applicable thereto, any rules and regulations
promulgated by Landlord or the manager of the Parking Garage, as applicable,
as the same may be amended from time to time. Upon the occurrence of any
breach of such rules, failure to make parking rental payments due hereunder
or default by Tenant under the Lease, Landlord shall be entitled to terminate
this Parking Exhibit, in which event Tenant's right to utilize the Space
shall thereupon automatically cease.
6. ACCESS. Landlord shall be entitled to utilize whatever access
device Landlord deems necessary (including but not limited to the issuance of
parking stickers or access cards), to assure that only these persons who have
contracted to use spaces in the Parking Garage are using the parking space
therein. Landlord currently limits access to the Parking Garage through the
use of a parking entry card system, the cards for which shall be provided by
Landlord. These cards are different from and do not, without a specific
request from Tenant, entitle the holder thereof to an after-hours entry card
to the Building. Landlord agrees to provide to Tenant seventeen (17) parking
entry cards. Tenant further agrees to surrender all parking entry cards in
its possession upon the expiration or earlier termination of this Lease.
Landlord shall be entitled to cancel any lost or stolen cards of which it
becomes aware. Tenant shall promptly notify Landlord of any lost or stolen
cards. Tenant shall pay Landlord for each additional card(s) or for each
replacement card(s) for any card(s) lost by or stolen from Tenant, in such
amount as Landlord shall, from time to time determine, the present charge for
such lost or stolen cards being $10.00 per card. In the event Tenant, its
agents or employees wrongfully park in any of the Parking Garage's spaces,
Landlord shall be entitled and is hereby authorized to have any such vehicle
towed away, at Tenant's sole risk and expense, and Landlord is further
authorized to impose upon Tenant a penalty of $25.00 for each such
occurrence. Tenant hereby agrees to pay all amounts falling due hereunder
upon demand therefor, and the failure to pay any such amount shall
additionally be deemed an event of default hereunder and under the Lease,
entitling Landlord to all of its rights and remedies hereunder and thereunder.
EXHIBIT "D" TO THIRD AMENDMENT TO OFFICE LEASE - Page Solo
<PAGE>
SCHEDULE 1
TO
EXHIBIT "D"
TO
THIRD AMENDMENT TO OFFICE LEASE AGREEMENT
BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY
AND METROPOLITAN TOWER REALTY COMPANY, INC.,
AS LANDLORD, AND
TEXSTAR PETROLEUM, L.L.C.,
AS TENANT
BUILDING GARAGE
---------------
RESERVED SPACES
CURRENT MONTHLY
LEVEL NO. OF SPACES PRICE PER SPACE
- ----- ------------- ---------------
0
TOTAL RESERVED SPACES 0
---------
---------
UNRESERVED SPACES
TOTAL NO. CURRENT MONTHLY
OF SPACES PRICE PER SPACE
--------- ---------------
2 $175.00 plus tax
1400 LOUISIANA GARAGE
---------------------
RESERVED SPACES
CURRENT MONTHLY
LEVEL NO. OF SPACES PRICE PER SPACE
- ----- ------------- ---------------
- -- 0 $_________
TOTAL RESERVED SPACES 0
---------
---------
UNRESERVED SPACES
TOTAL NO. CURRENT MONTHLY
OF SPACES PRICE PER SPACE
--------- ---------------
15 $50.00 plus tax
SCHEDULE 1 TO EXHIBIT "D" TO THIRD AMENDMENT TO OFFICE LEASE - Page Solo
<PAGE>
BENZ ENERGY INC.
OFFER TO EXCHANGE
UP TO 354,250 SHARES OF CLASS A, SERIES II CONVERTIBLE
PREFERRED STOCK FOR ANY AND ALL 9% CONVERTIBLE DEBENTURES,
SERIES 1 DUE MARCH 31, 2003
and
OFFER TO SELL
UP TO 121,000 SHARES OF CLASS A, SERIES II CONVERTIBLE PREFERRED STOCK
The Offering will expire at 5:00 p.m., London, England time, on June 30,
1999, unless extended or earlier terminated by the Company.
Benz Energy Inc. (the "Company" or "Benz") hereby offers, upon the terms and
subject to the conditions set forth in this Offering Circular (the "Offering
Circular") and in the related Letter of Transmittal (the "Letter of
Transmittal") and Subscription Agreement ("Subscription Agreement") (which
together constitute the "Offering"), to (a) exchange up to 354,250 shares of
the Company's Class A, Series II Convertible Preferred Stock, par value $1.00
per share (the "Preferred Stock") for up to $27,250,000 aggregate principal
amount of the Company's 9% Convertible Debentures, Series 1 due March 31,
2003 (the "Notes") and (b) sell up to 121,000 shares of Preferred Stock. The
Company will exchange (i) 65 shares of the Preferred Stock for each $5,000
principal amount of the Notes plus $1,500 cash payment tendered ("Option 1")
or (ii) 45 shares of Preferred Stock for each $5,000 principal amount of the
Notes tendered ("Option 2"). The Notes may be offered for exchange in minimum
denominations of $5,000 each and integral multiples thereof. In addition, the
Company has initially agreed to offer up to 121,000 shares of Preferred Stock
for $5,000 for each 55 shares of Preferred Stock purchased, in minimum
purchases of $5,000. As part of the Offering, holders of Notes accepted for
exchange in the Offering will cease to accrue interest under the Notes from
and after March 31, 1999 and instead will accrue dividends under the
Preferred Stock on and after March 31, 1999. The first payment of dividends,
which will be made on September 30, 1999, will be in respect of the period
from (and including) March 31, 1999 to (but excluding) September 30, 1999 and
will equal $4 per $100 nominal amount of the Preferred Stock. Dividends will
be payable in arrears semi-annually on September 30 and March 31 of each
year. The shares of Preferred Stock will have a liquidation preference of
$105 per share.
Pursuant to the terms and subject to the conditions of the Offering, the
Company will accept for exchange any and all Notes validly tendered and not
properly withdrawn prior to 5:00 p.m., London, England time, on June 30, 1999
or, if the Offering is extended, the latest time and date to which it is
extended (the "Expiration Date"). Tenders of Notes pursuant to the Offering
may be withdrawn at any time prior to the Expiration Date unless otherwise
agreed by a holder tendering Notes.
Each share of Preferred Stock will be convertible into shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), at an
initial conversion price of Cdn. $0.35 (the "Preferred Conversion Price"), as
compared to a conversion price of Cdn. $1.40 for the Notes (the "Note
Conversion Price").
CERTAIN RISKS ARE INHERENT IN AN INVESTMENT IN THE PREFERRED STOCK AND
INVESTORS ARE URGED TO CONSULT WITH A PROFESSIONAL ADVISOR BEFORE INVESTING
IN THE PREFERRED STOCK. THE PREFERRED STOCK AND COMMON STOCK ARE SUBJECT TO A
HIGH DEGREE OF RISK. AN INVESTMENT IN THE PREFERRED STOCK SHOULD BE
CONSIDERED HIGHLY SPECULATIVE. SEE "RISK FACTORS".
The Common Stock is listed on the Vancouver Stock Exchange ("VSE") and traded
under the symbol "BZG". On June 14, 1999, the closing sale price of the
Common Stock on the VSE was Cdn. $0.31. See "Common Stock Price Range and
Dividend Policy."
June 15, 1999
<PAGE>
THE OFFERING IS NOT CONDITIONAL UPON A MINIMUM AGGREGATE PRINCIPAL AMOUNT OF
NOTES BEING TENDERED.
NONE OF THE PREFERRED STOCK OFFERED HEREBY OR THE COMMON STOCK ISSUABLE IN
RESPECT OF THE PREFERRED STOCK HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") AND NONE OF SUCH SECURITIES MAY BE
OFFERED, SOLD, TRANSFERRED, PLEDGED, EXCHANGED OR OTHERWISE DISPOSED OF IN
THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY "U.S. PERSON"
(AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) BY THE COMPANY OR ANY
PURCHASER IN THIS OFFERING EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION UNDER
THE SECURITIES ACT OR TO EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
SUCH LAWS. NONE OF THE PREFERRED STOCK OR THE COMMON STOCK ISSUABLE ON
CONVERSION OF THE PREFERRED STOCK HAVE BEEN OR WILL BE QUALIFIED FOR
DISTRIBUTION UNDER THE SECURITIES LEGISLATION OF ANY PROVINCE OF CANADA AND
CANNOT BE OFFERED OR SOLD IN CANADA, DIRECTLY OR INDIRECTLY, EXCEPT IN
CERTAIN TRANSACTIONS EXEMPT FROM PROSPECTUS AND REGISTRATION REQUIREMENTS.
THE COMPANY AND THE AGENT HAVE AGREED IN WRITING THAT THEY WILL NOT, AS
PRINCIPAL OR AGENTS, MAKE ANY OFFERS OR SALES OF ANY OF THE PREFERRED STOCK
TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON OR CANADIAN PERSON.
HEDGING TRANSACTIONS IN THE PREFERRED STOCK MAY NOT BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT. THIS OFFERING IS NOT BEING MADE TO
PERSONS IN THE UNITED STATES OR CANADA AND AT THE TIME AN ELECTION TO
EXCHANGE IS MADE OR A BUY ORDER IS ORIGINATED, THE HOLDER OF THE NOTES OR THE
BUYER MUST BE OUTSIDE THE UNITED STATES AND CANADA.
NO SECURITIES COMMISSION OR SIMILAR REGULATORY AUTHORITY IN CANADA OR THE
UNITED STATES HAS PASSED ON THE MERITS OF THE SECURITIES OFFERED NOR HAS IT
REVIEWED THIS OFFERING CIRCULAR AND ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENCE. NO PREFERRED STOCK MAY BE SOLD IN CONNECTION WITH THIS
OFFERING WITHOUT DELIVERY TO THE PURCHASER OF THIS OFFERING CIRCULAR.
ANY BENEFICIAL HOLDER OF NOTES DESIRING TO TENDER ALL OR ANY PORTION OF THE
AGGREGATE PRINCIPAL AMOUNT OF HIS OR HER NOTES MUST COMPLETE, SIGN AND
DELIVER THE LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF IN ACCORDANCE WITH
THE INSTRUCTIONS IN THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED
DOCUMENTS TO MIDLAND BANK PLC, THE COMPANY'S EXCHANGE AGENT (THE "EXCHANGE
AGENT"), AND TENDER SUCH NOTES PURSUANT TO THE PROCEDURE FOR GUARANTEED
DELIVERY OR BOOK-ENTRY TRANSFER SET FORTH IN THIS OFFERING CIRCULAR UNDER THE
HEADING "THE OFFERING--HOW TO TENDER" AND IN THE LETTER OF TRANSMITTAL. A
BENEFICIAL HOLDER OF NOTES WHOSE NOTES ARE HELD BY A BROKER, DEALER,
COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE MUST CONTACT SUCH BROKER,
DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO TENDER SUCH NOTES.
THE COMPANY WOULD REQUEST THAT ALL HOLDERS EFFECTUATE DELIVERY OF THE NOTES
FOR EXCHANGE THROUGH THE GUARANTEED DELIVERY PROCEDURE OR BOOK-ENTRY TRANSFER
PROCEDURE, AS DESCRIBED IN THE LETTER OF TRANSMITTAL AND UNDER "THE
OFFERING--HOW TO TENDER."
QUESTIONS AND REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO THE COMPANY AT THE
ADDRESS AND TELEPHONE NUMBER SET FORTH ON THE LAST PAGE OF THIS OFFERING
CIRCULAR. REQUESTS FOR ADDITIONAL COPIES OF THIS OFFERING CIRCULAR MAY BE
DIRECTED TO THE COMPANY OR TO BROKERS, DEALERS, COMMERCIAL BANKS OR TRUST
COMPANIES.
The Preferred Stock will be offered to a limited number of investors who are
not Canadian residents or "U.S. persons" (as defined in Regulation S under
the Securities Act) in reliance upon an exemption from the registration
requirements of the Securities Act pursuant to Regulation S under the
Securities Act and exemptions from the registration and prospectus
requirements of applicable securities legislation in Canada. The Preferred
Stock will have restrictions on its resale. Regulation S, the safe harbor
pursuant to which the Preferred Stock is being offered, prohibits the
Preferred Stock from coming into the hands of U.S. persons for a period of
one year (unless registered under the Securities Act or sold pursuant to an
exemption from such registration requirements), deems the Preferred Stock
"restricted securities" as defined in Rule 144 of the Securities Act, and
imposes legend requirements. Hedging transactions involving the Preferred
Stock may not be conducted unless in compliance with the Securities Act.
Certain provisions have been included in the terms and conditions of the
Preferred Stock in order to assure compliance with Regulation S. The Company
may, in its discretion, revise the selling restrictions on the Preferred
Stock if the Securities and Exchange Commission (the "Commission") or any
other regulatory authority should, subsequent to the date of this Offering
Circular, amend or give advice or interpretations respecting the selling
restrictions applicable to the Preferred Stock. If the Company so revises the
selling restrictions, it will give notice to the holders of the Preferred
Stock addressed to each holder of record at his or her address appearing on
the books of the Company and it shall cause a copy of such notice (or a
reasonable summary thereof) to be published in THE FINANCIAL TIMES (EUROPEAN
EDITION) of London, England.
The Preferred Stock will bear a legend indicating that it has not been
qualified for distribution in British Columbia or in any other Province of
Canada and may not be offered, sold, transferred, pledged, converted or
otherwise disposed of in British Columbia or in any other Province of Canada
or to or for the benefit of any resident of British Columbia or in any other
Province of Canada except in accordance with applicable resale restrictions
which include
2
<PAGE>
in British Columbia a hold period of four months from the Closing Date. The
Company will use its reasonable best efforts to ensure that neither the
Preferred Stock nor any Common Stock issued as dividends or on conversion of
the Preferred Stock will be subject to a period of restriction in trading in
British Columbia in excess of four months following the Closing Date, save
that as otherwise provided herein such Common Stock will be Freely Tradable.
The Company, having made all reasonable inquiries, confirms that this
Offering Circular contains all information which is material in the context
of the Offering, that the information contained herein is true and accurate
in all material respects and is not misleading in any material respect, that
the opinions and intentions expressed herein are honestly held and that there
are no other facts the omission of which would make any of such information
or the expression of any such opinions or intentions misleading in any
material respect. The Company accepts responsibility accordingly.
No person has been authorized to give any information or to make any
representation with respect to the Company or the Preferred Stock being
offered hereby, except for the information contained in this Offering
Circular, the Letter of Transmittal and the Subscription Agreement and if
given or made, any other information or representation must not be relied
upon as having been authorized by the Company, the Agent or any other person.
Neither the delivery of this Offering Circular at any time nor any sale made
pursuant to the Offering shall, under any circumstances, constitute a
representation that there has been no change in the affairs of the Company or
any of its subsidiaries since the date hereof or create any implication that
the information contained herein is correct as of any time subsequent to the
date hereof.
No action is being taken to permit a public offering of the Preferred Stock
or the distribution of this Offering Circular in any jurisdiction where
action would be required for such purposes. Applicable laws may restrict the
distribution of this Offering Circular and the Offering related to the
Preferred Stock in certain jurisdictions. Persons into whose possession this
Offering Circular may come are required by the Company to inform themselves
about and to observe any such restrictions. This Offering Circular does not
relate to any securities other than the Preferred Stock and the Common Stock
that may be delivered in connection with the payment of dividends or into
which the Preferred Stock is convertible and does not constitute an offer to
sell or a solicitation of an offer to buy any of the Preferred Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such
offer of solicitation.
Purchase of the Preferred Stock may result in tax or other legal consequences
not discussed herein. Prospective investors are not to construe this Offering
Circular or any prior or subsequent communication from the Company or the
Agent or any of their respective directors, officers, agents or employees as
legal, tax or investment advice. Each prospective investor should consult
with and rely on the investor's own professional advisers, including legal
counsel and tax advisers, as to the consequences of any investment by the
prospective investor in the Preferred Stock.
The Preferred Stock is being offered when, as and if issued, subject to prior
sale or withdrawal, cancellation or modification of the Offering without
notice, and subject to the approval of certain legal matters by counsel and
certain other conditions.
The Agent has no obligation to make a market in the Preferred Stock and there
is no assurance that a market in the Preferred Stock will ever develop.
In this Offering Circular, all references to "dollars", "$" or "cents" are to
U.S. dollars and cents unless an indication to Canadian dollars or cents is
made.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
CONVERSIONS.........................................................................................4
SUMMARY.............................................................................................5
COMPARISON OF THE NOTES AND THE PREFERRED STOCK.....................................................9
GLOSSARY...........................................................................................13
THE OFFERING.......................................................................................16
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS..........................................20
RISK FACTORS.......................................................................................20
USE OF PROCEEDS....................................................................................29
CONSOLIDATED CAPITALIZATION........................................................................30
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY.......................................................31
SELECTED CONSOLIDATED FINANCIAL INFORMATION........................................................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............33
BUSINESS AND PROPERTIES............................................................................42
MANAGEMENT.........................................................................................57
PRINCIPAL SHAREHOLDERS.............................................................................61
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS........................................62
DESCRIPTION OF CAPITAL STOCK.......................................................................65
SUBSCRIPTION AND SALE..............................................................................68
SELLING RESTRICTIONS...............................................................................68
TAX CONSIDERATIONS.................................................................................74
LEGAL OPINIONS OF COMPANY COUNSEL..................................................................81
ADDITIONAL INFORMATION.............................................................................81
CERTIFICATE OF DESIGNATION.......................................................................APPENDIX A
AUDITED FINANCIAL STATEMENTS.....................................................................APPENDIX B
FIRST QUARTER FINANCIAL STATEMENTS..............................................................APPENDIX C
</TABLE>
CONVERSIONS
The following table sets forth certain standard conversions from
standard imperial units to the international system of units (or metric
units).
<TABLE>
<CAPTION>
TO CONVERT FROM TO MULTIPLY BY
---------------------------- --------------------------- ------------
<S> <C> <C>
MCF......................... Cubic.meters................ 28.174
Cubic meters................ Cubic.feet.................. 35.494
Bbls........................ Cubic.meters................ 0.159
Cubic meters................ Bbls.oil.................... 6.29
Feet........................ Meters...................... 0.305
Meters...................... Feet........................ 3.281
Miles....................... Kilometers.................. 1.609
Kilometers.................. Miles....................... 0.621
Acres....................... Hectares.................... 0.405
Hectares.................... Acres....................... 2.471
</TABLE>
4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHALL BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING OR INCORPORATED BY
REFERENCE ELSEWHERE IN THIS OFFERING CIRCULAR.
THE COMPANY
The Company is a Delaware corporation engaged in the acquisition,
exploration and development of oil and gas properties, primarily in the Gulf
Coast area of the United States. The Company's interests in its United States
properties are held primarily through its wholly owned Texas subsidiary,
Texstar Petroleum Inc. ("Texstar").
Through Texstar, the Company holds various oil and gas interests in
Mississippi, Louisiana and Texas. The Company's principal activity is
acquisition, drilling and production from prospects in those states including
its existing major projects and prospects of Lahinch, Rayburn and Old Ocean
and others in Texas and subsequent development of commercial wells in Texas,
Oakvale Dome, Morgantown, Wausau and other prospects in Mississippi. See
"Business and Properties".
The following table summarizes the Company's proved oil and gas reserve
quantities as estimated by the Company's independent petroleum engineers as
of January 1, 1999.
<TABLE>
<CAPTION>
PROVED RESERVES (1)
--------------------
<S> <C>
Gas, MMCF 36,405
Oil, Condensate & NGL, MBO 584
</TABLE>
---------------------------
(1) Includes reserves in Louisiana that were sold in May 1999
as part of the sale of the Lisbon Field. See "Business and
Properties-Recent Developments"
The Company's senior management is highly experienced in the oil and
gas industry and has participated in the development of various oil and gas
prospects throughout the United States. The Company's policy is to attract
and retain senior management with proven oil and gas expertise to conduct its
operations. Mr. Prentis B. Tomlinson, Jr., the Chairman and Chief Executive
Officer, has been involved in the oil and gas industry for the past 30 years.
THE OFFERING
The principal purposes of the Offering are to raise new capital,
reduce the Company's debt service requirements and to improve the Company's
debt to equity ratio. Noteholders who elect to exchange for Preferred Stock
will also receive the benefit of a reduction in the effective rate into which
the Notes convert into Common Stock. The Certificate of Designation
establishing the Preferred Stock is attached hereto as Appendix A.
TERMS OF EXCHANGE:
Option 1 65 shares of Preferred Stock for each $5,000
principal amount of the Notes plus $1,500
in cash.
Option 2 45 shares of Preferred Stock for each $5,000
principal amount of the Notes.
<TABLE>
<CAPTION>
<S> <C>
TERMS OF SALE: 55 shares of Preferred Stock for each $5,000
in cash.
AGENT: RP&C International Inc.
RP&C International Limited.
EXPIRATION DATE: The Company will accept for exchange Notes,
validly tendered prior to 5:00 p.m., London,
England time, on the Expiration Date. The
Offering will expire on the Expiration Date.
Tenders received prior to the Expiration
Date may be withdrawn at any time prior to
the Expiration Date unless otherwise agreed
by the holder. See "The Offering-Withdrawal
Rights."
5
<PAGE>
<S> <C>
DIVIDENDS: Through March 31, 2003, each share of
Preferred Stock will accrue an $8 annual
dividend (equivalent to 8% annually or $800
per $10,000 of Preferred Stock). After March
31, 2003 each share of Preferred Stock will
accrue a $15 annual dividend (equivalent to
15% annually or $1,500 per $10,000 of
Preferred Stock). If dividends are not
timely paid, annual dividends will be
increased by $3.00 per share until such
dividends have been paid. Dividends will be
payable semi-annually in arrears in cash or,
at the option of the Company, in Freely
Tradable (as defined in the Glossary) Common
Stock valued at the average of the Market
Price thereof for the 20 consecutive Stock
Exchange Business Days ending five Stock
Exchange Business Days prior to the dividend
payment date. "Market Price" is defined as
the weighted average price of the Common
Stock on the principal stock exchange on
which the Common Stock is traded on any
Stock Exchange Business Day. Dividends will
be paid free of withholding taxes. The
Preferred Stock will have a liquidation
value of $105 per share and will not be
subject to any sinking fund requirements.
Additionally, the Preferred Stock will have
greatly limited voting rights. See
"Comparison of the Notes and the Preferred
Stock" below and "Description of Share
Capital."
CONVERSION: Through March 31, 2000, the Preferred Stock
will be convertible, at the option of the
holder thereof, into Common Stock at an
initial conversion rate (the "Preferred
Conversion Price") equal to Cdn. $0.35. If
on March 31, 2000, the average of the Market
Prices during the preceding 20 consecutive
Stock Exchange Business Days is lower than
the Preferred Conversion Price, then the
Preferred Conversion Price will be adjusted
downward to such average price. The Company
will use its best efforts to ensure that
within four months after the Closing Date,
the Preferred Stock and any Common Stock
issuable as dividends or on conversion are
Freely Tradable. If such securities are not
Freely Tradable within that time period, the
Preferred Conversion Price shall be reduced
thereafter by 5% for each six month period
or portion thereof until such securities are
Freely Tradable. Upon the conversion of any
Preferred Stock, payment will be made by the
Company within 60 days following conversion
for dividends accrued during the period from
the most recent dividend payment date to the
conversion date.
REQUIRED CONVERSION: The Company may cause all of the Preferred
Stock to be converted into Common Stock at
the then Preferred Conversion Price at any
time after March 31, 2000, if the average
Market Price for 20 consecutive Stock
Exchange Business Days ending not more than
five days prior to the giving of such notice
is equal to or in excess of 140% of the
Preferred Conversion Price then in effect
and the Common Stock to be received in
connection with such conversion is Freely
Tradable. The Company is required to give 30
days notice in writing to the holders of the
Preferred Stock that it has elected a
mandatory conversion. Upon any mandatory
conversion of any Preferred Stock by the
Company, the Company will make payment for
dividends accrued during the period from the
most recent dividend payment date to the
conversion date.
REDEMPTION: The Preferred Stock is redeemable in whole
or in part by the Company at any time on the
giving of 30 days written notice at 105% of
the nominal amount thereof, together with
any accrued but unpaid dividends, payable in
cash ("Redemption Value"). Commencing April
1, 2003, at the option of the Company the
Preferred Stock may also be redeemed for
Freely Tradable Common Stock (i) at 115% of
the nominal amount if the market
capitalization of the Company is $300
million or more on such date, or (ii) at
120% of the nominal amount if the market
capitalization is less than $300 million on
such date. The Common Stock issued will be
valued at the average Market Price for the
20 Stock Exchange Business Days ending five
Stock Exchange Business
6
<PAGE>
<S> <C>
Days prior to the payment date. During the
30 day notice period, holders retain the
ability to convert their Preferred Stock
into Common Stock.
RANKING: The Preferred Stock will rank PARI PASSU
with the $9.5 million of Class A, Series I
Preferred Stock held by Lasco Energy
Partners, LP (the "Lasco Preferred") and any
new issue of preferred stock that stipulates
a liquidation preference PARI PASSU with the
Preferred Stock, and senior to all other
present and future equity of the Company.
The Preferred Stock will be subordinate to
claims of creditors, including holders of
the Company's outstanding debt instruments
(including the Notes, all production
financings and other creditors).
COVENANTS: During the period that any of the Preferred
Stock is outstanding, the Company will
maintain Tangible Assets equal to or greater
than 100% (rising to 140% in respect of the
years ending 31 December 2000 and thereafter)
of Long Term Debt (which includes the
Preferred Stock and other preferred stock
ranking PARI PASSU with the Preferred Stock).
A breach of this covenant by the Company or
a breach by the Company of certain other
covenants specified in the Certification of
Designation shall entitle the holder of the
Preferred Stock to cause a redemption
thereof by the Company.
VOTING RIGHTS: None prior to conversion except as
provided by law.
MINIMUM TENDER AMOUNT: Subject to the terms and conditions of the
Offering, all Notes will be accepted if duly
tendered and not withdrawn prior to the
Expiration Date. The Offering is not
conditioned upon a minimum aggregate
principal amount of Notes being tendered.
DENOMINATIONS AND FORM: The Preferred Stock will be registered and
issued in a non-certificated form that will
be eligible for clearing through the
Depository Trust Company ("DTC"), New York,
New York. The Preferred Stock will have a
nominal value of $100 and a liquidation
value of $105.
RESTRICTIONS ON RESALES: The Preferred Stock will have restrictions
on their resale. The Preferred Stock will
bear a legend indicating that it has not
been registered under the Securities Act and
that resales will be restricted for the
first two years after issuance in accordance
with Regulation S under the Securities Act
unless an exemption applies. The Preferred
Stock will bear a legend indicating that
they have not been qualified for
distribution in Canada and may not be
offered, sold, transferred, pledged,
converted or otherwise disposed of in Canada
or to or for the benefit of any resident of
Canada except in accordance with applicable
resale restrictions which include a hold
period of four months from the Closing Date.
EXTENSIONS: Subject to the approval of the Agent, the
Company expressly reserves the right to
extend the Expiration Date. See "The
Expiration Date-Expiration and Extension of
Tender Period".
HOW TO TENDER: Tendering holders of Notes must complete and
sign a Letter of Transmittal, forward the
Letter of Transmittal and any other required
documents to the Exchange Agent and tender
such Notes pursuant to the procedures for
guaranteed delivery or book-entry transfer,
and if choosing option 1 and the holder is a
member of the ICSD system, instruct Cedel or
Euroclear to debit such holder's ICSD
account by the required amount on the
instructions of the Exchange Agent and
thereafter deliver such amount to the
Exchange Agent's account, or if the holder
of Notes is not a member of the ICSD system,
then such holder must contact the Agent to
arrange for the delivery of the required
cash payment. Physical delivery of Notes is
not recommended due to the fact that the
Notes are in bearer form. Confirmation of a
book-entry transfer of such Notes to the
Exchange Agent's account at the Book-Entry
Facility (as defined below) will
7
<PAGE>
<S> <C>
effectuate delivery in a timely fashion.
Questions regarding how to tender and
requests for information should be directed
to the Company. See "The Offering - How
to Tender".
ACCEPTANCE OF TENDERS: Subject to the terms and conditions of the
Offering and unless otherwise agreed with a
holder, Notes validly tendered will be
accepted on or promptly after the Expiration
Date. Subject to such terms and conditions,
DTC accounts designated by the holders will
be credited with the appropriate number of
shares of Preferred Stock promptly after
acceptance of the tendered Notes. See "The
Offering - Acceptance of Tenders."
UNTENDERED NOTES: Holders of Notes who do not tender their
Notes in the Offering or whose Notes are not
accepted for exchange will continue to hold
such Notes and will be entitled to all the
rights and preferences and will be subject
to all of the limitations applicable
thereto, including the possible delisting of
the Notes from the Luxembourg Stock
Exchange. See "Risk Factors."
HOW TO PURCHASE: Any investor electing to purchase Preferred
Stock must complete and sign a Subscription
Agreement and forward the Subscription
Agreement and any other required documents
to the Agent and forward the cash payment to
the account referenced in the Subscription
Agreement, all in accordance with the
procedures set out in the Subscription
Agreement.
USE OF PROCEEDS: The net proceeds of the Offering will be
used by the Company to repay a portion of
its trade payables, to repay a portion of
amounts due under its senior debt facilities
and for general corporate purposes. See "Use
of Proceeds".
CLOSING: On the Expiration Date; however, the Company
may sell Preferred Stock or with the written
consent of a holder accept tenders prior to
the Expiration Date. Any sales or exchanges
completed prior to the Expiration Date shall
be final and binding regardless of whether
the Closing is further delayed or never
occurs.
RISK FACTORS: Certain risks are inherent in an investment
in the Preferred Stock and investors are
urged to consult with a professional advisor
before investing in the Preferred Stock. The
Preferred Stock and Common Stock are subject
to a high degree of risk. Risk factors
include, but are not limited to, variation
in commodity prices, actual success in
drilling and commercial completions and
availability and cost of services. See "Risk
Factors".
CUSIP NUMBER: 083453209
SWISS SECURITIES NUMBER
FOR THE PREFERRED STOCK: CH804491
SWISS SECURITIES NUMBER
FOR THE COMMON STOCK: CH679175
</TABLE>
8
<PAGE>
COMPARISON OF THE NOTES AND THE PREFERRED STOCK
The following is a brief summary comparison of certain of the principal terms
of the Notes and the Preferred Stock. Holders are encouraged to review in
detail the terms of the Preferred Stock as set forth in the Certificate of
Designation attached hereto as Appendix A, the Trust Indenture and Notes they
hold for a more complete description of each.
<TABLE>
<CAPTION>
NOTES PREFERRED STOCK
----- ---------------
<S> <C> <C>
MATURITY: March 31, 2003 The Preferred Stock will not be
subject to redemption except upon
the occurrence of certain specified
events. However, on March 31,
2003, the dividends payable on the
Preferred Stock increase to 15% per
annum.
INTEREST/DIVIDEND RATE: 9% annual interest (equivalent to Through March 31, 2003, $800 annual dividend
$900 annually per $10,000 principal per $10,000 of Preferred Stock (8% annual
amount of Notes) payable in cash dividend) and after March 31, 2003, $1,500
semi-annually in arrears on March 31 annual dividend per $10,000 of Preferred
and September 30 equally each year. Stock (15% annual dividend equivalent),
which dividends will be payable
semi-annually in arrears in cash or, at the
Company's option, in Common Stock on March
31 and September 30 of each year, when, as
and if declared by the Company's board of
directors. The Common Stock issued to pay
dividends will be Freely Tradable and
valued based on the average Market
Price for the 20 consecutive Stock Exchange
Business Days ending five Stock Exchange
Business Days prior to the relevant
dividend payment date.
INTEREST/DIVIDENDS RECEIVED: Interest paid on the Notes to holders Dividends paid on the Preferred
not connected with the United States Stock to holders not connected with
or Canada is adjusted upward to the United States will be adjusted
include applicable withholding taxes, upward to include applicable
subject to certain exceptions. withholding taxes, subject to
certain exceptions.
9
<PAGE>
NOTES PREFERRED STOCK
----- ---------------
<S> <C> <C>
RESTRICTIONS ON PAYMENT OF None The Company may only pay dividends out of
INTEREST/DIVIDENDS: surplus, as defined in the Delaware General
Corporation Law, or, if no surplus is
available, out of its net profits for the
fiscal year which the dividend or
distribution is declared and the preceding
fiscal year. No dividends or distributions
may be declared or paid if the Company is or
would be rendered insolvent by virtue of the
dividend distribution. In addition, the
EnCap Credit Facility and the BOCP Credit
Facility currently contain restrictions on
the payment of dividends.
CONVERSION: Convertible at the option of the Convertible at the option of the holder
holder at any time prior to maturity at any time into Common Stock at a
into Common Stock at a conversion conversion price of Cdn. $0.35. Subject to
price of Cdn. $1.40. further downward repricing on March 31,
2000, if the average 20 day Market Price
is lower than the Preferred Conversion
Price. If the Common Stock that would be
received in connection with conversion is
not Freely Tradable within four months
after the Closing Date, the Preferred
Conversion Price shall thereafter be
reduced by 5% for each 6 month period or
portion thereof until such Common Stock
becomes Freely Tradable.
CASH REDEMPTION OPTION: The Company may at any time after The Company may at any time redeem the
March 31, 2002, redeem the Notes for Preferred Stock for a cash price equal to
a cash price equal to the principal 105% of the nominal value of the Preferred
amount of the Notes together with Stock plus accumulated and unpaid dividends.
accrued and unpaid interest.
10
<PAGE>
NOTES PREFERRED STOCK
----- ---------------
<S> <C> <C>
MANDATORY CONVERSION: The Company may, at its option, cause The Company may, at its option, cause the
the Notes to be converted into shares Preferred Stock to be converted into shares
of Common Stock, at any time after of Common Stock at the Preferred Conversion
September 30, 1999 and prior to March Price at any time and from time to time
31, 2003, if the weighted average after March 31, 2000, if the average Market
trading price of the Common Stock on Price during 20 consecutive Stock Exchange
the principal stock exchange on which Business Days ending not more than five days
the Common Stock is traded during a prior to the giving of notice is equal to or
20 consecutive trading day period is in excess of 140% of the Preferred
not less than 140% of the conversion Conversion Price then in effect. The Company
price then in effect. The Company is is required to give 30 days notice in
required to give notice that it has writing to the holders thereof that it has
elected mandatory conversion. elected mandatory conversion. Upon any
mandatory conversion of any Preferred Stock
by the Company, payment will be made by the
Company for dividends accrued during the
period from the most recent dividend payment
date to the conversion date.
CONVERSION PRICE ADJUSTMENT: The conversion price will be adjusted The Preferred Conversion Price will be
upon the occurrence of certain events adjusted upon the occurrence of certain
including (i) on the subdivision or events including (i) on the subdivision or
consolidation of the outstanding consolidation of the outstanding Common
Common Stock; (ii) on the issue of Stock; (ii) on the issue of any Common Stock
any Common Stock to holders of Common to holders of Common Stock by way of stock
Stock by way of stock dividends (with dividends (with certain exceptions); (iii)
certain exceptions); (iii) on the on the issue of rights, options or warrants
issue of rights, options or warrants to substantially all of the holders of
to substantially all of the holders Common Stock entitling them to acquire
of Common Stock entitling them to Common Stock or securities convertible into
acquire Common Stock or securities Common Stock (with certain exceptions); or
convertible into Common Stock (with (iv) on the distribution to substantially
certain exceptions); or (iv) on the all of the holders of Common Stock of class
distribution to substantially all of or of rights, options or warrants or of
the holders of Common Stock of any evidences of indebtedness or of assets.
other class or of rights, options or
warrants or of evidences of any other
indebtedness or of assets.
VOTING RIGHTS: None. Non-voting, except as otherwise required
by law.
LISTING: The Notes are listed on the The Preferred Stock is not currently
Luxembourg Stock Exchange. The Common listed on an exchange.
Stock is currently listed on the VSE.
11
<PAGE>
NOTES PREFERRED STOCK
----- ---------------
<S> <C> <C>
RANKING: The Notes rank equally amongst The Preferred Stock will rank PARI PASSU to the
themselves and at least equally with Lasco Preferred and any new issue of
all other unsecured obligations (other preferred stock stipulates a liquidation
than in respect of statutorily that preference PARI PASSU with the Preferred
preferred creditors) of the Company. Stock, and senior to all other present and
At April 30, 1999, the Company had future equity of the Company. The Preferred
outstanding $27,200,000 of secured Stock will be subordinate to claims of
obligations. creditors, including holders of the
Company's outstanding debt securities
(including the Notes, all production
financings and other creditors). The
Preferred Stock will also be effectively
subordinated to all debt obligations of the
Company's subsidiaries.
DEBT COVENANT: The Noteholders are entitled to the Holders of the Preferred Stock will the
protection of numerous covenants have right to require redemption of their
provided in the Trust Indenture Preferred Stock if the Company fails to
including a covenant that the Company maintain Tangible Assets equal to or greater
must maintain tangible assets equal to than 100% (rising to 140% in respect of the
or greater than 100% (rising to 140% years ending 31 December 2000 and
in respect of the years ending 31 thereafter) of Long Term Debt.
December 2000 and thereafter) of long
term debt and any preferred stock of
the Company.
RESALE RESTRICTIONS: None The Preferred Stock will bear legends
indicating that they have not been (i)
registered under the Securities Act and that
resales will be restricted for the first two
years after issuance in accordance with
Regulation S under the Securities Act unless
an exemption applies and (ii) qualified for
distribution in Canada and may not be
offered, sold, transferred, pledged,
converted or otherwise disposed of in Canada
or to or for the benefit of any resident of
Canada except in accordance with applicable
resale restrictions which include a hold
period of four months from the Closing Date.
SETTLEMENT: Notes are settled in the Euroclear/ Preferred Stock will be eligible for
Cedel System. settlement in the DTC system.
FORM: The Notes are in bearer form. The Preferred Stock will be issued in
registered form as non-certificated shares.
</TABLE>
12
<PAGE>
GLOSSARY
In this Offering Circular (including the Summary), the following words and
phrases shall have the meaning set forth below, unless the context otherwise
requires:
"Alternative Stock Exchange" means any national or regional stock exchange,
or if not available, a U.S. national or regional stock quotation service such
as the Nasdaq National Market System or the quotation service maintained by
the National Quotation Bureau (the pink sheets) or any successor thereto,
which in any such case is acceptable to the Agent. The Agent has agreed that
the bulletin board trading system operated by Nasdaq is acceptable and will
constitute an "Alternative Stock Exchange".
"Agency Agreement" means the Agency Agreement entered into between the
Company and the Agent.
"Agent" means RP&C International Inc. and RP&C International Limited.
"BCFG" means billion cubic feet of gas.
"BCPD" means barrels of condensate per day.
"BO" means barrels of oil.
"BOCP" means BOCP Energy Partners, L.P.
"BOCP Credit Facility" means Texstar's Credit Facility with BOCP in effect at
the date hereof and as it may be increased, decreased, supplemented or
amended from time to time hereafter.
"BOPD" means barrels of oil per day.
"BPO" means the designated interest held before payout occurs.
"Calibre" means Calibre Energy, L.L.C.
"Certificate of Designation" means the Certificate of Designation adopted by
the board of directors of the Company establishing the Preferred Stock and
substantially in the form attached hereto as Appendix A.
"Certificate of Incorporation" means the Company's Certificate of
Incorporation on file with the Secretary of State of Delaware.
"Closing Date" means the date the Company accepts the Notes in exchange for
the Preferred Stock.
"Common Stock" means the common stock, par value $0.01 per share of the
Company.
"Company" means Benz Energy Inc.
"Convertible Debentures" means the Notes and if converted, the resulting
Series 2 Debentures and the Series 3 Debentures.
"EnCap" means EnCap Investments, L.C.
"EnCap Credit Facility" means Texstar's credit facility with EnCap Energy in
effect at the date hereof and as it may be increased, decreased, supplanted
or amended from time to time hereafter.
"EnCap Energy" means EnCap Energy Capital Fund III, L.P.
"Exchange Agent" means Midland Bank plc.
"Expiration Date" means June 30, 1999, or such later date as is designated by
the Company with the approval of the Agent.
13
<PAGE>
"Farmout" means the exchange of a working interest for a smaller net profits
interest or royalty interest.
"Freely Tradable" means with respect to the Preferred Stock and the Common
Stock, that such stock has been registered pursuant to a registration
statement that has been declared effective pursuant to the Securities Act or
that such stock can be resold without restrictions under an exemption from
registration under the Securities Act applicable to all holders of such
Preferred Stock or the Common Stock, is listed on the VSE or on an
Alternative Stock Exchange and is tradable on such exchange without further
restrictions.
"Lasco Transaction" means the acquisition by the Company of reserves in east
Texas and northwest Louisiana.
"Lenser & Associates" means R.A. Lenser and Associates, Inc., petroleum
engineers.
"Letter of Transmittal" means the Letter of Transmittal forwarded along with
the Offering Circular to the Noteholders.
"LOE" means lease operating expenses.
"Long Term Debt" as defined in the Certificate of Designation attached hereto
as Appendix A.
"MB" means thousand barrels.
"MBO" means thousand barrels of oil.
"MCF" means thousand cubic feet.
"MCFGPD" means a thousand cubic feet of gas per day.
"MCFPD" means a thousand cubic feet per day.
"MMBO" means a million barrels of oil.
"MMCFG" means a million cubic feet of gas.
"nominal amount" means as to each share of Preferred Stock, $100.
"Noteholder" means the beneficial holders of the Notes.
"NPI" means net profit interest, which is revenues less royalty burden,
operating expenses, excise taxes, gathering and treating expenses and capital
costs of drilling and completing the producing well, provided that the excess
of such deductions over revenues is recouped solely through future revenues
to the owner of the net profits interest.
"Offering" means the offering of Preferred Stock pursuant to the Offering
Circular, the Letter of Transmittal and the Subscription Agreement.
"Old Ocean Loan" means the $2,200,000 of indebtedness outstanding pursuant to
the terms of the Letter Loan Agreement dated December 31, 1998 among Texstar,
as borrower, and the Agent and the other lenders signatory thereto.
"Preferred Conversion Price" means on the Closing Date Cdn. $0.35 per
Common Share, as subsequently may be adjusted.
"Preferred Stock" means the Class A, Series II Convertible Preferred Stock,
par value $1.00 per share, of the Company with a nominal value of $100 per
share and a liquidation value of $105 per share, which Preferred Stock was
established pursuant to the Certificate of Designation substantially in the
form attached hereto as Appendix A.
"psi" means pounds of pressure per square inch.
14
<PAGE>
"Series 2 Debentures" means the Special Notes, Series A issued in April of
1998 to Canadian investors and any Debentures into which such Special Notes
may be converted.
"Series 3 Debentures" means the Special Notes, Series B issued in April of
1998 to United States investors and the Debentures into which such Special
Notes have been converted.
"Stock Exchange Business Day" means any day (other than a Saturday or Sunday)
on which the principal exchange on which the Common Stock is traded or the
Alternative Stock Exchange, as the case may be, is open for business.
"Subscription Agreement" means those certain Subscription Agreements executed
by persons interested in purchasing Preferred Stock.
"Subsidiary" of any person means any corporation of which at least a majority
of the shares of stock having by the terms thereof ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective
of whether or not at the time stock of any other class of such corporation
shall have voting power by reason of the happening of any contingency) is
directly or indirectly owned or controlled by any one of or any combinations
of the Company or one or more of its Subsidiaries.
"Trust Indenture" means that certain Trust Indenture dated as of March 25,
1998 between the Corporation and Montreal Trust Company of Canada, as amended
by the First Supplemental Trust Indenture and the Second Supplemental Trust
Indenture.
"Tangible Assets" as defined in the Certificate of Designation attached
hereto as Appendix A.
"Trustee" means Montreal Trust Company of Canada.
"VSE" means The Vancouver Stock Exchange.
15
<PAGE>
THE OFFERING
EXCHANGE OFFER; OFFERING OF PREFERRED STOCK
The Company hereby offers, upon the terms and conditions set forth
herein and in the related Letter of Transmittal, to exchange up to 354,250
shares of the Company's Class A, Series II Convertible Preferred Stock, $1.00
par value for the Notes. Noteholders have the following exchange options: (i)
65 shares of Preferred Stock for each $5,000 principal amount of the Notes
plus $1,500 cash payment tendered or (ii) 45 shares of Preferred Stock for
each $5,000 principal amount of the Notes tendered. In addition, the Company
is offering a total of 121,000 shares of Preferred Stock in units of 55
shares of Preferred Stock for $5,000. On March 31, 1999, there was
$27,250,000 in aggregate principal amount of Notes outstanding. The Offering
is not conditioned upon any minimum number or principal amount of Notes being
tendered.
The Offering will expire at 5:00 p.m., London, England time, on the
Expiration Date. See "The Offering - Expiration and Extension of Tender
Period."
Holders of Notes who wish to exchange Notes for Preferred Stock must
validly tender certificates for Notes to the Company or validly tender Notes
by complying with the book-entry transfer procedures described below and, in
each case, must furnish the Letter of Transmittal and other required
documents to the Exchange Agent. If choosing Option 1 and the holder is a
member of the ICSD system, holders of Notes must also instruct Cedel or
Euroclear to debit such holder's ICSD account by the required amount on the
instructions of the Exchange Agent and thereafter deliver such amount to the
Exchange Agent's account, or if the holder of Notes is not a member of the
ICSD system then such holder must contact the Agent to arrange for the
delivery of the required cash payment. Thereafter, the holders will have
designated DTC accounts credited with the appropriate number of shares of
Preferred Stock, promptly after the tender is accepted by the Company.
Subject to the terms and conditions of the Offering and unless otherwise
agreed by a holder, properly tendered Notes will be accepted on or promptly
after the Expiration Date.
The Letter of Transmittal and Offering Circular will be forwarded to
Morgan Guaranty Trust Company of New York, Brussels office, as operator of
the Euroclear System and Cedelbank for distribution to holders who are listed
as participants in a clearing agency's position listing for subsequent
transmittal to beneficial owners of Notes. Such beneficial owners may also
obtain a copy of this Offering Circular and Letter of Transmittal from the
Company, the Agent and the Exchange Agent.
EXPIRATION AND EXTENSION OF TENDER PERIOD
The Offering will expire at 5:00 p.m., London, England time, on the
Expiration Date, subject to the right of the Company to (i) extend the
Expiration Date with the consent of the Agent and (ii) elect to sell
Preferred Stock or with the consent of a holder accept tenders of Notes prior
to the Expiration Date.
CERTAIN CONDITIONS OF THE OFFERING
Notwithstanding any other provisions of the Offering, the Company
will not be required to issue Preferred Stock in respect of any properly
tendered Notes not accepted and may delay the acceptance of the tendered
Notes but only if one or more of the following events shall have occurred (or
shall have been determined by the Company to have occurred) and which in the
Company's reasonable judgment in any such case makes it inadvisable to
proceed with the Offering:
(a) Any action or proceeding, order, decree or injunction
shall have been taken or threatened, instituted or pending, or any
statute, rule, regulation, judgment, order, stay, decree or
injunction shall have been sought, promulgated, enacted, entered,
enforced or deemed applicable to the Offering or the Company taken
as a whole, by or before any court or governmental, regulatory or
administrative authority or agency or tribunal, which (i) challenges
the making of the Offering, the acquisition of the Notes or issuance
of the Preferred Stock pursuant to the Offering or might directly or
indirectly prohibit, prevent, restrict or delay consummation of the
Offering, or (ii) materially adversely affects the business,
operations, condition (financial or otherwise), results of
operations, prospects, assets, liabilities, working capital or
reserves of
16
<PAGE>
the Company taken as a whole, or otherwise materially impairs in any
way the contemplated future conduct of the business of the Company
taken as a whole.
(b) There shall have occurred (i) the declaration of any
banking moratorium or suspension of payments in respect of banks in
Canada or the United States, (ii) any general suspension of trading
in, or limitation on prices for, securities on any Canadian or
United States national securities exchange or in the
over-the-counter market, (iii) any limitation (whether or not
mandatory) by any government or governmental, regulatory or
administrative agency or authority on, or any event which in the
Company's sole judgment might adversely affect, the extension of
credit by banks or other lending institutions in Canada or the
United States, or (iv) in the case of any of the foregoing existing
at the time of the commencement of the Offering, a material
acceleration or worsening thereof.
(c) There shall have occurred any event that has resulted,
or may in the reasonable judgment of the Company result, in an
actual or threatened material adverse change in the business,
operations, condition (financial or otherwise), results of
operations, prospects, assets, liabilities, working capital or
reserves of the Company.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company in its reasonable discretion regardless of the
circumstances (including any action or inaction by the Company) giving rise
to any such conditions, or may be waived by the Company, in its sole
discretion, in whole or in part at any time.
HOW TO TENDER
Tendering holders of Notes must complete and sign a Letter of
Transmittal or a facsimile thereof (all references in this Offering Circular
to the Letter of Transmittal shall be deemed to include a facsimile thereof),
forward the Letter of Transmittal and any other required documents to the
Exchange Agent at the address set forth in the Letter of Transmittal and
tender such Notes pursuant to the procedures for guaranteed delivery or
book-entry transfer. Physical delivery of Notes is not recommended due to the
fact that the Notes are in bearer form. Confirmation of a book-entry transfer
of such Notes to the Exchange Agent's account at the Book-Entry Facility (as
defined below) will effectuate delivery of the Notes in a timely fashion. If
electing Option 1 and if the holder of Notes has an ICSD account, then such
holder shall instruct Cedel or Euroclear to debit such holder's ICSD account
by the required cash payment on the instructions of the Exchange Agent and
thereafter deliver such amount to the Exchange Agent's account or if the
holder of Notes is not a member of the ICSD system, then such holder must
contact the Agent to arrange for payment. Questions regarding how to tender
and requests for information should be directed to the Company.
The Exchange Agent will establish an account with respect to the
Notes at Euroclear and Cedelbank (each individually, a "Book-Entry Facility")
as soon as practicable after the date of this Offering Circular, and any
financial institution which is a participant in the Book-Entry Facility may
make book-entry delivery of the Notes by causing the Book-Entry Facility to
transfer such Notes into the Exchange Agent's account in accordance with the
Book-Entry Facility's procedure for such transfer. Although delivery of Notes
may be effected through book-entry transfer into the Exchange Agent's account
at the Book-Entry Facility, the Letter of Transmittal, any required cash
payment (either through the ICSD account system or in readily available
funds) and any other required documents, must in any case be transmitted to
and received by the appropriate party on or prior to the Expiration Date.
Delivery of documents to the Book-Entry Facility does not constitute delivery
to the Exchange Agent. All references in this Offering Circular to deposit or
delivery of Notes shall be deemed to include the Book-Entry Facility's
book-entry delivery method.
THE METHOD OF DELIVERY OF NOTES AND ALL OTHER DOCUMENTS, INCLUDING
DELIVERY THROUGH THE BOOK-ENTRY FACILITY, IS AT THE ELECTION AND RISK OF THE
HOLDER OF NOTES.
The Notes will be offered for exchange in minimum denominations of
$5,000 each and integral multiples thereof. Tendering holders of Notes may
tender less than all of the Notes represented by the certificates they hold
provided they appropriately indicate this fact on the Letter of Transmittal
accompanying the tendered Note certificates.
17
<PAGE>
With respect to tenders of Notes, the Company reserves full
discretion to determine whether the documentation is complete and generally
to determine all questions as to tenders, including the date of receipt of a
tender, the propriety of execution of any document, and other questions as to
the validity, form, eligibility or acceptability of any tender. The Company
reserves the right to reject any tender not in proper form or otherwise not
valid or the acceptance for exchange of which may, in the reasonable opinion
of the Company's counsel, be unlawful or to waive any irregularities or
conditions, and the Company's interpretation of the terms and conditions of
the Offering (including the instructions on the Letter of Transmittal) will
be final. The Company shall not be obligated to give notice of any defects or
irregularities in tenders and shall not incur any liability for failure to
give any such notice. Notes shall not be deemed to have been duly or validly
tendered unless and until all defects and irregularities have been cured or
waived.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain
terms and conditions, which are summarised below and are part of the Offering.
On or prior to the Expiration Date, (i) a beneficial owner of the
Notes or an Agent Member Bank ("Agent Member Bank") of the Euroclear System
or Cedelbank must have effectuated the transaction on behalf of the tendering
beneficial owner(s) and (ii) the Letter of Transmittal, with other required
documents, must be transmitted to and received by the Exchange Agent at the
address as set forth in the Letter of Transmittal. If choosing Option 1 and a
member of the ICSD system, the holder must instruct Cedel or Euroclear to
debit such holder's ICSD account by the required amount on the instructions
of the Exchange Agent and thereafter deliver such amount to the Exchange
Agent's account, or if the holder of Notes is not a member of the ICSD
system, then such holder must contact the Agent to arrange for the delivery
of the required cash payment. The party tendering the Notes for exchange on
behalf of the beneficial owner(s) (the "Holder") by execution of the Letter
of Transmittal sells, assigns and transfers the Notes to the Exchange Agent
and irrevocably constitutes and appoints the Exchange Agent as the Holder's
agent and attorney-in-fact to cause the Notes to be transferred and
exchanged. The Holder warrants that it has full power and authority to
tender, exchange, sell, assign and transfer the Notes and to acquire shares
of Preferred Stock issuable upon the exchange of such tendered Notes and the
delivery of any required cash payment, that the Company will acquire good and
unencumbered title to the tendered Notes, free and clear of all liens,
restrictions, charges and encumbrances, and that the Notes tendered for
exchange are not subject to any adverse claims when accepted by the Company.
The Holder also warrants that it will, upon request, execute and deliver any
additional documents deemed by the Company to be necessary or desirable to
complete the exchange, sale, assignment and transfer of the tendered Notes.
All authority conferred or agreed to be conferred in the Letter of
Transmittal by the Holder will survive the death or incapacity of the Holder
and any obligation of the Holder shall be binding upon the heirs, personal
representatives, successors and assigns of such Holder.
All questions as to the validity, form, eligibility (including time
of receipt) and acceptability of any tender will be determined by the
Company, in its reasonable discretion, and such determination will be final
and binding. Unless waived by the Company, irregularities and defects must be
cured by the Expiration Date. The Company will pay all stock transfer taxes
applicable to the transfer and exchange of Notes tendered.
WITHDRAWAL RIGHTS
All tenders of Notes may be withdrawn at any time prior to the
Expiration Date unless otherwise agreed by a Holder. To be effective, a
notice of withdrawal must be timely received by the Exchange Agent at the
address as set forth in the Letter of Transmittal. Any notice of withdrawal
must specify the person named in the Letter of Transmittal as having tendered
the Notes, the number of Notes to be withdrawn and the name of the holder of
such Notes. If the Notes have been delivered pursuant to the book-entry
procedures set forth above under "The Offering - How to Tender," any notice
of withdrawal must specify the name and number of the participant's account
at the Book-Entry Facility to be credited with the withdrawn Notes. The
Exchange Agent will confirm to each Noteholder in writing as to any properly
withdrawn Notes as soon as practicable following receipt of notice of
withdrawal. All questions as to the validity, including time of receipt, of
notices of withdrawals will be determined in the Company's reasonable
judgement.
18
<PAGE>
ACCEPTANCE OF TENDERS
Subject to the terms and conditions of the Offering, Notes tendered
(either physically or through book-entry delivery as described in "The
Offering - How to Tender") with a properly executed Letter of Transmittal,
appropriate provision for any required cash payment and all other required
documentation, and not withdrawn, will be accepted on or promptly after the
Expiration Date. The Company reserves the right to accept one or more tenders
of Notes prior to the Expiration Date with the written consent of a holder.
Subject to such terms and conditions, Preferred Stock to be issued in
exchange for properly tendered Notes will be credited to the DTC Account
specified by a holder promptly after acceptance of the tendered Notes.
Preferred Stock will be issued in the name specified in the Letter of
Transmittal. The Company, however, reserves the right to delay acceptance of
tendered Notes upon the occurrence of any of the conditions set forth above
under the caption "The Offering - Certain Conditions of the Offering."
The tender of Notes pursuant to any one of the procedures set forth
in "The Offering - How to Tender" will constitute an agreement between the
tendering holder and the Company upon the terms and subject to the conditions
of the Offering.
SOLICITATION OF TENDERS
No person has been authorized to give any information or to make any
representations in connection with the Offering other than those contained in
this Offering Circular. If given or made, such information or representations
should not be relied upon as having been authorized by the Company. Neither
the delivery of this Offering Circular nor any exchange made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Company since the respective dates as of which
information is given herein. This Offering Circular does not constitute an
offer to exchange, or a solicitation of an offer to exchange, any securities
other than the securities covered by the Offering Circular by the Company or
any other person, nor does it constitute an offer to exchange or a
solicitation of an offer to exchange such securities by the Company, or any
such other person in any jurisdiction in which or to any person to whom it is
unlawful to make any such offer or solicitation. In any jurisdiction the laws
of which require the offer to be made by a licensed broker or dealer, the
offer in order to be capable of acceptance must be made on behalf of the
Company by one or more registered brokers or dealers licensed under the laws
of such jurisdiction.
SALE OF PREFERRED STOCK
The Company is offering a total of 121,000 shares of Preferred Stock
in units of 55 shares of Preferred Stock for $5,000. An investor electing to
purchase Preferred Stock must complete and sign a Subscription Agreement and
forward the Subscription Agreement and any other required documents to the
Agent and forward the cash payment to the account referenced in the
Subscription Agreement, all in accordance with the procedures set out in the
Subscription Agreement. Unless otherwise agreed by a purchaser, an election
to purchase may be withdrawn at any time prior to the Expiration Date. To be
effective, a notice of withdrawal must be timely received by the Agent at the
address set forth in the Subscription Agreement. A properly executed
Subscription Agreement, which has not been withdrawn, and the appropriate
provision for any required cash payment will be accepted on or promptly after
the Expiration Date and the DTC account as specified by a purchaser will be
credited with the appropriate number of shares of Preferred Stock.
19
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Offering Circular includes "forward-looking statements." All
statements other than statements of historical facts included in this
Offering Circular, including without limitation statements under "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business and Properties" regarding planned
capital expenditures, the availability of capital resources to fund capital
expenditures, estimates of proved reserves, the number of anticipated wells
to be drilled in the future, the Company's financial position, business
strategy and other plans and objectives for future operations, are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. There
are numerous uncertainties inherent in estimating quantities of proved oil
and natural gas reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the
Company's control. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in
an exact way, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgement. As a result, estimates made by different engineers often vary
from one another. In addition, results of drilling, testing and production
after the date of an estimate may justify revisions of such estimate and such
revisions, if significant, would change the schedule of any further
production and development drilling. Accordingly, reserve estimates are
generally different from quantities of oil and natural gas that ultimately
are recovered. Additional important factors that could cause actual results
to differ materially from the Company's expectations are disclosed elsewhere
in this Offering Circular. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such factors.
RISK FACTORS
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; ACCUMULATED LOSSES AND WORKING
CAPITAL DEFICITS
The Company commenced operations in 1991 and acquired a substantial
portion of its operating assets through the acquisition of Texstar in October
1996. Potential purchasers, therefore, have limited historical financial and
operating information upon which to base an evaluation of the Company's
performance and whether to invest in the Company's securities. The Company
has incurred substantial operating and net losses to date. The following
table reflects total net losses and net losses per share of Common Stock for
the periods indicated:
<TABLE>
<CAPTION>
PER SHARE
AMOUNT (BASIC)
--------------- -----------
<S> <C> <C>
Quarter Ended March 31, 1999 $ (2,665,782) $ (0.08)
Year Ended December 31, 1998 $ (11,915,191) $ (0.37)
Four Month Period Ended December 31, 1997 $ (2,739,322) $ (0.10)
Ten Month Period Ended August 31, 1997 $ (1,917,141) $ (0.09)
</TABLE>
The Company has also had the following working capital surplus
(deficit) as at the dates indicated:
<TABLE>
<S> <C>
March 31, 1999 $(35,135,688)
December 31, 1998 $(27,360,635)
December 31, 1997 $(15,290,406)
August 31, 1997 $ 1,784,075
</TABLE>
20
<PAGE>
The Company will continue to require substantial expenditures to
develop and expand its business. The Company's future financial results will
depend primarily on the following:
- its ability to economically locate hydrocarbons in
commercial quantities;
- its ability to reduce drilling risks and costs through 3-D
seismic data and CAEX technologies in selecting site and
depth of wells;
- its ability to secure adequate financial resources to fund
activities; and
- externally, on oil and gas prices.
There can be no assurance that the Company will achieve or sustain
profitability or positive cash flows from operating activities in the future.
See "Risk Factors - Substantial Capital Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company has experienced and expects to continue to experience
substantial working capital needs. Its ongoing capital requirements consist
primarily of the following items:
- funding the 1999 capital and exploration budget;
- payment for the recently completed 3-D survey at Old Ocean
Field in installments totaling approximately $6,700,000
beginning in June of 1999. The first scheduled payment is
past due. The Company has reached an oral agreement with
respect to payment terms described below under "Impending
Maturity Dates".
- payment of EnCap Credit Facility, the BOCP Credit Facility
and the Old Ocean Loan, all due June 30, 1999 in the
principal amounts of $12.0 million, $6.0 million and $2.2
million, plus accrued interest, respectively. The Company is
negotiating a production financing facility to fund the
repayment of the first two facilities and is negotiating to
use Preferred Stock to repay all but $100,000 of the Old
Ocean Loan;
- potential repurchase of the Shell Production Payment;
- payment of certain trade payables of which $11,360,000 is
past due as of June 10, 1999;
- payment of preferred dividends not otherwise paid in Common
Stock; and
- payment of interest on the Convertible Debentures and bank
obligations.
The Company's 1999 capital and exploration budget is $11.3 million
(excluding capitalized interest and overhead). The Company plans to finance
anticipated ongoing expenses and its 1999 capital and exploration budget with
funds generated from the following sources:
- available cash and cash investments;
- cash provided by operation activities;
- capital the Company believes it can raise through an
increase in the Shell Production Payment or the sale of a
term production payment, and sale of equity;
- non-core asset sales and sales of excess interests in core
assets;
- a $4.0 million capital infusion from an affiliate of EnCap;
and
- capital raised in connection with the Offering.
No assurance can be given as to the availability or terms of
additional financing that may be required. If such capital resources are not
available, the Company may be required to curtail its drilling, development
and other operations; may not be able to participate in operations proposed
by others with an interest in its properties and be subjected to applicable
non-consent penalties; and may not be able to meet certain of its existing
contractual
21
<PAGE>
obligations, which as to any of the foregoing could have a material adverse
effect on the Company and its financial condition.
IMPENDING MATURITY DATES
The Company's EnCap, BOCP and Old Ocean Credit Facilities will come
due on June 30, 1999. The Company anticipates that as to the indebtedness
reflected by the Old Ocean Loan, that all lenders, other than affiliates of
EnCap that are owed $100,000, will elect to convert their respective
indebtedness and the mineral interests obtained in connection with the Old
Ocean Loan into Preferred Stock. The Company anticipates that it will pay off
the $100,000 owed to affiliates of EnCap under the Old Ocean Loan and the
indebtedness reflected by the EnCap Credit Facility and the BOCP Credit
Facility with funds obtained in connection with the Offering and new funds
anticipated to be received in connection with either an increase of the Shell
Production Payment or through funds received in connection with a new
production payment arrangement with a new lender. The Company is currently
engaged in negotiations as to both financing options, but does not have a
binding agreement with respect to either option. There can be no assurance
that either financing option will be consummated. The Company anticipates
that any such financing will not close until after June 30, 1999. The Company
currently does not have an extension of the maturity dates with respect to
the EnCap and BOCP Credit Facilities, but the lenders thereunder have in the
past granted maturity date extensions, and the Company believes that EnCap
Energy and BOCP will continue to extend the maturity dates to provide the
Company with sufficient time to obtain the new financings. If the maturity
dates under the EnCap and BOCP Credit Facilities are not extended or the
Company is unable to obtain sufficient new financings to pay off the EnCap
Credit Facility and the BOCP Credit Facility, then the Company will be in
default under the applicable Credit Facility and the applicable lenders will
have the right to seek immediate repayment of the entire indebtedness due
thereunder and enforce its other remedies, which include the right to
foreclose on substantially all of the properties of the Company. Such a
default will also cause defaults under other material contracts to which the
Company and its subsidiaries are parties. Any of the foregoing actions could
cause the Company to cease operations.
On June 10, 1999, the Company was obligated to pay one-half of the
$6.7 million cost of acquiring certain seismic materials relating to the Old
Ocean Prospect and was obligated to pay the remaining amounts 60 days after
delivery of the processed data. The Company failed to make the payment due on
June 10, 1999. The Company has, however, reached a verbal arrangement for the
extension of the date of the first required payment until the end of the week
of June 14, 1999, at which time the Company has agreed to pay a portion, but
not all, of the first payment. The verbal agreement requires that the balance
of the initial payment be paid by the end of July rather than the currently
scheduled payment date of 60 days following delivery of the processed data.
Funds for the payment are anticipated to come from a sale by the Company of
approximately 37.5% of its interest in the Old Ocean Prospect. The Company
currently is in negotiation for the sale of such interest, but has not
entered into a definitive agreement with any party with respect to the sale.
Although the Company believes the sale will be consummated in time for the
Company to meet its payment obligations, there can be no assurance that the
sale of the interest will be consummated by such time or at all. If the
Company is unable to complete such transaction and is unable to satisfy its
payment obligations by some other means, the Company will be in default with
respect to its obligations to the company that has completed the seismic
survey and with the other owner of an interest in the Old Ocean Prospect.
Such defaults would subject the Company to the possibility of losing its
rights in the seismic materials and in a substantial portion of its rights in
the Old Ocean Prospect. Such defaults will also cause defaults under other
material contracts to which the Company and its subsidiaries are parties. Any
of the foregoing actions would have a material adverse effect on the Company
and its financial condition.
TRADE PAYABLES
At June 10, 1999, the Company had outstanding approximately
$12,980,000 of accounts payable to industry partners and trade creditors.
Approximately $11,360,000 of this amount is past due. The Company intends to
request the holders of such accounts payable to accept payment over an
extended time and to accept a discount on the total payment due or accept a
further delay in the payment of such payables and receive payment in full.
There can be no assurance that any of the Company's creditors will accept the
proposed discounts or other payment terms. The Company anticipates funding
these payment obligations by using the proceeds to be received from either
the increase in the Shell Production Payment, the new production payment that
the Company is attempting to arrange, sale of assets and production revenue.
If a creditor is unwilling to participate in any such arrangement and the
Company does not have sufficient funds to pay such creditor, then a creditor
may declare the Company in default
22
<PAGE>
and pursue its available remedies against the Company. Those remedies could
include, under certain circumstances, placing the Company into involuntary
bankruptcy.
ABILITY TO CONTINUE AS A GOING CONCERN
The report of the Company's independent public accountants in the
Company's financial statements includes an explanatory paragraph that states
that the Company's ability to continue as a going concern is in question.
Note 18 to the Company's consolidated financial statements states that the
financial statements were prepared assuming that the Company is able to
continue as a going concern assuming certain events, such as refinancing of
the Company's indebtedness and the anticipated success of certain of the
Company's oil and gas wells will occur. There can be no assurance that the
events described in the going concern note will occur, and if they do not
occur, the Company may be unable to continue as a going concern.
VOLATILITY OF OIL AND GAS MARKETS
MARKET PRICES ARE VOLATILE
The Company's profitability and cash flow depend greatly on the
market price of oil and natural gas. Prices for oil and natural gas are
subject to wide fluctuations in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors
that it cannot control. These factors include:
- the level of consumer product demand;
- weather conditions;
- domestic and foreign governmental regulations;
- the price and availability of alternative fuels;
- political conditions in the Middle East;
- the foreign supply of oil and natural gas;
- the price of oil and gas imports; and
- overall economic conditions.
The Company's ability to maintain or increase its borrowing capacity
and to obtain additional capital on attractive terms, or not at all, is also
substantially dependent upon oil and gas prices. Compared to 1997, the
average prices for the Company's production have generally declined.
Continued low prices could seriously effect the Company's cash flow,
financial condition and access to additional capital.
HEDGING TRANSACTIONS MAY MITIGATE FLUCTUATION IN PRICES
Substantially all of the Company's sales of oil and natural gas are
made in the spot market or pursuant to contracts based on spot market prices.
To reduce price risk, the Company sometimes executes contracts on a portion
of its production to hedge against market price changes. Hedging transactions
are intended to limit the negative effect of future price declines, but could
also limit the Company's participation in significant price increases for the
covered period. The Company cannot be certain that hedging transactions will
reduce the effect of any substantial declines in oil and natural gas prices.
As of December 31, 1998, the Company was not a party to any natural gas
futures contracts, crude oil swap agreements or other commodity hedging
agreement; however, the Company has agreed to backstop the limited gas hedges
entered into by Shell Capital covering gas dedicated to its term production
payment in the event such gas volumes delivered to Shell Capital are less
than the amounts hedged. In March, the Company entered into a forward sale of
ten contracts for delivery in May 1999 and twelve contracts for delivery in
June, July and August, of its anticipated gas production at an average price
of $2.07/MMBTU. Each contract equates to 10,000 million BTU of gas.
23
<PAGE>
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
There is substantial uncertainty in estimating quantities of proved
reserves and projecting future production rates and the timing of development
expenditures. No one can measure underground accumulations of oil and natural
gas in an exact way. Accordingly, oil and gas reserve engineering requires
subjective estimations of those accumulations. Estimates of other engineers
might differ widely from those of the Company's internal engineers as well as
Lenser & Associates, the Company's independent engineers. Accuracy of reserve
estimates depends on the quality of available data and on engineering and
geological interpretation and judgment. Lenser & Associates may make material
changes to reserve estimates based on the results of actual drilling, testing
and production. As a result, the Company's reserve estimates often differ
from the quantities of oil and gas it ultimately recovers. Also, the Company
makes certain assumptions regarding future oil and gas prices, production
levels, and operating and development costs that may prove incorrect. Any
significant variance from these assumptions could greatly affect the
Company's estimates of reserves and future net revenues.
EXPLORATION RISKS; RELIANCE ON 3-D SEISMIC DATA AND CAEX TECHNOLOGY
The Company's strategy is to enhance the value of its prospects
through the use of 3-D seismic data and CAEX technology with emphasis on
direct hydrocarbon detection technologies. These technologies create computer
generated 3-D displays of subsurface geological formations that enable the
Company's explorationists to detect seismic anomalies and structural features
that are not apparent in 2-D seismic surveys. These technologies, however,
require greater pre-drilling expenditures than traditional drilling
strategies. Even when fully used and properly interpreted, 3-D seismic data
and CAEX visualization techniques only assist geo-scientists in identifying
subsurface structures and hydrocarbon indicators, and do not conclusively
allow the interpreter to know if hydrocarbons will in fact be present and
recoverable in such structures.
OPERATING AND UNINSURED RISKS
The Company must continually acquire or explore for and develop new
oil and natural gas reserves to replace those produced and sold. The
Company's hydrocarbon reserves and revenues will decline if it is not
successful in its drilling, acquisition or exploration activities. The
Company cannot be certain that its exploration and development projects will
result in significant additional reserves or that the Company will have
success drilling productive wells at economically viable costs. Casualty risk
and other operating risks could cause reserves and revenues to decline.
CASUALTY RISKS
The Company's operations are subject to the following inherent
casualty risks:
- fires;
- explosions and blow-outs;
- abnormally pressured formation;
- uncontrollable flows of oil, natural gas or well fluids;
- pollution and other environmental risks; and
- pipe failure.
The Company could suffer substantial financial losses due to any of
the following:
- injury or loss of life;
- severe damage to and destruction of property and equipment;
- pollution and other environmental damage;
- regulatory investigations and penalties; and
- suspension of operations.
24
<PAGE>
UNINSURED RISKS
As is customary in the industry, the Company maintains insurance
against some, but not all, casualty risks incidental to its business.
OTHER OPERATING RISKS
Numerous risks affect the Company's drilling activities, including
the risk of drilling non-productive wells or dry holes. The cost of drilling,
completing and operating wells and of installing production facilities and
pipelines is often uncertain. Also, the Company's drilling operations could
diminish or cease because of any of the following:
- title problems;
- compliance with governmental regulations;
- shortages or delays in the delivery or availability of
drilling rigs and other equipment; and
- weather conditions.
Moreover, effective marketing of the Company's natural gas
production depends on a number of factors such as the following:
- existing market supply of and demand for natural gas;
- the proximity of its reserves to pipelines;
- the available capacity of such pipelines; and
- government regulations.
The marketing of oil and gas production similarly depends on the
availability of pipelines and other transportation, processing and refining
facilities, and the existence of adequate markets. As a result, even if
hydrocarbons are discovered in commercial quantities, a substantial period of
time may elapse before commercial production commences. If pipeline
facilities in an area are insufficient, the Company may have to wait for
construction or expansion of pipeline capacity before the Company can market
production from the area.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL RISKS
LEGAL LIMITATIONS
The Company is subject to various United States federal, state and
local laws and regulations on taxation, exploration and development, and
environmental and safety matters. Many laws and regulations require drilling
permits and govern the spacing of wells, the prevention of waste, rates of
production and other matters. These statutes and regulations, and any others
that are passed by the jurisdictions where the Company has production, could
limit the total number of wells drilled or the total allowable production
from successful wells, which could limit revenues. Currently, the Company has
not curtailed production on any of its oil and gas wells.
ENVIRONMENTAL LIABILITIES
The Company could incur liability to the government or third parties
for any unlawful discharge of oil, gas or other pollutants into the air, soil
or water, including responsibility for remedial costs. The Company could
potentially discharge oil or natural gas into the environment in any of the
following ways:
- from a well or drilling equipment at a drill site;
- leakage from storage tanks, pipelines or other gathering and
transportation facilities;
- damage to oil or natural gas wells resulting from accidents
during normal operations; or
25
<PAGE>
- blow-outs or explosions.
Environmental discharges may move through soil to water supplies or
adjoining properties giving rise to additional liabilities. Some laws and
regulations could impose liability for failure to notify the proper
authorities of a discharge and other failures to comply with those laws.
Environmental laws may also affect the costs of the Company's acquisitions of
properties. The Company does not believe that its environmental risks are
materially different from those of comparable companies in the oil and gas
industry. However, the Company cannot be certain that environmental laws will
not, in the future, result in decreased production, substantially increased
costs of operations or other adverse effects to its operations and financial
condition. Pollution and similar environmental risks generally are not fully
insurable.
COMPETITION
The oil and gas industry is highly competitive. The Company competes
with major oil and gas companies, other independent oil and gas concerns, and
individual producers and operators. Many of these competitors have financial
and other resources substantially greater than those available to the
Company. Moreover, the oil and gas industry competes with other industries in
supplying the energy and fuel needs of industrial, commercial and other
consumers. Increased competition causing over supply and depressed prices
could greatly affect the Company's operations revenues.
DEPENDENCE ON THE K.S. BYRD 31-1 #1 WELL AND HOWELL #1 WELL
For the first quarter of 1999, revenue from the K.S. Byrd 31-1#1
well totaled approximately $640,800, 47% of the Company's total revenue, on
net production of 4,290 MCFGED. The K.S. Byrd 31-1#1 well accounted for
approximately $2.4 million of the Company's revenue for the year ended
December 31, 1998, 49% of total revenue, on net production of 3,226 MCFGED.
After dedication of certain volumes to the Shell Production Payment or a
replacement production payment, the K.S. Byrd 31-1 #1 will continue to be a
major contributor to the Company's net production. Subsequent to year-end
1998, the Company put the Howell #1 on production at a high rate of gas flow.
The Howell well is expected to contribute greater net production than the
Byrd, and thus, should become the largest production source for the Company.
CONFLICTS OF INTEREST WITH RESPECT TO CERTAIN TRANSACTIONS
The Company has engaged in acquisitions, financings, and other
transactions with entities that are owned in part by certain of the Company's
officers, directors and affiliates. The Company believes that these
transactions were fair to the Company; however, the transactions did not
result from arms length negotiations. See "Interests in Management and Others
in Material Transactions".
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Chairman and Chief Executive Officer, Prentis B. Tomlinson, Jr.
and his wife Heather Tomlinson, beneficially own approximately 35.8% and
6.6%, respectively, of the Company's outstanding Common Stock. Mr. and Mrs.
Tomlinson are able to exercise significant influence over the Company's
affairs, including election of the board of directors and other matters
submitted to a vote of the stockholders. Assuming full conversion of all
Convertible Debentures and the exercise of all warrants, Mr. and Mrs.
Tomlinson will beneficially own approximately 6% and 1.1%, respectively, of
the then outstanding shares of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1999, the Company had 33,727,724 shares of Common
Stock outstanding. Of the outstanding Common Stock, 16,430,717 shares are
owned by affiliates, as defined in regulations under the Securities Act, and
will be considered "Restricted Stock" within the meaning of Rule 144 under
the Securities Act. Common Stock held by affiliates may not be sold in the
United States in the absence of registration under the Securities Act, unless
an exemption from registration is available. The remaining outstanding Common
Stock is freely transferable in the United States by persons other than
affiliates without restriction or further registration under the Securities
Act. Although the Company cannot predict the timing or amount of future sales
of Common Stock, if any, by selling shareholders or affiliates of the Company
or the effect that the availability of such Common Stock for sale
26
<PAGE>
will have on the market price from time to time, sales of substantial amounts
of Common Stock could adversely affect the market price of the Common Stock.
See "Principal Shareholders" and "Description of Share Capital". In addition
to the Common Stock described above, 7,311,578 shares of Common Stock are
reserved for issuance or are issuable upon the exercise of outstanding
warrants, options and other convertible securities. Upon completion of the
Offering, an additional 216,903,158 shares of Common Stock will be issuable
upon conversion of the Preferred Stock, assuming 55,000 shares of Preferred
Stock are purchased in the Offering, all holders of Notes elect Option 1 in
the Exchange and the Series 2 Debentures are converted (or 157,963,678 shares
of Common Stock if all holders of Notes select Option 2 in the Exchange).
To the extent that outstanding options and warrants are exercised,
the percentage ownership of Common Stock of the Company's stockholders will
be diluted. Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected because the holders of
outstanding options and warrants can be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than the exercise terms
provided by such outstanding securities. In the event of the exercise of a
substantial number of stock options or warrants or the conversion of any
convertible securities, including the Notes and the Preferred Stock, within a
reasonably short period of time after the right to exercise commences, the
resulting increase in the amount of Common Stock of the Company in the
trading market could substantially affect the market price of the Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview - Capitalization."
ABSENCE OF UNITED STATES TRADING MARKET
The Common Stock is currently traded on the VSE. There is no
established trading market for the Common Stock in the United States. The
future value of the Common Stock and Preferred Stock will depend on many
factors including:
- prevailing foreign currency exchange rates,
- operating results, and
- the market for similar domestic securities.
The Company cannot assure purchasers that the Common Stock will be
listed on a U.S. exchange, that an active United States public market will
develop or that if a purchaser's Preferred Stock is converted into Common
Stock, that it will be able to resell such securities in the United States.
See "Summary - The Offering".
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED STOCK; RESTRICTIONS ON TRANSFER
There is currently no existing market for the Preferred Stock. The
Company has agreed to a reduction in the Preferred Conversion Price if the
Preferred Stock and the Common Stock issuable on conversion is not Freely
Tradable within four months after the Closing Date. See "Summary - The
Offering." Prior to the registration of the Preferred Stock and the Common
Stock issuable thereunder, the Preferred Stock offered hereby and underlying
Common Stock may only be offered or sold pursuant to an exemption from the
registration requirements of the Securities Act or pursuant to an effective
registration statement. See "Restrictions on Transfer."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation authorizes the issuance of
preferred stock at the discretion of the Company's board of directors. The
board of directors can, without shareholder approval, issue preferred stock
with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of holders of the Company's
securities. In the event of issuance, the preferred stock could be used,
under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. This could discourage bids for
the Company and, thereby, prevent shareholders from receiving the maximum
value for their shares. The board of directors may institute further
protections on behalf of shareholders to assure their fair consideration in
certain circumstances. The terms of the Preferred Stock prohibit the Company
from issuing additional preferred stock that would be senior to the Preferred
Stock without the consent of the holders of the Preferred Stock.
27
<PAGE>
SUBORDINATION OF THE PREFERRED STOCK
The Preferred Stock will rank PARI PASSU with Lasco Preferred and
any new issue of preferred stock that stipulates a liquidation preference
PARI PASSU with the Preferred Stock, and senior to all other present and any
future equity of the Company that does not stipulate it will be PARI PASSU
with the Preferred Stock. The Preferred Stock will be subordinate to claims
of creditors, including holders of the Company's outstanding debt instruments
(including the Notes, all production financings and other creditors). As of
March 31, 1999, the Company had $61,871,600 of indebtedness outstanding,
including $27,250,000 of indebtedness outstanding under the Notes. In
addition, at March 31, 1999, the Company had approximately $12,300,000 of
trade payables outstanding.
Additional indebtedness will be incurred by the Company and its
subsidiaries from time to time subject to certain restrictions contained in
its credit arrangements, the Trust Indenture and the terms of the Preferred
Stock. In the event of a liquidation, dissolution or winding up of the
Company, lenders to and other creditors of the Company and its subsidiaries
would be entitled to payment in full before satisfaction of the liquidation
preference on the Preferred Stock.
EFFECT OF SUBSTANTIAL INDEBTEDNESS
The Company's indebtedness will have several important consequences
to the holders of Notes electing to exchange Notes for Preferred Stock,
including, but not limited to, the following: (i) the holders of Preferred
Stock will be subordinate to any such debt; (ii) the Company's ability to
obtain additional financing in the future, as needed, may be limited; (iii)
the Company's leverage position and the covenants contained in its existing
contractual arrangements may limit the Company's ability to expand its
business and take advantage of certain business opportunities; and (iv) the
Company's leverage may make it more vulnerable to economic downturns, limit
its ability to withstand competitive pressures, and reduce its flexibility in
responding to changing business and economic conditions.
NO DIVIDENDS
The Company may only pay dividends out of surplus, as defined in the
Delaware General Corporation Law, or, if no surplus is available, out of its
net profits for the fiscal year which the dividend or distribution is
declared and the preceding fiscal year. No dividends or distributions may be
declared or paid if the Company is or would be rendered insolvent by virtue
of the dividend distribution. The Company does not believe that these
restrictions will limit its ability to pay dividends on the Preferred Stock
in the future. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash dividends on the Common
Stock or the Preferred Stock in the foreseeable future. See "Common Stock
Price Range and Dividend Policy." The Company currently intends to pay
dividends on the Preferred Stock with Common Stock. The EnCap Credit Facility
and the BOCP Credit Facility currently contain restrictions on the payment of
dividends; however, the Company intends to pay off these credit facilities
shortly after the Closing Date at which time the restriction will no longer
be applicable.
LIMITATION ON MONETARY LIABILITY OF OFFICERS AND DIRECTORS TO STOCKHOLDERS
Section 145 of the Delaware General Corporation Law contains
provisions entitling directors and officers of the Company to indemnification
from judgments, fines, amounts paid in settlement and reasonable expenses,
including attorney's fees, as the result of an action or proceeding in which
they may be involved by reason of being or having been a director or officer
of the Company provided the officers or directors acted in good faith. The
Certificate of Incorporation contains provisions indemnifying officers and
directors of the Company to the fullest extent permitted by Delaware law.
These provisions provide, among other things, that a director of the Company
shall not be liable either to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director. These provisions may
limit the ability of the Company's stockholders to collect on any monetary
liability owed to them by an officer or director of the Company.
28
<PAGE>
POSSIBLE DE-LISTING OF SECURITIES FROM THE LUXEMBOURG STOCK EXCHANGE
If less than 100% of the holders of the Notes accept the Exchange
Offer, and if less than the equivalent of 10,000,000 Luxembourg Francs of
Notes (equal to $265,675 at the exchange rate as of April 15, 1999) remain
outstanding, the remaining holders of Notes will be subject to the risk of an
automatic delisting of the Notes from the Luxembourg Stock Exchange.
USE OF PROCEEDS
The net proceeds to the Company through the sale of Preferred Stock
vary depending upon how many Notes are tendered using each option and the
amount of Preferred Stock sold. Under Assumption 1, the Company has assumed
that all Notes (Series 1 Debentures totaling $27.25 million) are exchanged
under Option 1. Under Assumption 2, the Company has assumed that all Notes
are exchanged under Option 2. In both cases the Company assumes that 55,000
shares of Preferred Stock are sold. Such proceeds are anticipated to be used
as follows (all amounts are approximate and are subject to the discretion of
the board of directors):
<TABLE>
<CAPTION>
ASSUMPTION 1 ASSUMPTION 2
ALL NOTES ALL NOTES
EXCHANGED - OPTION I EXCHANGED - OPTION II
-------------------- ---------------------
<S> <C> <C>
Drilling (1)............................ $2.4 Million $0.1 Million
Repayment of Old Ocean Loan (2)......... $0.3 Million $0.3 Million
Seismic Costs (3)....................... $3.2 Million $3.2 Million
Other general corporate needs (4)....... $5.9 Million $0.7 Million
Agent's Commission...................... $1.1 Million $0.4 Million
Estimated Expenses...................... $0.3 Million $0.3 Million
------------ ------------
Total Anticipated Uses.................. $13.2 Million $5.0 Million
============= ============
</TABLE>
Notes:
(1) Anticipated to include completion of Fortenberry #1 and some or all of
additional wells at Oakvale Dome, LaHinch, Rayburn and such other prospects
deemed appropriate by the Company. Prospects selected are subject to change
at the sole election of the Company.
(2) Assumes that all lenders participating in the Old Ocean Loan other than
lenders affiliated with EnCap will convert their indebtedness into
Preferred Stock, and includes repurchase of the net profits interest held
by such Old Ocean lenders. Principal amount of the Old Ocean loan is
$2,200,000. The Old Ocean loans bears interest at the rate of 10 % per
annum and matures on June 30, 1999.
(3) Amount due as initial payment to Western Geophysical on 3-D seismic survey
with respect to the Old Ocean Prospect.
(4) Working capital needs including reduction of existing trade payables.
Pending their use, the Company intends to invest the net proceeds in short
term, high grade, interest bearing investments.
Even if the Company receives the maximum anticipated proceeds of
$13.2 million in this Offering, such proceeds will be insufficient for the
Company to satisfy all of its trade payables, pay Western Geophysical in full
for the 3-D seismic survey with respect to the Old Ocean prospect or fund the
Company's exploration budget for the balance of 1999. The Company will
require additional financing from its existing or new lenders to obtain the
funds for such purposes. If loans from these sources plus cash from
operations are insufficient for these purposes, the Company may be required
to curtail its exploration activities.
29
<PAGE>
The actual allocation of the proceeds from this Offering will depend
on the amount of such proceeds and the Company's success in exploring for,
finding and developing oil and gas reserves. The board of directors may
reallocate the proceeds of this Offering, but currently does not intend to do
so.
CONSOLIDATED CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at 31
March, 1999; (ii) the capitalization of the Company as adjusted to give
effect to the Offering assuming holders of Notes and Series III Debentures
elect Option 1 and 55,000 shares of Preferred Stock offered hereby are sold;
and (iii) the capitalization of the Company as adjusted to give effect to the
Offering assuming holders of Notes and Series III Debentures elect Option 2
and 55,000 shares of the Preferred Stock offered hereby are sold.
<TABLE>
<CAPTION>
As at March 31, 1999
-----------------------------------------------------------------
As Adjusted As Adjusted
Historical Option 1 Option 2
------------------- -------------------- -------------------
<S> <C> <C> <C>
Long-term debt, including current
maturities, net of unamortized discount
of $937,500 $ 61,871,586 $ 27,261,586 $ 27,261,586
Redeemable Preferred Stock, no par value,
unlimited shares authorized; 9,488,140
shares issued and outstanding; redemption
value of $9,488,140 9,488,140 9,488,140 9,488,140
Stockholders equity:
Preferred Stock, $1.00 par value,
100,000,000 shares authorized; no
shares issued or outstanding; (504,930
shares outstanding as adjusted Option
1; 366,490 shares outstanding as
adjusted Option 2)(a) -- 49,993,000 36,149,000
Common Stock; no par value, unlimited
shares authorized; 33,727,724 shares
issued and outstanding (a) 20,424,996 20,424,996 20,424,996
Common Stock reserved for issuance,
1,927,436 shares reserved (a) 2,496,030 2,496,030 2,496,030
Additional paid-in capital 878,067 878,067 878,067
Accumulated deficit (19,237,436) (19,237,436) (19,237,436)
Unrealized losses on available for sale
marketable securities (72,882) (72,882) (72,882)
Cumulative foreign currency translation
adjustment (94,455) (94,455) (94,455)
------------------- -------------------- -------------------
Total stockholders' equity 4,394,320 54,387,320 40,543,320
------------------- -------------------- -------------------
Total Capitalization $ 75,754,046 $ 91,137,046 $ 77,293,046
=================== ==================== ===================
</TABLE>
30
<PAGE>
(a) On May 18, 1999, the Company migrated from the Yukon Territory, Canada
and became a Delaware Corporation. Authorized capital stock is currently
400,000,000 shares consisting of 300,000,000 shares of common stock, $.01 par
value, and 100,000,000 shares of preferred stock, $1.00 par value.
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Common Stock is listed on the VSE under the symbol "BZG". At March 31,
1999, there were approximately 272 shareholders of record of Common Stock and
1,190 beneficial owners.
The following table sets forth, for the periods indicated, the high and
low sales prices per share, in Canadian Dollars and in U.S. Dollar equivalents,
for the Common Stock as reported on Canada Stockwatch. The Company commenced
operations on October 31, 1996.
<TABLE>
<CAPTION>
COMMON SHARE PRICE RANGE COMMON SHARE PRICE RANGE
(CDN$) (US$) (1)
--------------------------- --------------------------
HIGH LOW HIGH LOW
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
TEN MONTHS ENDED AUGUST 31, 1997
Month ended November 30, 1996......................... $2.50 $1.90 $1.88 $1.41
Second Quarter ended February 28, 1997................ $4.30 $2.00 $3.15 $1.48
Third Quarter ended May 31, 1997...................... $4.40 $3.00 $3.23 $2.19
Fourth Quarter ended August 31, 1997.................. $3.35 $2.50 $2.44 $1.82
FOUR MONTHS ENDED DECEMBER 31, 1997(2) $3.50 $1.55 $2.53 $1.08
1998
First Quarter ended March 31, 1998.................... $2.10 $1.10 $1.49 $0.77
Second Quarter ended June 30, 1998.................... $2.04 $1.30 $1.43 $0.89
Third Quarter ended September 30, 1998................ $1.80 $0.45 $1.24 $0.30
Fourth Quarter ended December 31, 1998................ $1.15 $0.32 $0.74 $0.21
1999
First Quarter $0.75 $0.28 $0.49 $0.18
Second Quarter (through June 9, 1999).................. $0.50 $0.29 $0.34 $0.20
</TABLE>
- -------------------------------
(1) Share price was converted from Canadian dollars to U.S. dollars using
the average of the high and low exchange rate in effect during the
respective periods.
(2) In 1997, the Company changed its fiscal year-end from August 31 to
December 31.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock. The
Company intends to retain its earnings, if any, to provide funds for
reinvestment in the Company's exploration, development and production
activities, and, therefore, does not anticipate declaring or paying dividends
on its Common Stock in the foreseeable future. Furthermore, payment of
dividends, if any, in the future is within the discretion of the board of
directors and will depend on the Company's earnings, if any, its capital
requirements and financial condition and other relevant factors. Presently,
the payment of dividends in cash by the Company on its Common Stock is
restricted under the terms of certain of the Company's credit facilities. The
Company has the right through December 31, 1999 to pay dividends due on its
Class A, Series I Preferred Stock with Common Stock priced at a trailing
average closing price. To date the Company has elected this option with
respect to all dividends due on the Series I Preferred Shares. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources."
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial data as of and for the ten month
period ended August 31, 1997, the four month period ended December 31, 1997,
and the year ended December 31, 1998, have been derived from the Company's
audited consolidated financial statements. The selected consolidated
financial data as of and for the three month period ended March 31, 1998 and
1999 have been derived from the Company's unaudited consolidated financial
statements. The unaudited consolidated financial statements include all
adjustments consisting of normal recurring accruals that the Company
considers necessary for a fair presentation of the Company's financial
position as of such dates and the results of operations and cash flows for
such periods. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of the Company and
the related notes thereto included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
Four Month Ten Month
Year Ended Period Ended Period Ended
For the Quarter Ended March 31, December 31, December 31, August 31,
1999 1998 1998 1997(1) 1997(2)
-------------------------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited) (audited)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Petroleum revenues $ 1,370,957 $1,040,780 $4,947,457 $ 707,987 $444,203
Earnings (loss) before
DD&A, interest
amortization of
issuance costs income
tax and preferred
dividends 210,271 (465,790) (2,756,466) (1,479,769) (1,686,624)
Net loss applicable to
common stockholders (2,665,782) (2,365,163) (11,915,191) (2,739,322) (1,917,141)
<CAPTION>
As of As of As of
As of December 31, December 31, August 31,
March 31, 1998 1997 (1) 1997(2)
---------------------------------- ---------------- -- ----------------- -- ---------------
1999 1998 (audited) (audited) (audited)
---------------- -----------------
BALANCE SHEET DATA (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Working Capital Surplus (Deficit) $(35,135,688) $2,538,902 $(27,360,635) $(15,290,406) $1,784,075
Properties and Equipment, net 85,463,843 45,109,137 79,412,241 25,319,771 11,916,817
Total Assets 97,890,925 75,339,380 95,240,247 36,216,129 21,520,880
Long-term Debt, including
current maturities 61,871,586 41,152,167 59,490,912 12,708,303 781,326
Redeemable Preferred Shares 9,488,140 12,000,000 9,488,140 -- --
Stockholders' Equity 4,394,320 12,547,544 6,990,828 11,806,496 14,089,948
</TABLE>
- --------------------------------
(1) The Company changed its fiscal year end to December 31.
(2) Represents the period from inception to original year-end, August 31.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with information
provided above under "Cautionary Statement Regarding Forward-Looking Statements"
and "Risk Factors," and with the Company's Consolidated Financial Statements and
notes thereto attached as Appendix B and Appendix C to this Offering Circular.
OVERVIEW
The following matters had a significant impact on the Company's results of
operations and financial position for the three months ended March 31, 1999:
VOLUME AND PRICE INFORMATION
Revenue for the first quarter of 1999 was significantly impacted by low
average natural gas prices. Natural gas production accounts for 87% of the
Company's total production on an equivalent MCF basis. The Company's revenues
are therefore more sensitive to gas price fluctuations than to oil price
changes. For the first quarter of 1999 natural gas prices received by the
Company for its production averaged $1.70 per MCF compared to $2.27 for the
comparable period in 1998.
The following table summarizes volume and price information with
respect to the Company's oil and gas production for the three months ended March
31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
Increase
1999 1998 (Decrease)
------ ------ ----------
<S> <C> <C> <C>
Gas Volume - MCFGD 7,913 4,570 3,343
Average Gas Price - per MCF $ 1.70 $ 2.27 $(0.57)
Oil Volume - BOD 191 99 92
Average Oil Price - per barrel $ 9.50 $12.08 $(2.58)
</TABLE>
OUTSTANDING DEBT
At March 31, 1999, the Company had outstanding debt of $61.9 million.
The Company's EnCap, BOCP and Old Ocean Credit Facilities will come due on June
30, 1999. The Company anticipates that as to the indebtedness reflected by the
Old Ocean Loan, that all lenders, other than affiliates of EnCap that are owed
$100,000, will elect to convert their respective indebtedness and the mineral
interests obtained in connection with the Old Ocean Loan into Preferred Stock.
The Company anticipates that it will repay the $100,000 owed to affiliates of
EnCap under the Old Ocean Loan and the indebtedness reflected by the EnCap
Credit Facility and the BOCP Credit Facility in June with funds obtained in
connection with the Offering and new funds received in connection with either an
increase of the Shell Production Payment or through funds received in connection
with a new production payment arrangement with a new lender. The Company is
currently engaged in negotiations as to both financing options and believes such
new financing will be available in time to meet the current maturity dates. If
the Company is unable to obtain sufficient new financing to pay off the EnCap
Credit Facility and the BOCP Credit Facility, then the Company will be in
default under the applicable Credit Facility and the applicable lenders will
have the right to seek immediate repayment of the entire indebtedness due
thereunder and enforce its other remedies, which include the right to foreclose
on substantially all of the properties of the Company. Any of the foregoing
actions could cause the Company to cease operations.
The following had a significant impact on the Company's results of
operations and financial position for the year ended December 31, 1998:
CAPITALIZATION
The Company completed in March and April of 1998 the private placement
of $37.5 million principal amount of Convertible Debentures, which include the
Notes. After expenses and escrow of $1.056 million for the satisfaction of
certain put rights of holders of Convertible Debentures (of which approximately
$988,000 has been
33
<PAGE>
put), $32.5 million of the proceeds remained available to the Company. In
April 1999, the Company and the holders of the Notes agreed to lower the
conversion price of their debentures from Cdn. $1.70 per common share to Cdn.
$1.40 per common share in exchange for certain changes to the indentures.
Series 3 Debentureholders and the Series A Special Noteholders have agreed to
the same changes by written consent. The Notes are convertible into
29,003,555 shares of Common Stock, based on a conversion price of Cdn.$1.40
and an exchange rate of $0.6711 per Cdn.$1.00 (the exchange rate as of April
15, 1999). The remaining Convertible Debentures are convertible into
10,551,121 shares of Common Stock based on a current conversion price of
Cdn.$1.40 adjusted for the 10% penalty on conversion due to delayed
registration.
DISCOVERY WELL
The K. S. Byrd Well, which began producing in September of 1997,
contributed an average of 2,402 MCF per day during 1998, before including 747
MCF per day for acquired interests. The Company's interest in this well
increased with the Calibre Acquisition and the Southern Gas Acquisition.
ACQUISITIONS
The Company acquired certain producing properties from Lasco Energy
Partners in January 1998, Calibre Energy, L.L.C. in April 1998 and Southern Gas
Company in May 1998 (together with the Starbucks Acquisition and the Mobil
Acquisition, (the "Acquisitions"). The assets acquired in these transactions
contributed an average of 2,982 MCF per day during 1998, of which 747 MCF per
day was additional production to the Company related to the K. S. Byrd well not
included in the discussion above.
VOLUME AND PRICE INFORMATION
The Company's average realized price for natural gas decreased $0.56
per MCF from $2.80 per MCF for the year ended December 31, 1997 to $2.24 per MCF
for the comparable period in 1998. Income in 1998 from hedging gains increased
gas realizations by $0.18 per Mcf. The average realized oil price decreased
$8.25 per barrel from $19.08 per barrel in 1997 to $10.83 per barrel in 1998.
The following table summarizes volume and price information with respect to
the Company's oil and gas production for the years ended December 31, 1998 and
1997, the four month period ended December 31, 1997 and the ten month period
ended August 31, 1997:
<TABLE>
<CAPTION> Four Months Ten Months
Year Ended December 31, Ended Ended
------------------------- Increase December 31, August 31,
1998 1997 (1) (Decrease) 1997 1997
-------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Gas Volume - MCFGD 5,505.6 788.3 4,717.3 1,833.5 275.7
Average Gas Price - per MCF $ 2.24 $ 2.80 $ (0.56) $ 2.79 $ 3.05
Oil Volume - BOD 111.4 33.2 78.2 36.9 30.5
Average Oil Price - per barrel $ 10.83 $19.08 $ (8.25) $ 18.54 $20.28
</TABLE>
- ------------------------------
(1) The amounts for the year ended December 31, 1997 were derived by adding the
audited four month period ended December 31, 1997 and the audited ten month
period ended August 31, 1997 and then subtracting the unaudited two month
period ended December 31, 1996.
34
<PAGE>
OUTSTANDING DEBT
At December 31, 1998, the Company had outstanding debt of $59.5 million
compared to $12.7 million at December 31, 1997. The increase reflects the
issuance of $37.5 million of Convertible Debentures, proceeds from which were
used to fund oil and gas prospect drilling, leasing and seismic data acquisition
activities in the onshore Texas and Mississippi Gulf of Mexico region, repayment
of a portion of the Company's outstanding debt and other working capital uses.
In addition, the Company entered into a financing agreement with Shell Capital
whereby the Company sold a term production payment to Shell Capital for $7.0
million. The Company's debt-to-capitalization ratio at December 31, 1998 was
78.3%.
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
For the three months ended March 31, 1999, revenue from crude oil and
natural gas production increased 32% over the same period in 1998. Natural gas
contributed 88% and crude oil contributed 12% of total oil and gas production
revenue.
Natural gas sales increased 30%, from $932,400 for the three months
ended March 31, 1998 to approximately $1.2 million for the same period in 1999;
however, the impact of increased production was significantly reduced by the
decline in natural gas prices. Production for the first quarter of 1999
increased significantly over the comparable prior year period due primarily to
production from the assets purchased in the second quarter of 1998 and
production from new wells drilled and completed. This increase in production
improved revenue from the 1999 period by $681,800. The average realized price
for natural gas sales declined from $2.27 per MCF in the first quarter of 1998
to $1.70 per MCF in the comparable 1999 period decreasing revenues by $406,700.
For the three months ended March 31, 1999, oil sales increased 51% to
$163,500, compared to $108,400 for the same period in 1998, due primarily to
sales of production from properties acquired in the second quarter of 1998 and
from new wells drilled and completed. This increase in production improved
revenue for the first quarter of 1999 by approximately $99,500. The Company's
average realized price for sales of crude oil in the first quarter of 1999
decreased by $2.58 per barrel, or 21%, decreasing revenue by $44,400 compared to
the same period in 1998.
The Company's depreciation, depletion and amortization ("DD&A") expense
for the first quarter of 1999 totaled $1.2 million compared to $676,600 in the
comparable period for 1998. Full cost DD&A totaled $1.1 million for the three
months ended March 31, 1999 compared to $621,600 for the same period in 1998.
The increase in DD&A is consistent with a higher amortizable asset base and an
increase in production for the 1999 period compared to the prior year period. On
an equivalent MCF basis, full cost DD&A decreased $0.04 per MCFE, from $1.34 per
MCFE for the three months ended March 31, 1998 to $1.30 per MCFE in the
comparable 1999 period. DD&A of other assets for the first quarter of 1999
totaled $102,500, an increase of $47,500 over the comparable period in 1998, due
primarily to an increase in the related asset base.
Operating costs, including lease operating expense ("LOE") and
production taxes, increased 30% from $129,200 in the first quarter of 1998 to
$168,200 for the same period in 1999. The increase was due primarily to
increased production from wells drilled or acquired since the prior year period.
For the three months ended March 31, 1999, LOE, excluding severance taxes,
totaled $138,000 compared to $111,100 for the comparable period in 1998. On an
equivalent MCF basis, average LOE for the first quarter of 1999 decreased from
$0.24 per MCFE in 1998 to $0.17 per MCFE in the same 1999 period.
General and administrative expense for the three months ended March 31,
1999 decreased $552,200, or 37%, compared to the same period in 1998. On an
equivalent MCF basis, general and administrative expenses declined 64% to $1.15
per MCFE for the three months ended March 31, 1999 compared to $3.19 per MCFE
for the same period in 1998. The decrease in G&A costs was due primarily to
lower compensation expense generated by staff reductions during the fourth
quarter of 1998 and the first quarter of 1999. These staff reductions, as well
as salary reductions for certain of the remaining employees, are expected to
significantly reduce G&A costs in 1999.
Interest expense for the three months ended March 31, 1999 totaled $1.0
million compared to $1.2 million in the comparable prior year period. Average
debt was approximately $59.8 million for the first quarter of 1999, resulting in
gross interest costs of $2.0 million. Other financing costs include the
amortization of discount of $77,800. Partially offsetting these costs was
capitalized interest of $1.0 million, which is based on the carrying value of
unproved properties. Financing costs also included amortization of debt issuance
costs totaling $582,030
35
<PAGE>
for the first quarter of 1999. For the first quarter of 1998, average debt
was approximately $25.6 million, resulting in gross interest costs of
$857,000. Other financing costs included the amortization of the original
issue discount for the EnCap NPI and warrants of $512,400. Partially
offsetting these costs was capitalized interest of $171,400. Amortization of
debt issuance costs totaled $53,800 for the first quarter of 1998.
Other income (expense) for the three months ended March 31, 1999
included interest income of $88,200 partially offset by losses on the sale of
marketable securities totaling $58,600. For the comparable period in 1998 other
income included interest income of $29,000 and gains on the sale of marketable
securities totaling $108,800.
For the three months ended March 31, 1999, the Company reported a net
loss applicable to common stockholders of $2.7 million, or $0.08 per share,
compared to a net loss of $2.4 million, or $0.08 per share, in the comparable
1998 period. Weighted average shares outstanding increased from approximately
30.6 million in the first quarter of 1998 to over 33.7 million in the comparable
1999 period as a result of the issuance of Common Stock as dividend payment on
preferred shares as well as the exercise of warrants and options in the second
half of 1998.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1998, the Company reported a net loss
applicable to common stockholders, of $11.9 million, or $0.37 per share,
compared to a net loss of $4.4 million, or $0.18 per share, in the comparable
1997 period. Weighted average shares outstanding increased from approximately
24.1 million in 1997 to over 32.4 million in 1998 as a result of the conversion
and exercise of warrants in late 1997 and the issuance of Common Stock to
acquire certain properties in 1998 and to pay interest and dividends on the
Lasco Acquisition note and subsequent preferred shares.
For the year ended December 31, 1998, revenue from crude oil and
natural gas production increased 378% over the same period in 1997. Natural gas
contributed 91% and crude oil contributed 9% of total oil and gas production
revenue.
Natural gas sales increased over 460%, from $804,700 for the year ended
December 31, 1997 to approximately $4.5 million for the same period in 1998, as
the impact of increased production more than offset the impact of the decline in
natural gas prices. Production for 1998 increased significantly over the
comparable prior year period due primarily to production from the assets
purchased in the Acquisitions and production from the K. S. Byrd Well. This
increase in production improved revenue for 1998 by $4.8 million. The average
realized price for natural gas sales declined from $2.80 per MCF in 1997 to
$2.24 per MCF in the comparable 1998 period, decreasing revenues by $1.1
million. Income in 1998 from hedging gains increased gas realizations by $0.18
per Mcf.
For the year ended December 31, 1998, oil sales increased 91% to
$440,500, compared to $231,100 for the same period in 1997, due primarily to
sales of production for properties acquired in the Acquisitions and production
from the Reedy Creek properties. This increase in production improved revenue
for 1998 by approximately $544,700. The Company's average realized price for
sales of crude oil in 1998 decreased by $8.25 per barrel, or 43%, decreasing
revenue by $335,300 compared to the same period in 1997.
The Company's depreciation, depletion and amortization ("DD&A") expense
for 1998 totaled $3.2 million compared to $854,100 in the comparable period for
1997. Full cost DD&A totaled $2.8 million for the year ended December 31, 1998
compared to $709,200 for the same period in 1997. The increase in DD&A is
consistent with the increased production for 1998 compared to the prior year
period. Included in DD&A for the year ended December 31, 1997, was $221,000 of
non-cash charges attributable to a price-related reduction in the book value of
the Company's oil and gas reserves. On an equivalent MCF basis, full cost DD&A
decreased $0.71 per MCFE, from $1.97 per MCFE for the year ended December 31,
1997 to $1.26 per MCFE in the comparable 1998 period. DD&A of other assets for
1998 totaled $305,700, an increase of $160,800 over the comparable period in
1997 due primarily to an increase in the related asset base.
Operating costs, including lease operating expense ("LOE") and
production taxes, increased 763% from $111,500 in 1997 to $962,700 for the same
period in 1998. The increase was due primarily to increased production from
wells drilled or acquired since the prior year period. For the year ended
December 31, 1998, LOE, excluding severance taxes, totaled $860,200 compared to
$86,500 for the comparable period in 1997. On an equivalent MCF basis, average
LOE for 1998 increased from $0.24 per MCFE in 1997 to $0.38 per MCFE in 1998.
This increase is primarily due to the Lasco Acquisition that was comprised of
older, lower rate wells.
36
<PAGE>
General and administrative expense for the year ended December 31, 1998
increased over $1.9 million, or 52%, compared to the same period in 1997. On an
equivalent MCF basis, general and administrative costs declined 76% to $2.56 per
MCFE for the year ended December 31, 1998 compared to $10.51 per MCFE for the
same period in 1997. The increase in G&A costs was due primarily to higher
compensation expense generated by a larger staff. The Company began 1998 with 26
employees, increasing to 37 employees during the year. Staff reductions during
the fourth quarter of 1998 reduced total employees to 29 at year-end. Further
staff reductions during the first quarter of 1999 reduced total employees to 21
at March 31, 1999. These staff reductions, as well as salary reductions for the
majority of the remaining employees, are expected to significantly reduce G&A
costs in 1999. The overall high level of general and administrative expenses in
1997 was due to the initial costs associated with creating and managing the
Company's extensive capital program.
Interest expense for the year ended December 31, 1998 totaled $5.8
million compared to $689,219 in the comparable prior year period. The increase
is due primarily to the financing arrangements under the EnCap Credit Facility
entered into in December 1997 and interest on the $37.5 million principal amount
of Convertible Debentures issued in March and April of 1998. Average debt was
approximately $44.6 million for 1998, resulting in gross interest costs of $4.8
million. Other financing costs include the amortization of the original issue
discount for the EnCap NPI (defined below) of $1.7 million and the amortization
of deferred loan and issuance costs of $1.2 million. Partially offsetting these
costs were capitalized interest of $1.9 million, which is based on the carrying
value of unproved properties.
Other income (expense) for the year ended December 31, 1998 included a
charge of $1.0 million due to the termination of a key employee of the Company
recorded in December 1998 to reflect settlement of his employment contract. Such
settlement will be paid out through January 2001. Offsetting this expense were
interest income of $573,609 and gains on the sales of marketable securities
totaling $24,971. For the comparable period in 1997, interest income of $77,844
was offset by losses on the sales of marketable securities totaling $86,824.
FOUR MONTHS ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED AUGUST 31, 1997
The Company reported a net loss of $2,739,300, or $0.10 per share, for
the four months ended December 31, 1997 and $1,917,100 or $0.09 per share, for
the ten months ended August 31, 1997. Weighted average shares outstanding were
27.9 million for the four months ended December 31, 1997 and 21.9 million for
the ten months ended August 31, 1997.
Natural gas sales for the four months ended December 31, 1997 and the
ten months ended August 31, 1997 totaled $624,400 and $256,000, respectively.
Production averaged 1,833 MCFD for the four-month period ended December 31, 1997
at an average price of $2.79 per MCF and 276 MCFD for the ten-month period ended
August 31, 1997 at an average price of $3.05 per MCF. The K.S. Byrd Well began
production in September 1997 and averaged 1,605 MCFD for the four months ended
December 31, 1997.
The Company's crude oil sales for the four months ended December 31,
1997 and the ten months ended August 31, 1997 totaled $83,500 and $188,200,
respectively. Production averaged 36.9 barrels per day and 30.5 barrels per day,
respectively, for the four-month period ended December 31, 1997 and the
ten-month period ended August 31, 1997. The Company's average realized price for
sales of crude oil for the four month period ended December 31, 1997 and the
ten-month period ended August 31, 1997 were $18.54 per barrel and $20.28 per
barrel, respectively.
For the four months ended December 31, 1997, DD&A expense totaled
$634,500 and for the ten months ended August 31, 1997, DD&A expense was
$240,400. Full cost DD&A averaged $2.32 per MCFE for the four months ended
December 31, 1997 and $1.07 per MCFE for the ten months ended August 31, 1997,
due primarily to a ceiling test write-down of $221,000 at December 31, 1997.
Operating costs totaled $49,800 and $68,500, respectively, for the four
month period ended December 31, 1997 and the ten month period ended August 31,
1997. LOE, excluding severance taxes, totaled $42,700 and $45,600 for the same
periods, respectively. On an equivalent barrel basis, LOE for the four months
ended December 31, 1997 averaged $0.17 per MCFE and for the ten months ended
August 31, 1997 averaged $0.33 per MCFE.
37
<PAGE>
General and administrative costs totaled $2,087,100 for the four months
ended December 31, 1997 and $2,026,400 for the ten months ended August 31, 1997.
On an equivalent MCF basis, general and administrative expenses were $8.32 per
MCFE for the four months ended December 31, 1997 and $14.53 per MCFE for the ten
months ended August 31, 1997. General and administrative costs were significant
during these periods and reflected establishment of the infrastructure necessary
to sustain the planned expansion of oil and gas operations and the Company's
desired position as operator of many of its prospects. Costs included signing
bonuses paid to professional and senior management staff as inducements to leave
their previous employment and join the Company, legal and accounting fees, and
the settlement of a lawsuit filed by a former employee.
Net financing costs for the four months ended December 31, 1997 were
$625,100, and consisted of gross interest expense of $286,700, the amortization
of the original issue discount for the EnCap NPI of $427,500 and amortization of
deferred loan costs of $42,900. Partially offsetting these costs was capitalized
interest of $108,200 and interest income of $23,800. For the ten months ended
August 31, 1997, gross interest expense of $49,300 was more than offset by
interest income of $59,200. The higher financing costs in the four month period
ended December 31, 1997 reflects the Company's increase in long-term debt from
$759,300 at August 31, 1997 to $14.7 million at December 31, 1997. This increase
in debt relates to the EnCap Credit Facility, entered into in late 1997, that
was used to finance the Oakvale Dome Field and Old Ocean acquisitions and
related development.
Other revenue for the four-month period ended December 31, 1997 and the
ten-month period ended August 31, 1997 represents losses on the sale of
marketable securities of $50,900 and $35,900, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for exploration, development and
acquisition of oil and gas properties, payment for the acquisition and
processing of seismic data, the repayment of trade payables and repayment of
principal and interest on outstanding debt. The Company has budgeted $11.3
million to fund planned capital expenditures on its prospects during 1999. The
Company's sources of financing include net proceeds from the Offering, a
tentative commitment of equity from an affiliate of EnCap, revenue generated
from operations, ongoing sales of non-core assets and proceeds from production
payment facilities. Based on the foregoing, the Company will require additional
capital from more than one of the sources identified above to fund its ongoing
activities and capital budget. If the Company is unable to obtain such
additional capital, the Company will either have to sell interests in its
prospects to fund its drilling program, curtail its exploration activities
and/or curtail ongoing activities. Such curtailing of activities could include
reducing the number of wells drilled, slowing activities on projects that the
Company operates, selling additional interests in the Company's prospect
inventory or a combination of the foregoing. In the absence of any new funding,
the Company will have inadequate liquidity to satisfy its existing contractual
obligations and to continue operations in its current form.
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues to examine alternative sources of long-term capital,
including bank borrowings, the issuance of debt instruments, the sale of Common
Stock or other equity securities, the issuance of net profits interests, sales
of promoted interests in its prospects, and various forms of joint venture
financing. In addition, the prices the Company receives for its future oil and
natural gas-production and the level of the Company's production will have a
significant impact on future operating cash flows.
LIQUIDITY
At March 31, 1999, the Company had cash and cash equivalents on hand of
$565,200 and working capital deficit of $35.1 million, as compared to a cash
balance of $2.3 million and a working capital deficit of $27.4 million as at
December 31, 1998 and a cash balance of $3.2 million and a working capital
deficit of $15.3 million at December 31, 1997. The Company's ratio of current
assets to current liabilities was 0.16:1 at March 31, 1999, 0.25:1 at December
31, 1998 and 0.37:1 at December 31, 1997. The working capital deficit and low
current ratio is primarily due to the EnCap Credit Facility discussed below,
repayment of which is due by June 30, 1999.
38
<PAGE>
CASH FLOWS
Cash flows used in operations totaled $153,600 for the three months
ended March 31, 1999, compared to $4.1 million for the year ended December 31,
1998. Cash used in investing activities for the quarter ended March 31, 1999 and
year ended December 31, 1998 was $4.1 million and $35.4 million, respectively.
During the first quarter of 1999, costs incurred for exploration and development
expenditures totaled $4.1 million and capital expenditures for furniture and
equipment totaled $64,200. Partially offsetting these costs was proceeds of
$128,100 from the sale of marketable securities. Cash outlays for exploration
and development expenditures totaled approximately $36.3 million and capital
expenditures for furniture and equipment totaled $745,400 during the year ended
December 31, 1998. Partially offsetting these costs were $1.1 million in
proceeds from the sale of non-core properties and $1.1 million in proceeds from
the sale of marketable securities.
Cash provided by financing activities totaled $2.4 million for the
first quarter of 1999 and included borrowings under the BOCP Credit Facility of
approximately $2.7 million and repayments under the Shell Production Payment
totaling approximately $352,500. For the year ended December 31, 1998 cash
provided by financing activities totaled approximately $38.7 million and
consisted primarily of proceeds from the issuance of Convertible Debentures
including the Notes. The Company also borrowed $3.0 million under the EnCap
Credit Facility and repaid $5.0 million thereunder during the first quarter of
1998. In December 1998, the Company entered into a financing agreement with
Shell Capital whereby the Company sold a term production payment to Shell
Capital for $7.0 million. Also in December, the Company repaid $2.9 million on
Tranche A and Tranche B loans under its BOCP Credit Facility resulting in net
borrowings under that Facility of $2.3 million for the year ended December 31,
1998. The Company also borrowed $2.2 million for the acquisition of property
interests from Mobil through a short term, secured advance from investors
introduced by the Agent (referred to herein as the Old Ocean Loan).
CREDIT FACILITIES
ENCAP CREDIT FACILITY
In 1999, the Company entered into a $20 million credit agreement (the
"EnCap Credit Facility") with EnCap Capital Fund III, L.P. ("EnCap Energy")
consisting of a promissory note for $12,000,000 (the "Original Note") and a
promissory note for $8,000,000 (the "Supplemental Note"; collectively, the
"Notes"). The Original Note bears interest at 10% per annum through December 31,
1998 and at 18% per annum thereafter. The Note is due, with accrued interest, by
June 30, 1999. The Supplemental Note was repaid in full and is no longer
outstanding. Under the terms of the Convertible Debentures (other than the
Notes), the Company has agreed to limit borrowings under the EnCap Credit
Facility to $12,000,000, all of which is outstanding and due June 30, 1999
following an extension obtained by the Company. The proceeds from the facility
were applied to the acquisition of Oakvale Dome ($8,000,000), and Old Ocean
properties and the drilling and completion of certain development wells
($4,000,000). A first lien on certain properties and a second lien on certain
other properties secure the Original Note. Mr. Tomlinson, Calibre and certain
affiliates of Calibre guarantee the Original Note.
Under the terms of the Original Note, the Company agreed to convey to
EnCap Energy, on January 1, 1999, a 25% net profit interest (the "EnCap NPI")
from the properties acquired with the proceeds of the borrowing. In connection
with the original granting of the EnCap NPI, the Company recorded a discount on
the Original Note of $2,102,180 as of December 31, 1997. The discount has been
amortized over the term of the Original Note. The carrying amount of the oil and
gas interests has been reduced by the same amount.
Under the terms of the Supplemental Note, EnCap Energy was issued
warrants to purchase up to 1.5 million shares of Common Stock at an exercise
price of $1.28 per share. In connection with the issuance of these warrants, the
Company recorded a discount on the Supplemental Note of $367,881 as of December
31, 1997. This discount is being amortized over the term of the Supplemental
Note. Pursuant to a financing agreement dated November 4, 1998 with EnCap Energy
and as consideration for enabling additional funding through the BOCP Credit
Facility, the warrants were re-priced to $0.46475 per share.
BOCP CREDIT FACILITY
In December 1998, the Company's loan agreement with Bank One NA ("Bank
One") was purchased by BOCP Energy Partners, L.P. ("BOCP"), an affiliate of
EnCap. Pursuant to an assignment of note and liens dated
39
<PAGE>
December 29, 1998, Bank One assigned the original loan agreement, together
with all loan documents referred to therein, to BOCP. In December 1998, the
principal amount then outstanding under Tranche A of $2.9 million plus
interest was repaid and, per amendments to the loan agreement, no further
advances will be requested or made under Tranche A. Interest accrued on
Tranche A at prime plus 2.0% and on Tranche B at a rate of 15% per annum,
payable monthly.
The amendments also modified the terms of Tranche B of the credit facility as
follows:
(1) Maximum availability of $6,000,000;
(2) No advances on Tranche B will be requested or made on or after April 30,
1999;
(3) Maturity date of June 30, 1999; and
(4) Interest rate of prime plus eight percent per annum through and including
December 31, 1998, and fifteen percent per annum from and after January 1,
1999.
The present outstanding balance of the BOCP Credit Facility is $6.0 million. All
interest accrued on Tranche B remains unpaid and owing and is due on June 30,
1999. The Company has reached a standstill agreement covering certain covenants
of which the Company is currently in violation and received an extension in the
maturity date to June 30, 1999.
SHELL FINANCING
In December 1998, the Company entered into a financing agreement with
Shell Capital, Inc. ("Shell Capital") whereby the Company sold a term production
payment ("Shell Production Payment") to Shell Capital for $7.0 million. The
production payment comprised a dedication of 42% of the net revenues from the
Wausau, Oak Hill and East Morgantown properties, 23.1% of Oakvale Dome's Howell
well, 12.2% of Oakvale Dome's Fortenberry well and 38.5% of Oakvale Dome's Byrd
well. The interests conveyed are subject to future adjustment. The Shell
Production Payment is secured solely by the properties and is non-recourse to
the Company. Following full pay-out ($7.0 million plus a 15% rate of return) of
the production payment, the dedicated revenue interest is returned to the
Company less a permanent royalty interest equal to 8.75% of the Company's net
revenue interest in Wausau, Oak Hill and East Morgantown; 4.8% of the Howell and
Byrd wells; and 2.5% of the Fortenberry well. The Company has the right to buy
back the production payment at a stated rate of return of 25% plus a payment of
$1.0 million. In connection with the right to buy back the permanent overriding
royalty interest conveyance, the Company recorded a discount on the financing of
$1.0 million. The carrying amount of the oil and gas interests has been reduced
by the same amount. Shell Capital further agreed to expand the Shell Production
Payment up to $25.0 million provided that the Company sell certain properties,
enter into a payment schedule for amounts owed to an industry partner, raise
additional capital and obtain certain minimum results from current development
drilling activity. The Company is currently negotiating with Shell Capital and
other parties to complete the expansion of the Shell Production Payment or the
creation of a new production payment.
This financing has been classified as debt on the balance sheet and
began being reduced in 1999 as production is delivered to Shell under the terms
of the contract. Volumes delivered to Shell are reported as revenue at prices
received by Shell. Interest expense is recorded based on a rate of 15% per
annum.
OLD OCEAN LOAN
On December 31, 1998, the Company obtained a $2.2 million loan from a
group of lenders led by the Agent, the proceeds being used to acquire additional
interests in the Old Ocean Project from Mobil. The loan is due, through
extension, on June 30, 1999, and is secured by the acquired interests and a
junior lien on certain other properties. The Company has proposed that it repay
the loan through the issuance of Preferred Stock. The Company also granted the
providers of the facility with an overriding royalty that is to be converted
into a participating net profits interest, which interest can be repurchased by
the Company for $1.1 million in cash or stock and $1.1 million principal amount
of warrants. The Company has proposed repurchasing the overriding interest and
participating net profits interest with Preferred Stock as well. One lender of
$100,000 has elected to accept cash for repayment of its portion of the loan and
purchase of the overriding interest.
40
<PAGE>
CONVERTIBLE DEBENTURES
In April 1998, the Company issued the Series A Special Notes (which
Notes and the Debentures into which they are exchangeable are referred to herein
as the Series 2 Debentures) to Canadian investors and the Series 3 Debentures to
United States investors on substantially similar terms to the Notes. It is the
Company's intention to offer holders of the Series 3 Debenture the ability to
exchange their special notes or debentures into Preferred Stock on terms which
are not any more favorable, in whole or in part, than those attaching to the
Preferred Stock and to the terms set out in the Letter of Transmittal. The
holders of Series 2 Debentures (which amount to $1,652,000) are not being
offered the opportunity to exchange their Series 2 Debentures into Preferred
Stock.
CHANGES IN ISSUED SHARE CAPITAL
On March 31, 1999, the Company agreed to issue 1,057,000 shares of
Common Stock to certain holders of the Series 3 Debentures in exchange for
interest owed and due on March 31, 1999. Also on March 31, 1999, the Company
agreed to issue 541,700 shares of Common Stock to a holder of Series 3
Debentures to retire $250,000 principal amount of the debentures. The shares
will be issued following receipt of VSE acceptance.
YEAR 2000
The Company operates on an externally designed software package that is
compliant with the year 2000. The year 2000 problem is the result of software
that uses two digits (rather than four) to define the applicable year. Any
software or hardware that uses time-sensitive coding may recognize a day using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company is attempting to identify other
potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations, or
cash flows in future periods. If, however, the Company, its customers, or
vendors are unable to adequately resolve such processing issues in a timely
manner, the Company's operations and financial results may be adversely
affected.
41
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company is an independent energy company engaged in the exploration
for and development of oil and natural gas. The Company has interests in over 25
oil and gas prospects and projects primarily in the United States Gulf Coast
areas of Mississippi, Texas and Louisiana. Most of these prospects have been,
are being, or are expected to be, enhanced with 3-D seismic data and CAEX
technologies. The 3-D seismic data, including current surveys, will cover over
820 square miles. The Company's 1999 capital budget provides for a total of
$11.3 million for drilling and prospect development. Of such amount,
approximately $7.3 million is budgeted for development drilling, approximately
$1.0 million is budgeted for exploratory drilling, testing, and subsequent
completions, $2.3 million is budgeted for seismic data acquisitions and the
remainder is budgeted primarily for leasehold purchases. The Company believes
that its prospects represent a diverse array of technology enhanced, 3-D seismic
confirmed oil and gas exploration prospects.
A substantial portion of the Company's growth has been through
acquisitions, including the following 1998 acquisitions:
(i) in January 1998 the acquisition of certain oil and gas prospects from
Lasco Energy Partners, L.P. ("Lasco") (the "Lasco Acquisition");
(ii) the acquisition on April 22, 1998 of certain oil and gas property
interests of Calibre (the "Calibre Acquisition") (certain closing
matters to be completed);
(iii) the acquisition on May 1, 1998 of certain oil and gas properties from
Southern Gas Corporation (the "Southern Gas Acquisition");
(iv) the acquisition effective in July 1998 of certain oil and gas property
interests from Starbucks Trust (the "Starbucks Acquisition") (certain
closing matters to be completed); and
(v) the acquisition on December 29, 1998 of the Mobil interest in the Old
Ocean project (the "Mobil Acquisition", the Lasco Acquisition, the
Calibre Acquisition, Southern Gas Acquisition, Starbucks Acquisition
and Mobil Acquisition are referred to collectively herein as the
"Acquisitions").
The foregoing transactions, other than the Mobil Acquisition have
received regulatory acceptance by the VSE. Regulatory acceptance for the Mobil
Acquisition is pending and Company expects to receive this acceptance in due
course. If this acceptance is not received, the Company may be required to
modify certain aspects of these transactions, failing which the VSE may impose
regulatory sanctions, which could include delisting of the Company's Common
Stock from the VSE.
RECENT DEVELOPMENTS
In December 1998, the Company entered into a financing agreement with
Shell Capital, Inc. ("Shell Capital") whereby the Company sold a term production
payment to Shell Capital for $7.0 million. The Shell Production Payment
comprised a dedication of 42% of net revenues from the Wausau, Oak Hill and East
Morgantown Properties; 23.1% of Oakvale Dome's Howell well; 12.2% of Oakvale
Dome's Fortenberry well; and 38.5% of Oakvale Dome's Byrd well. The production
payment is secured solely by the properties and is non-recourse to the Company.
Following full payout of the production payment, the dedicated revenue interest
will be returned to the Company less a permanent royalty interest equal to 8.75%
of the Company's net revenue interest in Wausau, Oak Hill and East Morgantown;
4.8% of the interest in the Howell and Byrd wells; and 2.5% of the Fortenberry
interest. The Company has the right to buy back the production payment at a
stated rate of return of 25.0% plus $1 million. Shell Capital has agreed to
expand its term production payment up to $25.0 million provided that the Company
sell certain properties, enter into a payment schedule for amounts owed to an
industry partner, raise additional capital and obtain certain minimum results
from current development drilling activity. The Company is currently negotiating
with Shell Capital and other parties to complete the expansion of the term
production payment and believes that it will meet the specified requirements.
In December 1998, the Company acquired for $2.0 million all of Mobil's
right, title and interest in the deep rights below the existing production in
the Old Ocean Prospect. The Company has combined this interest with its
42
<PAGE>
contractual rights and ownership in the immediate area and is currently
attempting to secure one or more industry partners to purchase 37.5% of the
Company's ownership in the Old Ocean Prospect. The Company paid for this
acquisition through the Old Ocean Loan.
In January 1999, the Company acquired, on behalf of the Company and its
partner in the Wausau prospect, a gas pipeline in Mississippi for approximately
$425,000 to provide access for gas sales. Included in the purchase were a 100%
and a 93.75% BPO working interest in two producing gas wells. The Company does
not anticipate these wells reaching pay-out. The Company owns a 53.8% interest
in the pipeline and the Fairchild #1 well and a 50.5% interest in the A. Foote
Estate #1 well. Gas reserves net to the Company are estimated to be in excess of
150 MMCFG and net production of over 150 MCFGPD.
In May 1999, the Company closed the sale of its interests in the Lisbon
Field, comprising essentially all of its proven reserves in Louisiana, for
$507,500 in gross proceeds to an unrelated party.
In June 1999, the Company completed the drilling of its Fortenberry #1
well to a depth of 16,126 feet at Oakvale Dome Field in Jefferson Davis County,
Mississippi. The Company elected to not drill deeper to the projected depth of
16,250 feet due to concerns that additional drilling difficulties could be
encountered in the side-track hole. Open hole electric and porosity logs which
run to a depth of 16,088 feet, indicate a total of 80 net feet of hydrocarbon
bearing sands in the primary objectives in the Hosston Formation at depths
between 15,792 feet and 15,992 feet. An additional four feet of net pay was
measured by electric and porosity logs in the lower Booth zone starting at a
depth of 16,075 feet based on mud logs from the original side-track hole. The
remainder of the zone could not be logged due to existing hole conditions. The
Company owns a 70% working interest in the well and an average 64% working
interest in the field. The Company is proceeding to complete the well for
production.
The Company plans to co-mingle the 42 net feet in the Harper and the 38
net feet in the Booth for production. Both of these zones are producing in the
adjacent fault block to the north out of the Company's first two wells in the
field, the K. S. Byrd #1 and the Howell #1. The top 22 feet of the
partially-logged lower Booth have been cased and are expected to be added to the
producing stream with the Harper and Booth.
STRATEGY
The Company's strategy is to expand its reserves, production and cash
flow through the implementation of an exploration and exploitation program that
focuses on:
(i) obtaining dominant positions in core areas of exploration and
development in under-exploited areas in or adjacent to fields and
trends that have historically produced hydrocarbons in significant
quantities;
(ii) enhancing the value of its prospects and reducing exploration
risks through the use of 3-D seismic data and CAEX technologies;
(iii) maintaining an experienced technical staff with the expertise
necessary to take advantage of the Company's proprietary 3-D seismic
data and CAEX technologies;
(iv) adding reserves and production using modern reservoir stimulation
methods; and
(v) retaining control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS
The Company has identified core areas for exploration and development
in geological trends with demonstrated histories of prolific natural gas
production from high porosity reservoir rocks with profiles suitable for seismic
evaluation. The Company believes that by obtaining substantial working
interests, related 3-D seismic data and significant acreage positions within its
core areas, it will be able to achieve a dominant position in focused portions
of those areas. With a dominant leasehold position, the Company believes it can
better control the core areas, drilling opportunities and future production and
can attempt to minimize costs through economies of scale and other efficiencies
inherent in its focused approach. Such cost savings and efficiencies include the
ability to use the Company's 3-D seismic data to reduce drilling risks and lower
its leasehold acquisition costs by identifying and purchasing leasehold
interests only in those focused areas in which the Company believes drilling is
most likely to be successful.
43
<PAGE>
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES
The Company attempts to enhance the value of its prospects through the
use of 3-D seismic data and CAEX technologies, with an emphasis on direct
hydrocarbon detection technologies. These technologies create computer generated
3-dimensional displays of subsurface geological formations that enable the
Company's professional staff to detect seismic anomalies in structural features
that are not apparent in 2-D seismic surveys. The Company believes that 3-D
seismic data, if properly used, will reduce drilling risks and costs by reducing
the number of dry holes, optimizing well locations and reducing the number of
wells required to exploit a discovery.
EXPERIENCED TEAM
The Company maintains an experienced staff, including engineers,
geologists, geophysicists, a landman and other technical personnel. Such
professional staff has on average 18 years of experience in the oil and gas
industry.
USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING TECHNOLOGY
In addition to applying the latest in 3-D seismic and CAEX technology,
the Company uses the latest in industry reservoir stimulation and directional
drilling techniques. For example, many of the Company's development and
exploitation opportunities are "tight" reservoirs in which modern stimulation
practices may significantly increase production.
CONTROL OF DRILLING FUNCTIONS
The Company believes that controlling the most critical functions in
the drilling process will enhance its ability to develop successfully its
prospects. The Company has acquired a majority interest in many of its
prospects, including interests in most of the 3-D seismic data relating to those
prospects. In many cases where the Company does not own a majority interest in a
prospect the Company still owns a greater interest than that of any other
working interest owner. As a result, in many of its prospects, the Company will
be able to influence the areas to explore, manage the land permitting and option
process, determine seismic survey areas, oversee data acquisition and
processing, prepare, integrate and interpret the data and identify each prospect
drillsite. In addition, the Company will be the operator of many of the wells
drilled on these prospects.
BACKGROUND
The Company was originally formed on February 9, 1981 for the purpose
of conducting mineral exploration in Canada. In 1989, the Company changed its
focus and concentrated on investment and merchant banking activities. At that
time, the Company wrote off its mineral property costs and ceased all mineral
exploration activities. From 1991 to 1993, the Company diversified into the
acquisition and development of oil and gas properties. During 1996, the Company
sold substantially all of its investments outside of oil and gas and refocused
operations on oil and gas exploration and development in the United States.
Effective as of October 31, 1996, the Company acquired Texstar and as a result,
the Company focused its operations on oil and gas exploration and development in
the United States, specifically the Gulf Coast areas of Mississippi, Texas and
Louisiana. Former shareholders of Texstar acquired control of the Company and
Texstar became a wholly owned subsidiary of the Company. In July 1997, the
Company changed its name from Benz Equities Ltd. to Benz Energy Ltd. The Company
has migrated to the state of Delaware and is now a Delaware Corporation under
the name Benz Energy Inc.
THE PROSPECTS
The Company's prospects are located primarily in the Gulf Coast areas
of Mississippi, Texas and Louisiana. As of December 31, 1998, the Company owned
interests in 21 producing wells it operated and also owned non-operated
interests in 13 producing wells in Louisiana, Mississippi, and Texas. Daily
production from both operated and non-operated wells net to the Company's
interest averaged 5,506 MCFGD and 111.4 BOPD for the year ended December 31,
1998. Daily production as of March 31, 1999, was approximately 9,547 MCFGD and
219 BOPD. Each of the Company's prospects differs in scope and character and
consists of one or more types of assets, such as 3-D seismic data, working
interests in oil and gas leases, oil and gas lease options, contractual rights
to earn a working interest in oil and gas leases, royalty interests or other
mineral interests. Most of the Company's prospects
44
<PAGE>
have been, are being, or are expected to be enhanced with 3-D seismic data
and CAEX technologies. The 3-D seismic data acquired will, when completed for
the existing prospects, cover over 820 square miles (gross). The table below
gives certain information regarding the location, objectives, and present
status of the Company's most significant prospects as of December 31, 1998:
<TABLE>
<CAPTION>
Additional Gross
Prospect Leased Acreage Acreage (4) Square
------------------- ------------------ Miles of
Gross Net Gross Net 3-D Approx.
Acres Acres Acres Acres Seismic Formation Total
Prospect (1) (2) (1) (2) Data (5) Objective Depth
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MISSISSIPPI
Oakvale Dome (3,6,7) 4,853 2,675 N/A N/A 33 Hosston 16,700'
Hosston; Cotton
Glancy Re-entry (3,8) 5,175 4,692 N/A N/A N/A Valley 21,000'
Wausau (3) 1,240 471 N/A N/A 55 Cotton Valley 19,000'
Sardis Church Dome
(3,8) 4,000 2,835 N/A N/A N/A Hosston 16,500'
TEXAS
LaHinch (3,9) 1,382 1,036 N/A N/A 20 Wilcox 16,000'
Old Ocean
(8,10,11,12,13) 672 243 42,217 9,846 102 Frio 16,000'
Oak Hill Field (3) 793 698 N/A N/A N/A Cotton Valley 9,500'
Rayburn (3,8) 3,048 1,068 4,843 3,886 30 Yegua; Wilcox 15,000'
OTHER
Louisiana 13,176 2,222 N/A N/A 478
Mississippi 29,180 11,463 N/A N/A 73
New Mexico 160 12 N/A N/A N/A
Texas 8,408 3,557 N/A N/A 30
------ ------ ------ ------ ---
Total 72,087 30,972 47,060 13,732 821
====== ====== ====== ====== ===
</TABLE>
- -------------------------------------
(1) "Gross Acres" means an acre in which the Company owns a working
interest. When used in conjunction with acreage under options it means
an acre in which the Company will acquire a working interest if and
when the option is exercised.
(2) "Net Acres" means the sum of the fractional working interest owned in
gross acres expressed as whole numbers and fractions thereof.
(3) Operated by the Company.
(4) "Additional Acreage" refers to the number of acres in which the Company
owns options for oil and gas leases from mineral owners and, with
respect to part of the acreage reported for the Old Ocean Prospect,
also has contractual rights to earn a working interest in the 21,784
acre Old Ocean Unit.
(5) Represents 3-D seismic data acquired, being acquired or expected to be
acquired.
(6) Drilling.
(7) Completing.
(8) Soliciting industry participant.
(9) Evaluating 3-D seismic data.
(10) Shooting 3-D seismic survey.
45
<PAGE>
(11) Affiliates of EnCap own a overriding royalty interest that is
convertible into a participating net profits interest.
(12) The Company will earn an additional working interest in deep rights
upon completion and delivery of a 3-D survey over the unit and the
establishment of commercial production.
(13) Clients of the Agent and the Agent own an overriding royalty interest
that is convertible into a participating net profits interest. The
Company has the right to buy back the participating net profits
interest and is currently negotiating such purchase in exchange for
Preferred Stock.
Below are descriptions, as of December 31, 1998, unless otherwise
indicated, of the Company's most significant prospects.
OAKVALE DOME
The Oakvale Dome Prospect, located in Jefferson Davis County,
Mississippi, is the Company's most significant producing property. The Company
owns approximately 4,853 gross (2,675 net) acres in the Prospect. The Company is
the operator.
A 2-D seismic survey shot and processed originally in 1979 was
reprocessed in 1996 and confirmed the discovery well, which was the K.S. Byrd
Well. The K.S. Byrd Well was completed in June 1997 in the Harper formation from
15,964 feet to 15,988 feet, flowing 5.708 MMCFGD. Initial reserve estimates as
of August 1, 1997 conducted by an independent petroleum engineer gave the well
proved producing reserves of 8.7 BCFG and 34,800 barrels of condensate. Later
reserve estimates as of January 1, 1999 conducted by an independent petroleum
engineer revised the well's proved producing reserves to 12.1 BCFG and 41,500
barrels of condensate. The well began sales of production in September 1997 and,
as of December 31, 1998, was flowing at the rate of 10.4 MMCFGD and 42 BOPD. In
February of 1999 the Howell #1 well was completed and initial tests indicate a
commercial production rate of 21.1 MMCFGD and 19 barrels of condensate per day.
The Fortenberry #1 has just been drilled to total depth with promising
indications but due to mechanical problems is currently being sidetracked for
the lowest 500 feet and logged with 80 net feet of hydrocarbon bearing
reservoir. The well is being completed for production.
GLANCY
The Company owns approximately 5,175 gross (4,692 net) acres in the
Glancy Prospect in Copiah County, Mississippi. The Company is the operator.
Glancy Field has produced gas and condensate from the Lower Cretaceous Rodessa
formation on acreage not owned by the Company. The Glancy Prospect is
characterized as a simple anticline structure that formed as a result of a
deep-seated salt pillow. The presence of reservoir quality sandstones at both
the deeper Hosston and Cotton Valley levels has been demonstrated by two well
penetrations, both of which have produced gas and had multiple shows of
hydrocarbons. Early attempts (in 1971) to fracture stimulate one of the test
wells, having an initial production of 3.1 MMCFGD on an extended test from the
Cotton Valley, damaged the formation in the near-wellbore area. The Company
intends to re-enter a deep test well and to apply modern fracture stimulation to
establish commercial production.
WAUSAU
The Company owns approximately 1,240 gross (471 net) acres in the
Wausau Prospect in Wayne County, Mississippi (surface to 15,360 feet only). The
Company is the operator. The Company has rights in a 3-D survey acquired by
Compagnie Generale de Geophysiqe over this prospect area. This project is
located on two flanks of a large salt ridge trending northwest to southeast.
Based upon 3-D seismic data, the Cotton Valley appears to be trapped in both a
simple closure and an updip pinchout along the salt ridge flank. The Company
commenced drilling a test well in May 1998 and completed the well in November
1998 as a Cotton Valley discovery. Production commenced in November and was
increased to a rate of over 400 BOPD and 2,000 MCFD with the connection to a gas
sales pipeline in February 1999. The well has three additional shallower Cotton
Valley reservoirs behind pipe.
46
<PAGE>
SARDIS CHURCH DOME
The Company owns approximately 4,000 gross (2,835 net) acres in the
Sardis Church Dome Prospect in Copiah County, Mississippi. The Company is the
operator. The Company's drilling objectives are the Paluxy, Hosston and Cotton
Valley sands. The Company anticipates it will sell at least 50% of the working
interest to an industry participant before spudding the test well. This prospect
is an analog to the Oakvale Dome discovery and is located along trend. A nearby
offstructure well has tested significant oil and gas shows in the Hosston
objective section.
LAHINCH
The Company owns deep rights under approximately 1,382 gross (1,036
net) acres in the LaHinch Prospect in Duval County, Texas. The Company is the
operator. The objectives for the prospect are sands in the Upper Wilcox
formation. The adjoining operator has drilled an Upper Wilcox test on the same
structure that, if successful, will confirm the Company's prospect and
reclassify it as a proven location. This well reached total depth in April 1999
and is currently being completed. Upon its successful test, the Company will
commence a development program on its acreage.
OLD OCEAN
The Company owns leases, options for oil and gas leases and has
contractual rights to earn working interests in approximately 42,889 gross
(10,089 net) acres in the Old Ocean Prospect in Brazoria and Matagorda Counties,
Texas. The Company owns a 37.02% working interest within the Old Ocean Unit and
a 69.23% working interest outside the unit, but within the 3-D area. A 3-D
seismic survey is underway and the Company is the operator of the seismic
survey. The Old Ocean Prospect is the largest Frio gas field in the Gulf Coast,
having produced more than five TCFGE since its discovery in 1934. In excess of
200 wells have been drilled in the Old Ocean field. These reserves have been
produced from four normally pressured reservoirs between 9,500 and 11,000 feet.
The Old Ocean Prospect actually consists of numerous prospects and the main
objective is in the overpressured Frio. Deep well information confirms reservoir
quality sands and scattered production of 45 BCFG in the immediate vicinity.
Precise structural mapping from the 3-D seismic survey will allow accurate
delineation of prospects. Affiliates of EnCap and the Agent and certain of its
clients own a 50% overriding royalty interest in certain of the Company's
properties that make up the Old Ocean Prospect, which interest is convertible
into a participating net profits interest. The Company has the right to buy back
the participating net profits interests and is negotiating such purchase in
exchange for a cash payment to affiliates of EnCap and using Preferred Stock for
the other Old Ocean Lenders.
OAK HILL FIELD
The Company owns approximately 793 gross (698 net) acres in the Oak
Hill Field in Gregg and Rusk Counties, Texas. The Company is the operator. This
prospect produces from the Lower Cotton Valley sands at depths of approximately
10,150 to 10,500 feet and from the Upper Cotton Valley sands at depths of
approximately 9,000 to 10,000 feet. The Company has completed a recompletion
program covering six wells and involving up to eleven distinct zones. Six
recompleted zones have been fracture stimulated and have increased the Company's
net production by over 1,100 MCFD. Additionally, the Company expects an increase
of approximately 800 MCFD net production when the original producing interval is
reactivated and the pressures across the zones equalize. There are currently six
producing wells in Oak Hill Field owned by the Company.
RAYBURN
The Company owns approximately 3,048 gross (1,068 net) acres and has
options for oil and gas leases on an additional 4,843 gross (3,886 net) acres in
the Rayburn Prospect in Liberty Co., Texas. The Company is the operator. This
prospect is within a 30 square mile 3-D survey acquired in 1998 of which the
Company intends to sell up to 60% to industry partners. The objectives are sands
primarily in the Wilcox, Cockfield and Miocene formations ranging in depth from
2,000 to 16,000 feet.
47
<PAGE>
OIL AND GAS RESERVES
The following table sets forth information regarding estimated oil and
gas reserve quantities, reserve values and discounted future net revenues as
estimated by the Company's independent engineering consultant, Lenser &
Associates, as of January 1, 1999.
There are numerous uncertainties inherent in estimating quantities of
proven reserves and projecting future rates of production and timing of
development expenditures. The following reserve information represents estimates
only and should not be construed as being exact.
<TABLE>
<CAPTION>
Present Value of
Estimated Future
Net Revenues
Gas Before Income
Equivalent Estimated Taxes
(MMCFE) Future Net (Discounted at
Gas (MMCF) Oil (MBO) (1) Revenue (2) 10 Percent)
------------ ---------- --------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Proved developed
reserves: (3)
Louisiana (5) 87 75 541 $ 349 $ 311
Mississippi 15,940 279 17,611 $ 30,772 $ 24,373
Texas 4,182 55 4,516 $ 5,292 $ 3,473
------------ ---------- --------------- ----------------- ------------------
20,209 409 22,668 $ 36,413 $ 28,157
------------ ---------- --------------- ----------------- ------------------
Proved undeveloped
reserves: (4)
Louisiana (5) 1,359 119 2,072 $ 1,093 $ 362
Mississippi 14,837 56 15,171 $ 25,816 $ 17,154
Texas -- -- -- $ -- $ --
------------ ---------- --------------- ----------------- ------------------
16,196 175 17,243 $ 26,909 $ 17,516
------------ ---------- --------------- ----------------- ------------------
Total proved
reserves 36,405 584 39,911 $ 63,323 $ 45,673
============ ========== =============== ================= ==================
</TABLE>
- -----------------------------------
(1) Oil production is converted to MCFE at the rate of six MCF of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas
and oil.
(2) Estimated future net revenue represents estimated future gross revenue to
be generated from the production of proved reserves, net of estimated
production and future development costs, using prices and costs in effect
as of January 1, 1999. The amounts shown do not give effect to expenses
unrelated to property, such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization. The estimates shown do not include amounts dedicated to Shell
Capital pursuant to the Shell Production Payment (see description of Shell
Production Payment above), but do include the effect of the EnCap NPI which
vested on January 1, 1999. The EnCap NPI comprises a 6.25% interest in the
producing Byrd #1and Howell #1.
(3) "Proved Developed Reserves" means those reserves estimated as recoverable
under current technology and projected economic conditions, from that
portion of a reservoir that can reasonably be evaluated as economically
productive on the basis of analysis of drilling, geological, geophysical
and to be obtained by enhanced recovery processes demonstrated to be
economic and technically successful in the subject reservoir.
48
<PAGE>
(4) "Proved Undeveloped Reserves" mean those reserves estimated as recoverable
under current technology and projected economic conditions from that
portion of a reservoir that can reasonably be evaluated as technologically
productive, but which requires the drilling and completion of a well to
initiate production.
(5) In May 1999, the Company sold its interest in the Lisbon Field, which
accounted for all of the proved developed and undeveloped reserves in
Louisiana.
ACREAGE
The following table sets forth as of December 31, 1998, the gross and
net acres of developed and undeveloped oil and gas acreage that the Company
holds. Additionally, the data set forth below is based on the Company's before
pay-out working interests. In certain cases, the Company has a greater after
pay-out working interest. In certain other cases, the Company has only an after
pay-out working interest. As such, the amount of gross and net acreage will
increase when and if certain wells pay out.
<TABLE>
<CAPTION>
DEVELOPED (1) UNDEVELOPED (2)
------------------------------------- ---------------------------------------
Gross Net Gross Net
Acres Acres Acres Acres
(3) (4) (3) (4)
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
STATE
Louisiana(5)............ 6,254 1,839 6,922 383
Mississippi............. 2,080 833 42,368 21,303
New Mexico.............. 160 12 -- --
Texas................... 2,573 1,243 11,730 5,359
---------------- ----------------- ----------------- ------------------
Total................... 11,067 3,927 61,020 27,045
================ ================= ================= ==================
</TABLE>
- -----------------------------
(1) "Developed acreage" is that acreage which is spaced or assignable to
productive wells.
(2) "Undeveloped acreage" is leased acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas regardless of whether or not such
acreage contains proved reserves.
(3) "Gross acres" means an acre in which the Company owns a working
interest. When used in conjunction with acreage under options, it means
an acre in which the Company will acquire a working interest if and
when the option is executed.
(4) "Net acres" means the sum of the fractional working interest owned in
gross acres expressed as whole numbers and fractions thereof.
(5) The number of gross and net acres in Louisiana includes the acreage
associated with the Lisbon Field which the Company sold after December
31, 1998.
49
<PAGE>
PRODUCTIVE OIL AND GAS WELLS
The following table sets forth certain information regarding the
Company's ownership as of December 31, 1998 of productive oil and gas wells,
operated and non-operated, in the areas indicated. Additionally, the data below
are based on the Company's before pay-out working interest. In some cases the
Company has only an after pay-out working interest. As such, the number of gross
and net wells will increase when and if certain wells pay-out.
<TABLE>
<CAPTION>
GAS OIL
----------------------------- -----------------------------
Gross Net Gross Net
Wells Wells Wells Wells
(1) (2) (1) (2)
----------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
STATE
Louisiana.......... 17 8.78354792 1 0.04770200
Mississippi........ 4 2.05204750 1 0.03730014
New Mexico......... 1 0.07500000 -- --
Texas.............. 10 6.09927790 1 0.50000000
----------- -------------- ------------- ------------
Total.............. 32 17.00987332 3 0.58500214
=========== ============== ============= ============
</TABLE>
- --------------------------
(1) "Gross wells" means a well in which the Company owns a working
interest. The number of gross wells is the total number of wells in
which a working interest is owned.
(2) "Net wells" means the sum of the fractional working interest owned in
gross wells expressed as whole numbers and fractions thereof.
(3) The number of gross and net wells in Louisiana includes wells located
in the Lisbon Field which the Company sold after December 31, 1998.
DRILLING ACTIVITY
The Company participated in one Gross (0.14 Net) dry and three Gross
(1.8383 Net) productive exploratory wells and three Gross (0.25954 Net)
productive development wells during the year ended December 31, 1998. For the
four-month period ended December 31, 1997, the Company drilled one Gross
(0.48500 Net) productive exploratory well, two Gross (1.3575 Net) dry
exploratory wells and three Gross (0.342202 Net) productive development wells.
For the ten months ended August 31, 1997, the Company drilled one Gross (0.14725
Net) productive exploratory well and one Gross (0.20110 Net) dry exploratory
well. The Company is entitled to a working interest in certain additional wells
completed during these time periods when and if those wells pay-out.
Furthermore, the number of Net wells was calculated based-on the Company's
before pay-out working interest and in some cases the Company will have a
greater working interest or is entitled to a working interest in certain wells
completed during these time periods when and if these wells pay-out. In certain
cases, the Company, subsequent to completion, sold the prospect on which certain
of these wells were drilled. As such, while the Company did participate in the
drilling, it does not currently have an interest in all of the productive wells
mentioned above.
On December 31, 1998, the Company was drilling two Gross (1.2595076
Net) development wells. These wells are step out wells from the Byrd discovery
well at Oakvale Dome Field in Mississippi.
50
<PAGE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the
production volumes, average prices received and average production costs
associated with the Company's sale of oil and gas for the periods indicated.
<TABLE>
<CAPTION>
Twelve Months Four Months Ten Months
Three Months Ended Ended Ended
Ended December 12, December 31, August 31,
March 31, 1999 1998 1997 1997
-------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net Production:
Oil (BBL) 17,213 40,662 4,506 9,281
Gas (MCF) 712,171 2,009,550 223,683 83,810
Gas equivalent (MCFE) 815,449 2,253,522 250,719 139,493
Average sales price:
Oil ($ per BBL) $ 1.70 $ 10.83 $ 18.54 $ 20.28
Gas ($ per MCF) $ 9.50 $ 2.24 $ 2.79 $ 3.05
Gas Equivalent ($ per MCFE) $ 1.68 $ 2.20 $ 2.82 $ 3.18
Average production expenses
($ per MCFE)(1) $ 0.17 $ 0.38 $ 0.17 $ 0.33
</TABLE>
- --------------------------
(1) Average production costs, excluding severance taxes.
CAEX AND 3-D SEISMIC TECHNOLOGY
The Company, either directly or through other prospect participants,
uses 3-D seismic data and CAEX technology to collect and analyze geological,
geophysical, engineering, production and other data obtained about potential gas
or oil prospects. The Company uses this technology to correlate density and
sonic characteristics of subsurface formations obtained from 2-D seismic surveys
with like data from similar properties, and uses computer programs and modeling
techniques to determine the likely geological composition of a prospect and
potential locations of hydrocarbons.
Once all available data has been analyzed to determine the areas with
the highest potential within a prospect area, the Company may conduct 3-D
seismic surveys to enhance and verify the geological interpretation of the
structure, including its location and potential size. The 3-D seismic process
produces a three-dimensional image based upon seismic data obtained from
multiple horizontal and vertical points within a geological formation. The
calculations needed to process such data are made possible by computer programs
and advanced computer hardware.
While large oil companies have used 3-D seismic data and CAEX
technologies for approximately 20 years, these methods were not affordable by
smaller, independent oil and gas companies until more recently, when improved
data acquisition equipment and techniques and computer technology became
available at reduced costs. The Company believes that its use of 3-D seismic
data and CAEX technology may provide it with certain advantages in the
exploration process over those companies that do not use this technology. These
advantages include better delineation of the subsurface, which can reduce
exploration risks and help optimize well locations in productive reservoirs. The
Company believes these advantages can be readily validated based upon general
industry experience. Because computer modeling generally provides clearer and
more accurate projected images of geological formations, the Company believes it
is better able to identify potential locations of hydrocarbon accumulations and
the desirable locations for wellbores. However, the Company has not used the
technology extensively enough to arrive at any conclusion regarding the
Company's ability to interpret and use the information developed from the
technology.
51
<PAGE>
CUSTOMERS
During the year ended December 31, 1998, H&N Gas Ltd. "H&N Gas" and
Tejas Gas Marketing Co. accounted for approximately 51% and 24%, respectively of
the Company's total revenue. For the four month period ended December 31, 1997,
H&N Gas and KCS Resources, Inc. ("KCS") accounted for 75% and 10%, respectively,
of the Company's total revenue. For the ten months ended August 31, 1997, KCS,
Samedan Oil Corporation and Energy Operating Limited Partnership accounted for
50%, 30% and 15%, respectively, of the Company's total revenue. No other
purchasers accounted for more than 10% of the Company's total revenue in the
periods indicated above. The Company does not believe the loss of any existing
purchaser would have a material adverse effect on the Company.
MARKETING
The Company markets its natural gas and oil through monthly spot sales.
Because sales made under spot sales contracts result in fluctuating revenues to
the Company depending upon the market price of oil and gas, the Company from
time to time enters into various forward contracts covering a portion of its
production to minimize the fluctuations and the effect of price declines. Under
the terms of the term production payment with Shell Capital, the Company markets
its natural gas through Coral Energy Resources, L.P. ("Coral") whereby Coral
markets at both fixed and floating prices.
COMPETITION
The oil and gas industry is highly competitive in all of its phases.
The Company encounters strong competition from other oil and gas companies in
all areas of its operations, including the acquisition of exploratory and
producing properties, the permitting and conducting of seismic surveys and the
marketing of oil and gas. Many of these competitors possess greater financial,
technical and other resources than the Company. Competition for the acquisition
of producing properties is affected by the amount of funds available to the
Company, information about producing properties available to the Company and any
standards the Company establishes from time to time for the minimum projected
return on investment. Competition also may be presented by alternative fuel
sources, including heating oil and other fossil fuels. There has been increased
competition for lower risk development opportunities and for available sources
of financing. In addition, the marketing and sale of natural gas and processed
gas are competitive. Because the primary markets for natural gas liquids are
refineries, petrochemical plants and fuel distributors, prices generally are set
by or in competition with the prices for refined products in the petrochemical,
fuel and motor gasoline markets.
REGULATION
GENERAL
The oil and gas industry is extensively regulated by federal, state and
local authorities. In particular, oil and gas production operations and
economics are affected by environmental protection statutes, tax statutes and
other laws, rules and regulations relating to the petroleum industry, as well as
changes in such laws, changing rules and regulations and the interpretations and
applications of such laws, rules and regulations. Oil and gas industry
legislation and agency regulation are under constant review for amendment and
expansion for a variety of political, economic and other reasons. Numerous
regulatory authorities, and federal, state and local governments issue rules and
regulations binding on the oil and gas industry, some of which carry substantial
penalties for failure to comply. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and, consequently,
affects its profitability. The Company believes it is in compliance with all
federal, state and local laws, regulations and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.
SEISMIC PERMITS
Current law in Louisiana requires permits from owners of at least an
undivided 80% interest in each tract over which the Company intends to conduct
seismic surveys. As a result, the Company may not be able to conduct seismic
surveys covering its entire area of interest in that state. Moreover, 3-D
seismic surveys typically are conducted from various locations both inside and
outside the area of interest to obtain the most detailed data of the
52
<PAGE>
geological features within the area. To the extent that the Company is unable
to obtain permits to access locations to conduct the seismic surveys, the
data obtained may not be as detailed as might otherwise be available. In
addition, a recent decision of a federal court in Louisiana casts doubt on
traditional seismic permitting practices, which decision, in some instances,
could lead to the surface owner claiming ownership of the data.
EXPLORATION AND PRODUCTION
The Company's operations are subject to various regulations at the
federal, state and local levels. Such regulations include (i) requiring permits
for the drilling of wells; (ii) maintaining bonding requirements to drill or
operate wells; and (iii) regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilled, the plugging and abandoning of wells and the disposal
of fluids used in connection with well operations. The Company's operations also
are subject to various conservation regulations. These include the regulation of
the size of drilling and spacing units, the density of wells that may be
drilled, and the unitization or pooling of oil and gas properties. In addition,
state conservation laws establish maximum rates of production from oil and gas
wells, generally prohibiting the venting or flaring of gas, and impose certain
requirements regarding the ratability of production. The effect of these
regulations is to limit the amount of oil and gas the Company can produce from
its wells and to limit the number of wells or the locations at which the Company
can drill.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION
Federal legislation and regulatory controls in the United States have
historically affected the price of the natural gas produced by the Company and
the manner in which such production is marketed. The transportation and resale
of natural gas in interstate commerce are regulated by the Federal Energy
Regulatory Commission (the "FERC") pursuant to the Natural Gas Act and the
Natural Gas Policy Act of 1978 (the "NGPA"). Sales of the Company's natural gas
currently are made at market prices, subject to applicable contract provisions
and are not subject to federal or state price control. The FERC's jurisdiction
over natural gas transportation was unaffected by the Decontrol Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and transportation of natural gas. Commencing in April
1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (collectively,
"Order No. 636"), which, among other things, required interstate pipelines to
"restructure" their services to provide transportation separate or "unbundled"
from the pipelines' sales of gas. Also, Order No. 636 requires interstate
pipelines to provide open-access transportation on a nondiscriminatory basis
that is equal for all natural gas shippers. Order No. 636 has been implemented
through decisions and negotiated settlements in individual pipeline services
restructuring proceedings. In many instances, the result of Order No. 636 and
related initiatives has been to substantially reduce or eliminate the interstate
pipelines' traditional role as wholesalers of natural gas, and has substantially
increased competition and volatility in natural gas markets. The FERC has issued
final orders in virtually all Order No. 636 pipeline restructuring proceedings.
In July 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636 and remanded certain issues for further
explanation or clarification. Numerous petitions for review of the individual
pipeline restructuring orders are currently pending in that court. The issues
remanded for further action do not appear to materially affect the Company.
Proceedings on the remanded issues are currently ongoing before the FERC
following its issuance of Order No. 636-C in February 1997. Although it is
difficult to predict when all appeals of pipeline restructuring orders will be
completed or their impact on the Company, the Company does not believe that it
will be affected by the restructuring rule and orders any differently than other
natural gas producers and marketers with which it competes.
Although Order No. 636 does not regulate natural gas production
operations, the FERC has stated that Order No. 636 is intended to foster
increased competition within all phases of the natural gas industry. It is
unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company and its natural gas
marketing efforts. Although Order No. 636 could provide the Company with
additional market access and more fairly applied transportation service rates,
terms and conditions, it could also subject the Company to more restrictive
pipeline imbalance tolerances and greater penalties for violation of those
tolerances.
53
<PAGE>
The Company does not believe, however, that it will be affected by any action
taken with respect to Order No. 636 materially differently than other natural
gas producers and marketers with which it competes.
The FERC has recently announced its intention to re-examine certain of
its transportation-related policies, including the appropriate manner for
setting rates for new interstate pipeline construction, the manner in which
interstate pipeline shippers may release interstate pipeline capacity under
Order No. 636 for resale in the secondary market, the price that shippers can
charge for their released capacity, and the use of negotiated and market-based
rates and terms and conditions for interstate gas transmission. Several
pipelines have obtained FERC authorization to charge negotiated rates as an
alternative to traditional, cost-of-service rate making methodology. In February
1997, the FERC announced a broad inquiry into issues facing the natural gas
industry to assist the FERC in establishing regulatory goals and priorities in
the post-Order No. 636 environment. In December 1997, the FERC requested
comments on the financial outlook of the natural gas pipeline industry,
including among other matters, whether the FERC's current rate making policies
are suitable in the current industry environment. In April 1998, the FERC issued
a new rule to further standardize pipeline transaction tariffs that, as the
result of newly standardized provisions regarding firm intra day transportation
nominations, could adversely affect the reliability of scheduled interruptible
transportation service on some pipelines. While any resulting FERC action would
affect the Company only indirectly, any new rules and policy statements may have
the effect of enhancing competition in natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC and state
regulatory bodies. The Company cannot predict when or if any such proposals
might become effective, or their effect, if any, on the operations of the
Company. The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue indefinitely. The
regulatory burden on the oil and natural gas industry increases the Company's
cost of doing business and, consequently, affects its profitability and cash
flow. In as much as such laws and regulations are frequently expanded, amended
or reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.
LOUISIANA LEGISLATION
The Louisiana legislature passed Act 404 in 1993, which permits a party
transferring an oil field site to establish a site-specific trust account for
such oil field. If the site-specific trust account is established in accordance
with the requirements of the statute, the party transferring the oil field site
may not thereafter be held liable by the state for any site restoration costs or
actions associated with the transferred oil field site. The parties to a
transfer may elect not to establish a site-specific trust account. However, in
the absence of such an account, the transferring party will continue to have
liability for the costs of restoration of the site. If the parties to a transfer
elect to establish a site-specific trust account pursuant to the statute, the
Louisiana Department of Natural Resources (the "DNR") requires an oil field site
restoration assessment to be made at the time of the transfer or within one year
thereafter, to determine the site restoration requirements existing at the time
of transfer. Based upon the site restoration assessment, the parties to the
transfer must propose to the DNR a funding schedule for the site-specific trust
account, providing for some contribution to the account at the time of transfer
and at least quarterly payment thereafter. If the DNR approves the establishment
and funding of the site-specific trust account, the purchaser will thereafter be
the responsible party to the state, except that the failure of a transferring
party to make a good faith disclosure of all oil field site conditions existing
at the time of the transfer will render that party liable for the costs of
restoration of such undisclosed conditions in excess of the balance of the
site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES
The FERC also regulates rates and service conditions for interstate
transportation of crude oil, liquids and condensate, which can affect the amount
the Company receives from the sale of these products. Rates for such
transportation are generally subject to an indexing system under which rates may
be increased as long as they do not exceed an index rate that is tied to
inflation. Over time, this indexing system could have the effect of increasing
the cost of transporting crude oil, liquids and condensate by pipeline. Sales of
crude oil, condensate and gas liquids by the Company are not regulated and are
made at market prices. The price the Company receives from the sale of these
products is affected by the cost of transporting the products to market.
54
<PAGE>
ENVIRONMENTAL MATTERS
The Company's oil and natural gas exploration, development and
production operations are subject to stringent federal, state and local laws
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Numerous governmental agencies, such as the
Environmental Protection Agency (the "EPA"), issue regulations to implement and
enforce such laws, which often require difficult and costly compliance measures
that carry substantial civil and criminal penalties for failure to comply. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentrations of various
substances that can be released into the environment in connection with drilling
and production activities, limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands, ecologically sensitive and other
protected areas, require some form of remedial action to prevent pollution from
former operations, such as plugging abandoning wells, and impose substantial
liabilities for pollution resulting from the Company's operations. In addition,
these laws, rules and regulations may restrict the rate of oil and natural gas
production below the rate that would otherwise exist. The regulatory burden on
the oil and gas industry increases the cost of doing business and consequently
affects its profitability. Changes in environmental laws and regulations occur
frequently, and any changes that result in more stringent and costly waste
handling, disposal or cleanup requirements could adversely affect the Company's
operations and financial position, as well as those of the oil and gas industry
in general. While management believes that the Company is in substantial
compliance with current applicable environmental laws and regulations and the
Company has not experienced any material adverse effect from compliance with
these environmental requirements, there is no assurance that this will continue
in the future.
The primary environmental statutory and regulatory programs that affect
the Company's operations include the following:
The Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA") also known as "Superfund", imposes liability without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include (i) the current owner and
operator of a facility from which hazardous substances are released, (ii) owners
and operators of the facility at the time the disposal of hazardous substances
took place, (iii) generators of hazardous substances who arranged for the
disposal or treatment at or transportation to such facility of hazardous
substances and (iv) transporters of hazardous substances to disposal or
treatment facilities selected by them.
Under CERCLA, such persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances or other
pollutants into the environment. Furthermore, although petroleum, including
crude oil and natural gas, is exempt from CERCLA, at least two courts have ruled
that certain wastes associated with the production of crude oil may be
classified as "hazardous substances" under CERCLA, and thus such wastes may
become subject to liability and regulation under CERCLA. Regulatory programs
aimed at remediation of environmental releases could have a similar impact on
the Company.
The Federal Water Pollution Control Act of 1972 ("FWPCA") as amended,
also known as the Clean Water Act (the "CWA"), imposes restrictions and strict
controls regarding the discharge of pollutants, including produced waters and
other oil and gas wastes, into waters of the United States (as defined in the
CWA). The discharge of pollutants into regulated waters is prohibited, except in
accordance with the terms of a permit issued by the EPA or the state. These
proscriptions also prohibit certain activities in wetlands unless authorized by
a permit issued by the U.S. Army Corps of Engineers. Sanctions for unauthorized
discharges include administrative, civil and criminal penalties, as well as
injunctive relief.
The Oil Pollution Act of 1990 (the "OPA") amends certain provisions of
the CWA, and other statutes as they pertain to the prevention of and response to
spills or discharges of hazardous substances or oil into navigable waters. Under
the OPA, a person owning or operating a facility or equipment (including land
drilling equipment) from which there is a discharge or threat of a discharge of
oil into or upon navigable waters or adjoining shorelines is liable, regardless
of fault, as a "responsible party" for removal costs and damages. Federal law
impose strict, joint and several liability on facility owners for containment
and clean-up cost and certain other damages, including natural resource damages,
arising from a spill.
55
<PAGE>
The EPA is also authorized to seek preliminary and permanent injunctive
relief and, in certain cases, criminal penalties and fines. State laws governing
the control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground. If a discharge occurs at a well site at which
the Company is conducting production operations, the Company may be exposed to
claims that it is liable under the OPA, the CWA or similar state laws.
The Resource Conservation and Recovery Act ("RCRA"), as amended,
generally does not regulate most wastes generated by the exploration and
production of oil and gas. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by the EPA or state
agencies as solid waste. Moreover, ordinary industrial wastes, such as paint
wastes, waste solvents, laboratory wastes, and waste compressor oils, may be
regulated as hazardous waste. Pipelines used to transfer oil and gas may also
generate some hazardous wastes. Although the costs of managing solid and
hazardous waste may be significant, the Company does not expect to experience
more burdensome costs than similarly situated companies involved in oil and gas
exploration and production.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the oil and gas industry, liens for current taxes not
yet due and other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations, including a title opinion covering the drill site by local
counsel, generally are made before commencement of drilling operations. With
respect to acquisitions of producing properties, it is customary to review title
opinions, review engineering reserve reports and conduct environmental and
operational reviews before the closing of the purchase.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations, and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations.
The Company maintains an oil and gas lease operator insurance policy
that insures the Company against certain sudden and accidental risks associated
with drilling, completing and operating its wells. In addition, we require
certain parties conducting operations for us to maintain general comprehensive
liability policies with contractual coverage to support the contractors'
obligations to indemnify and defend us in certain circumstances. There can be no
assurance that this insurance will be adequate to cover any losses or exposure
to liability. The Company also carries comprehensive general liability policies
and an umbrella policy. Although the Company believes that the amount of
coverage it maintains is customary in the industry, it does not provide complete
coverage against all operating risks. An uninsured or partially insured claim,
if successful and of sufficient magnitude, could have a material adverse effect
on the Company and its financial condition. If the Company experiences
significant claims or losses, the Company's insurance premiums could be
increased, which may adversely affect the Company and its financial condition,
or limit the ability of the Company to obtain coverage. Any difficulty in
obtaining coverage may impair the Company's ability to engage in its business
activities.
LEGAL PROCEEDINGS
The Company is involved in routine litigation arising in the ordinary
course of business. Management believes that the results of each proceedings,
individually and in the aggregate, will not have a material adverse effect on
the Company's financial position or results of operations.
56
<PAGE>
FACILITIES
The Company maintains approximately 25,100 square feet of office space
in Houston, Texas, which is leased at an annual rent of $396,187. The lease
expires January 31, 2003. The Company believes it will be able to renew the
lease on acceptable terms, and is currently offering up to half of the space for
sublease.
EMPLOYEES
The Company has 21 full-time employees in its Houston, Texas office as
of May 31, 1999. Their functions include management, production, engineering,
geology, geophysics, land, gas marketing, accounting, financial planning and
administration. Certain operations of the Company's field activities are
accomplished through independent contractors who are supervised by the Company.
The Company believes its relations with its employees and contractors are good.
No employees of the Company are represented by a union.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers. Officers of the Company are elected by the
board of directors and serve at the discretion of the board. All of the current
directors serve until the next annual shareholders' meeting or until their
successors have been duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Prentis B. Tomlinson, Jr. (1) 56 Chairman of the Board and Chief Executive Officer
Robert S. Herlin (1)(2) 44 Director, Senior Vice President and Chief Financial Officer
Todd E. Grabois 39 Vice President, Treasurer & Secretary
Robert L. Zorich (1) 49 Director
Yale Fisher (2) 53 Director
David P. Quint (3) 48 Director
Gary Peterson (3) 53 Director
Russell Cleveland (3) 60 Director
</TABLE>
- --------------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) New directors elected by the Board on June 2, 1999 to fill vacant
seats. Elected to serve until next annual shareholders' meeting.
PRENTIS B. TOMLINSON, JR. has been involved in the oil and gas industry
for the past 30 years and has been involved with the Company as its President
and Chief Executive Officer since its inception in October 1996. Mr. Tomlinson
served as Chairman of Texstar North America, Inc. from 1984 to 1995, founded and
served as Chairman of TGS Geophysical Company, Inc. from 1983 to 1993 and served
as Chairman and President of Tomlinson Interests, Inc. from 1973 to 1983. Mr.
Tomlinson commenced his career in the oil and gas industry as a geophysicist
with Western Geophysical Inc. in 1969.
ROBERT S. HERLIN has been Senior Vice President, Chief Financial
Officer and Director of the Company since November 1997, when he joined the
Company. Mr. Herlin has 17 years experience in finance, planning and corporate
development in the oil and gas industry with several companies, including his
own management consulting firm. Most recently, he was vice president of Enron
Liquids Services, a subsidiary of Enron Corporation, and Manager of Planning and
Investor Relations for Kelley Oil & Gas Corporation.
TODD E. GRABOIS has been Vice President, Treasurer and Secretary of the
Company since November 1997. Prior, thereto, Mr. Grabois served as Chief
Financial Officer of the Company from September 1997 until November 1997 and
Director of the Company from inception in October 1996 until November 1997. He
has served in various other positions with the Company or its predecessors since
1984.
57
<PAGE>
ROBERT L. ZORICH has been a Director of the Company since November
1997. He is the Managing Director and co-founder of EnCap, a Houston-based
venture capital and mezzanine fund for the energy industry. Before founding
EnCap, Mr. Zorich was a senior officer in the energy group of Republic Bank.
EnCap recently announced its sale to El Paso Field Services.
YALE FISHER has been a Director of the Company since January 1997. He
is, and has been, an independent investment banker based in California since
July 1994. Before that he was head of trading at Bank of America in Los Angeles
and San Francisco, California and New York, New York.
DAVID P. QUINT was elected by the Board to serve as a director on
June 2, 1999. Mr. Quint has been Managing Director of RP&C International, Inc.,
an international investment banking firm based in London and Zurich, for over
five years.
GARY PETERSON, was elected by the Board to serve as a director on
June 2, 1999. Mr. Peterson has been Managing Director of EnCap, a
Houston-based venture capital and mezzanine fund for the energy industry for
the past five years.
RUSSELL CLEVELAND was elected by the Board to serve as a director on
June 2, 1999. Mr. Cleveland is the principal founder and the majority
shareholder of Renaissance Capital Group Inc. Renaissance Capital provides
capital to emerging publicly owned companies. Mr. Cleveland currently serves as
President of the Managing General Partner of Renaissance Capital Partners,
Limited., President and Director of Renaissance Capital Growth & Income Fund
III, Inc. (which is traded on NASDAQ), and a Director of Renaissance U.S. Growth
and Income Trust PLC, which is traded on the London Stock Exchange. Mr.
Cleveland also currently serves as a director of Danzer Corp. (formerly Global
Environmental Corp.), Feminique, Inc. (formerly Biopharmaceutics, Inc.), Tutogen
Medical, Inc., Bentley Pharmaceuticals, Inc., and Technology Research, Inc.
AGREEMENT RELATING TO ELECTIONS OF DIRECTORS
Pursuant to an agreement dated December 16, 1998 (the "December 1998
Funding Agreement") between the Company, Mr. Tomlinson and EnCap, the Company
agreed to make certain changes in its Bylaws restricting the number of directors
to seven. The Agent now has the right to designate up to two directors to serve
on the board of directors during a two year period. The Agent has exercised the
board representation right described above.
58
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation, including bonuses, paid by
the Company during the years ended December 31, 1998, 1997 and 1996 to the Chief
Executive Officer and to those executive officers whose aggregate cash
compensation exceeded $100,000 during the last fiscal year other than the Chief
Executive Officer of the Company (collectively the "Named Executive Officers").
<TABLE>
<CAPTION>
Number of All
Year Ended Annual Compensation Securities Other
December 31, ----------------------------- Underlying Compensation
Name and Principal Position (1) Salary Bonus Options (2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr. (6) 1998 $243,750 -- -- $3,400
Chairman & Chief 1997 150,000 210,000 1,621,000 4,750
Executive Officer 1996 (3) 25,000 -- -- --
Ernest J. LaFlure (5) 1998 200,000 -- -- 2,500
Former Director, President 1997 (4) 46,282 100,000 300,000 --
And Chief Operating Officer 1996 -- -- -- --
Robert S. Herlin (6) 1998 165,000 -- -- 5,250
Director, Senior Vice 1997 (4) 14,884 110,000 300,000 --
President and Chief 1996 -- -- -- --
Financial Officer
Todd E. Grabois (6) 1998 105,000 -- -- 4,865
Vice President, 1997 85,000 -- 140,000 4,750
Treasurer and Secretary 1996 69,462 -- -- --
</TABLE>
- --------------------------------
(1) In 1997, the Company changed its fiscal year end from August 31 to
December 31.
(2) Other compensation includes Company contributions made to each person's
respective account under the Company's 401(k) plan.
(3) Total compensation to Mr. Tomlinson for the year ended December 31,
1996 was $150,000, including amounts paid before the inception of the
Company.
(4) Salary for Messrs. LaFlure and Herlin represent amounts paid from date
of hire to the end of the year.
(5) Mr. LaFlure resigned as President and Chief Operating Officer of the
Company effective February 15, 1999; and as Director in April 1999.
(6) Effective February 1, 1999, the salaries of Messrs. Tomlinson, Herlin
and Grabois were reduced to $184,248, $105,000 and $84,000,
respectively. Effective May 17, 1999, the salary of Mr. Grabois was
reinstated.
DIRECTOR COMPENSATION
Certain non-employee directors are individually awarded stock options
and receive cash compensation at the Board's discretion.
EMPLOYMENT AND TERMINATION AGREEMENTS
The Company entered into a three-year employment agreement with Mr.
LaFlure on September 30, 1997 pursuant to which Mr. LaFlure served as the
Company's President and Chief Operating Officer.
Under the employment agreement, Mr. LaFlure received a monthly salary
of $16,666.67 and an initial bonus of $100,000. Mr. LaFlure was entitled to
participate in all other employee compensation and welfare benefit plans and
programs available to the Company's other employees and executive officers,
including, but not limited to, health, dental and 401(k) plans. If the Company
terminated the employment agreement other than for cause or for
59
<PAGE>
disability or death (as each such term is defined in the agreement) at any
time before the expiration thereof, then the Company was obligated to pay Mr.
LaFlure $1,500,000 minus (i) the amount of monthly salary for each month Mr.
LaFlure was paid; (ii) all cash bonuses received by Mr. LaFlure before the
termination; and (iii) the value of his stock options, such value being the
difference between the option price and the value of the option shares as of
the date of termination.
The Company terminated Mr. LaFlure's employment without cause effective
January 15, 1999 and requested Mr. LaFlure to resign all of his positions with
the Company except his position as a director of the Company. Mr. LaFlure
resigned as a director in April of 1999. Pursuant to a settlement agreement, Mr.
LaFlure was entitled to receive $1,150,000 payable as follows:
- - Payments of $10,000 per month for 12 months commencing February 15, 1999;
- - Payment of $400,000 on January 15, 2000
- - Payment of $200,000 on July 15, 2000; and
- - Payment of the balance due under his agreement, as adjusted, (as
described in the immediately following paragraphs,) on January 15, 2001.
In addition, Mr. LaFlure was granted new stock options in lieu of the
previous options for 300,000 shares of Common Stock granted on December 18,
1997. The new stock option agreement dated February 15, 1999 is for 500,000
shares of Common Stock at an exercise price of Cdn.$0.53 per share. The
remaining amounts due under the settlement agreement payable on January 15,
2001, shall be reduced by the difference between the option price under the new
option agreement for 500,000 shares of Common Stock and the 500,000 option
shares as of the date the payment of the balance of the agreed amounts. All cash
payments payable to Mr. LaFlure shall be reduced by applicable federal, state of
local withholding taxes. The Company also agreed that at its sole cost and
expense to continue current health insurance coverage for Mr. LaFlure as
required by applicable law until January 15, 2000.
The Company entered into a two-year employment agreement with Mr.
Herlin on November 15, 1997. Under the employment agreement, Mr. Herlin receives
an initial monthly salary of $11,250 and an initial bonus of $110,000. Mr.
Herlin is entitled to participate in all other employee compensation and welfare
benefit plans and programs available to the Company's other employees and
executive officers, including, but not limited to, health, dental and 401(k)
plans. If the Company terminates the employment agreement other than for cause,
disability or death at any time before the expiration thereof, then the Company
must pay to Mr. Herlin the remaining amount of salary accrued or otherwise to be
paid throughout the remainder of the term of the agreement; provided that the
remaining amount may be no less than 12 months of Mr. Herlin's salary. If such
termination is due to a change of control of the Company, the minimum remaining
amount must be equal to 24 months of Mr. Herlin's salary.
In the event of termination of Mr. Herlin for cause, such agreement
terminates immediately and the Company's sole remaining obligation is to pay any
amounts accrued thereunder through the date of termination.
On December 16, 1998, the Company entered into an agreement with EnCap,
the largest secured creditor of the Company, that should Mr. Tomlinson's
employment be terminated, except for cause, following certain events, then EnCap
will make a cash payment to Mr. Tomlinson of $1.0 million within 30 days of
severance, enter into a consulting agreement with a three year term providing
for payments of $185,000 per annum, and grant Mr. Tomlinson an overriding
royalty interest in certain properties. These payments are obligations of the
Company and EnCap has agreed to provide financing to fund such payment
obligation.
OPTION REPRICING
In February 19, 1999, the board re-priced stock options previously
awarded to certain employees of the Company, including the Named Executive
Officers, one director of the Company and one contract employee. Options were
re-priced at CDN. $0.50, which was the previous 10-day average closing price of
the Common Stock as reported on Canada Stockwatch. Such re-pricing of options
held by the Named Executive Officers and the director is subject to shareholder
and regulatory approval.
60
<PAGE>
OPTION GRANTS
No options were granted to the Named Executive Officers in 1998. See
"Management-Executive Compensation."
OPTION EXERCISE AND YEAR-END VALUES
The following table provides information with respect to options to
purchase Common Stock exercised by the Named Executive Officers during 1998 and
with respect to the number and value of unexercised options held by the Named
Executive Officers at December 31, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-The-Money Options at
Number of Unexercised Options at December 31, 1998
Shares Value December 31, 1998 CDN$
Acquired on Realized --------------------------------------------------------------------
Exercise CDN Exercisable (1) Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr. -- -- 983,700 -- -- --
Ernest J. LaFlure (2) -- -- 300,000 -- -- --
Robert S. Herlin -- -- 300,000 -- -- --
Todd Grabois -- -- 140,000 -- -- --
</TABLE>
- ---------------------------------
(1) All options held by employees of the Company as of February 19, 1999,
including Named Executive Officers, were re-priced to Cdn$0.50, subject to
shareholder approval.
(2) Subject to the terms of a settlement agreement of Mr. LaFlure's employment
contract, his original options were replaced with 500,000 options with an
exercise price of Cdn$0.53 and a term through January 15, 2001.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as at March 31,
1999, regarding the persons or companies known by the Company to own
beneficially, directly or indirectly, or exercise control or direction over 5%
or more of the issued Common Stock:
<TABLE>
<CAPTION>
Percentage of
issued and
Outstanding
Name Number of Shares Common Stock
- ------------------------------------------ --------------------- ---------------
<S> <C> <C>
Prentis B. Tomlinson, Jr. 13,240,603 (1) 35.90%
Encap Investors 3,228,269 (2) 9.05%
Donald W. Busby 2,406,685 (3) 6.70%
Heather Tomlinson 2,350,000 (4) 6.53%
</TABLE>
- ----------------------------------
(1) Includes:
(a) 1,193,000 shares in the name of Houston Trust, a trust of
which Mr. Tomlinson is the trustee and exercises control or
direction;
(b) 850,000 shares in the name of Ruston Trust, a trust which Mr.
Tomlinson is the trustee and exercises control or direction;
(c) 5,525,000 shares in the name of Slattery Trust, a trust of
which Mr. Tomlinson is the beneficiary;
(d) 2,452,774 shares in the name of Texstar Holdings LLC, a
private company controlled by Mr. Tomlinson;
(e) 1,933,910 shares in the name of Calibre, controlled by Mr.
Tomlinson; and
61
<PAGE>
(f) 983,700 shares issuable upon the exercise of stock options.
(2) Shares in the name of Lasco Energy Partners, L.P., an affiliate of
EnCap.
(3) Held through Boone Petroleum Inc., a private corporation wholly owned
by Mr. Busby.
(4) Includes 2,330,000 shares held in the name of Starbucks Trust, a trust
which Mrs. Tomlinson, wife of the Chairman and CEO, is the beneficiary.
As at March 31 1999, the directors, officers, promoters and other
members of management of the Company, as a group, beneficially owned, directly
or indirectly, 16,430,717 shares of Common Stock, representing 41.70% of the
issued and outstanding shares of the Common Stock of the Company.
SECURITIES SUBJECT TO POOLING AGREEMENTS
Pursuant to an agreement dated April 18, 1997, as amended on
September 11, 1997 (the "Pooling Agreement"), between the Company, certain
shareholders of the Company including Mr. Tomlinson and other senior
management of the Company, and Montreal Trust, the Company's registrar and
transfer agent, as well as the agent under the Pooling Agreement, a total of
10,342,497 shares of Common Stock were deposited on a pooled basis. In
addition, a total of 2,000,000 shares of Common Stock to be issued on
exercise of outstanding share purchase warrants were, once exercised, to be
deposited and held by Montreal Trust pursuant to the terms and conditions of
the Pooling Agreement. All Common Stock subject to the Pooling Agreement will
be released over a period of three years ending April 18, 2000, subject to
earlier release from the pool in certain circumstances. As of April 19, 1999,
a total of 313,000 shares of Common Stock are held by Montreal Trust pursuant
to the terms and conditions of the Pooling Agreement.
Pursuant to an agreement dated September 15, 1997 (the "Escrow
Agreement"), between the Company, certain shareholders of the Company, Mr.
Tomlinson, Mr. Busby and Montreal Trust, a total of 13,505,780 shares of Common
Stock were deposited with Montreal Trust to be held in escrow pursuant to the
Escrow Agreement. All Common Stock subject to the Escrow agreement will be
released in accordance with the policies of the Ontario Securities Commission.
As of April 19, 1999, a total of 10, 804,624 shares of Common Stock are held in
escrow by Montreal Trust pursuant to the Escrow Agreement.
Pursuant to an option agreement between Boone Petroleum Inc., a
corporation controlled by Mr. Busby, and Texstar Petroleum, L.L.C., a company
controlled by Mr. Tomlinson, Boone Petroleum Inc. granted Texstar Petroleum,
L.L.C. an option to purchase 1,200,000 shares of Common Stock from Boone
Petroleum Inc. The option was exercised and 1,100,000 shares of the Company's
Common Stock were transferred within escrow on September, 1998 to Texstar
Petroleum, L.L.C. As of April 19, 1999, the remaining 100,000 shares of Common
Stock have not been transferred within escrow.
Pursuant to an unsigned agreement dated October 9, 1997 (the "Pledge
Agreement"), between EnCap Energy, Montreal Trust, the Company, Texstar
Holdings, L.L.C. and the Slattery Trust, Texstar Holdings, L.L.C. and the
Slattery Trust granted to EnCap Energy a security interest in 535,521 shares of
Common Stock owned by Texstar Holdings, L.L.C. and 5,525,000 shares of Common
Stock owned by the Slattery Trust subject to the Escrow Agreement.
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
The Company has entered into several agreements with entities that are
owned or managed by certain of its directors, officers or other affiliates, or
in which certain of its directors, officers or affiliates have an interest. The
Company also has entered into agreements with certain of its former directors
and officers. Although some of these transactions were approved by the Company's
outside directors, there can be no assurance that these transactions were
negotiated at arms-length or on terms that would have been negotiated with
unaffiliated third parties. The related entities with which the Company has
entered into transactions include:
- EnCap Capital Fund III L.P., a partnership whose general
partner is EnCap Investments, L.C., which is managed by Robert
L. Zorich, one of the Company's directors;
- Slattery Trust, a private trust of which Mr. Tomlinson is the
beneficiary;
62
<PAGE>
- Starbucks Trust, a private trust of which Heather Tomlinson,
is the beneficiary;
- Calibre Energy, LLC, a limited liability company owned by
Slattery Trust, Starbucks Trust, Mr. Grabois and Mr. Novak,
and which is managed by Heather Tomlinson;
- Lasco, an affiliate of EnCap;
- Texstar Holdings, L.L.C., a private limited liability company
owned by certain of the Company's shareholders;
- Stanford Energy, Inc., a company affiliated with Donald W.
Busby, the former chairman of the Company's board of
directors; and
- RP&C International of which David Quint is a director and
shareholder.
RELATED PARTY TRANSACTIONS
ENCAP CREDIT FACILITY
In 1997, the Company entered into a $20.0 million credit agreement with
EnCap consisting of an Original Note for $12.0 million and a Supplemental Note
for $8.0 million. The Original Note bears interest at 10.0% per annum, and was
due, with accrued interest, in December 1998. The Supplemental Note, which has
been repaid in full, bore interest at 10.0% per annum until July 1, 1998 and at
18.0% per annum thereafter. Under the terms of the Supplemental Note, EnCap was
issued warrants for the purchase of 1.5 million shares of common stock at an
exercise price of $1.28 per share. The Original Note is secured by a first lien
on the properties acquired and a second lien on certain other properties. The
Original Note has been guaranteed by Mr. Tomlinson, Calibre and certain of
Calibre's affiliates.
Under the Original Note, the Company agreed to convey to EnCap a 25.0%
net profit interest from the properties acquired with the proceeds of the
borrowing. EnCap also required Slattery Trust, Texstar Holdings and certain of
the Company's shareholders to enter into a Put/Call Agreement pursuant to which
those shareholders, under certain conditions, have the right to obtain or "call"
the EnCap NPI in exchange for 1.5 million shares of the Company's common stock.
The Put/Call Agreement also gives EnCap the right, under certain conditions, to
sell, or put, portions of the EnCap NPI to the shareholders for $1.5 million or
3.5 million shares of the Company's common stock as of December 31, 1998 or
March 31, 1999, respectively. The shareholders' rights and obligations under the
Put/Call Agreement have been transferred to the Company.
STANFORD ENERGY DEBENTURE
In August 1997, Stanford Energy issued the Company an unsecured
convertible debenture in the principal amount of Cdn.$200,000. The debenture
bore interest at a rate of 8.0% per annum, payable quarterly. The debenture was
repaid on August 6, 1997.
ADVANCES TO CALIBRE EQUADOR
In the Spring of 1997, the Company and Slattery Trust, Starbucks Trust,
Mr. Grabois, Mr. Novak and James Alexander formed Calibre Ecuador, Inc. to
develop certain oil and gas prospects in Ecuador. The Company owned 50% of the
outstanding common stock of Calibre Ecuador and the other parties collectively
owned the other 50%. The development of the prospects required enactment of
certain enabling legislation that would permit non-Ecuador citizens to own oil
and gas properties in Ecuador. Pending the enactment of such legislation, the
Company advanced funds to Calibre Ecuador to generate the prospect, all rights
to were contributed to Calibre Ecuador by the parties other than the Company. As
of December 31, 1997 the Company had written off advances totaling $402,192 made
to Calibre Ecuador. Calibre Ecuador had no means with which to repay the
advances. The advances were non-interest bearing and due upon demand. Due to the
write-off, the Company obtained rights to substantially all of Calibre Equador's
common stock.
In November, 1998, the Company entered into a Participation Agreement
with Burlington Resources International Inc. to develop the gas fields in
Ecuador. The Company and Burlington have participation interests of 25% and 75%,
respectively. Burlington has indicated it might not renew the agreement and the
action could have an
63
<PAGE>
impact on the Company's ability to maintain an interest in the region.
However, the Company would retain a 25% interest in any project related to
the subject area pursued by Burlington for one year.
CALIBRE TRANSACTIONS
In December 1997, the Company advanced funds to Calibre Oil & Gas, Inc.
Net advances to Calibre Oil & Gas, Inc. totaled $1,768,772 at December 31, 1997.
The advances bore no interest and were due upon demand.
On April 22, 1998, in a single transaction, the Company acquired all of
the outstanding shares of Calibre Oil & Gas, Inc. from Calibre and certain oil
and gas properties owned by the Slattery Trust, the Starbucks Trust, Todd
Grabois, Robert Novak, Prentis B. Tomlinson, Jr., and Calibre Oil & Gas, Inc.
The shares of Calibre Oil & Gas, Inc. were valued at $3,820,713 and were paid
for through the issuance to Calibre of 1,927,426 shares of common stock of the
Company valued at Cdn. $2.80 per share. The total purchase price for the oil and
gas properties acquired from the other parties was $2,261,000, paid $261,000 in
cash and $2,000,000 in promissory notes issued by Texstar Petroleum Inc. in
differing amounts to each party. These notes were guaranteed by the Company,
paid 10% annual interest and were to be repaid in two equal installments due on
April 1, 1998 and September 1, 1998. The purchase price was to be adjusted by a
credit for proceeds from production attributable to each property through
January 31, 1998.
In connection with the acquisition of the oil and gas properties and
shares of Calibre Oil & Gas, Inc., $1.45 million of the advances to Calibre Oil
& Gas, Inc. were reclassified as an assumption of payables and the remaining
$318,772 was written off as a bad debt. Calibre Oil & Gas, Inc. was subsequently
merged into the Company and ceased to exist on January 7, 1999.
LASCO ACQUISITION
In January 1998, and effective on December 1, 1997, the Company
acquired proved reserves in Texas and Louisiana from Lasco for 2.57 million
shares of Common Stock and 12.0 million shares of the Company's Series 1
preferred stock. In December 1998, the Company reconveyed a portion of those
interests to Lasco in exchange for approximately 2.5 million shares of the
Company's Series 1 preferred stock.
STARBUCKS NOTE
On January 1, 1998, the Company loaned Starbucks Trust $2.5 million
pursuant to a promissory note due December 31, 1998 that bears interest at 9.0%
per annum. Starbucks Trust is a grantor trust with the sole beneficiary and
trustee being Heather Tomlinson, Prentis Tomlinson's spouse. Total advances and
accrued interest under the note are $2.9 million as of March 31, 1999. Funds
that the Company lent to Starbucks Trust were a portion of the proceeds the
Company received from the Offering of the Notes that are being exchanged in the
Offering. The loan was intended to (i) give the Company a greater return on
investment than it was receiving at the time; (ii) acquire shares of the
Company's common stock in the open market to support the public trading price;
and (iii) acquire Common Stock that was reconveyed by Starbucks Trust to certain
of the Company's lenders in an effort to deliver to those lenders freely
tradeable Company common stock. The entire principal interest outstanding under
the note remains due and payable and is carried on the Company's books as an
account receivable; however, Starbucks Trust lost money on the securities
transactions it made with the proceeds of the loan and currently is unable to
repay the loan.
Starbucks has claimed and requested credits, for expenses incurred on
behalf of the Company, against the amounts owed under the note of Cdn. $740,240.
Separately, and pursuant to the terms of the Starbucks Trust Acquisition
Agreement, the Company owes the Starbucks Trust $1,283,462 inclusive of accrued
interest as of December 31, 1998. Pursuant to the Calibre Acquisition Agreement,
as of December 31, 1998, the Company further owes the Starbucks Trust $213,918
and Prentis Tomlinson $1,588,489 inclusive of accrued interest. On December 28,
1998, as part of the Shell transaction, the above parties and Texstar Holdings,
LLC and Security Oil, LLC signed a standstill agreement wherein all parties
mutually deferred payments and further agreed not to pursue collection of any
amounts until the Termination Date of the Shell transaction and to toll the
applicable statutes of limitations related to claims arising from any such
amounts until the earlier of the Termination Date or December 31, 2003.
64
<PAGE>
STARBUCKS ACQUISITION
In July 1998, the Company entered into the Starbucks Acquisition
pursuant to which the Company acquired certain proved non-producing oil and gas
properties in Mississippi, Texas and Louisiana from Starbucks Trust for $2.33
million and 600,000 shares of Common Stock. The purchase is subject to approval
by the Vancouver Stock Exchange and is subject to certain post-closing
adjustments relating to purchase value. The purchase value is guaranteed and
secured by 2.1 million shares of Common Stock owned by the Starbucks Trust.
OTHER RELATED PARTY TRANSACTIONS
The Company had an agreement with DWB Management Ltd. to provide
management, professional and office services. DWB Management is a private
company owned by Donald W. Busby, the Company's former chairman of the board.
During the four months ended December 31, 1997, the Company paid DWB Cdn.$8,000.
Under the agreement, the Company paid DWB for services rendered a fee of
Cdn.$8,000 per month. The agreement with DWB Management was terminated in
September 1997.
The Company entered into an agreement with Chase Management Ltd. to
provide management, professional and office services to the Company, including
daily accounting services as required, and general legal assistance for routine
Canadian securities filings. Chase Management is a private company owned by Nick
DeMare, a former officer and director of the Company. The agreement was for one
year commencing on the first day of October 1997 through the last day of
September 1998. Thereafter, the agreement continues in effect from year to year
unless terminated by either party upon 60 days' written notice. During the last
fiscal year the Company paid Chase Management Cdn.$60,000 and for the remaining
term of the agreement, the Company will pay Chase Management Cdn.$5,000 per
month for services rendered.
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation provides for authorized
capital stock of 400,000,000 shares, consisting of 300,000,000 shares of Common
Stock, par value $0.01 per share and 100,000,000 shares of Preferred Stock, par
value $1.00 per share. The following summary description of the capital stock is
qualified in its entirety by reference to the Certificate of Incorporation and
the attached Certificate of Designation. As of May 31, 1999, 33,727,724 shares
of Common Stock and 9,488,140 Class A, Series I Preferred Shares
(non-convertible 10% dividend) were issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all the directors. Subject to the terms
of any outstanding series of preferred stock, the holders of Common Stock are
entitled to dividends in such amounts and at such times as may be declared by
our board of directors out of funds legally available therefor. Upon liquidation
or dissolution, holders of Common Stock are entitled to share ratably in all net
assets available for distribution to stockholders after payment of any
liquidation preferences to holders of preferred stock. Holders of Common Stock
have no redemption, conversion or preemptive rights.
PREFERRED STOCK
The board of directors has the authority to cause the Company to issue
up to the authorized number of shares of preferred stock in one or more series,
to designate the number of shares constituting any series, and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of such series, without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of the common stock.
SERIES I PREFERRED STOCK
On March 6, 1998, the Company's board of directors authorized the
issuance of 12,000,000 shares of Series I preferred stock. Set forth below is a
summary of the terms of the Series I preferred stock.
65
<PAGE>
DIVIDENDS. The shares of Series I preferred stock are entitled
to dividends at the Designated Rate (as defined below), to be paid in
cash quarterly on March 31, June 30, September 30, and December 31 of
each year and are cumulative whether or not declared or whether or not
there are funds legally available to pay the dividend on the aggregate
price paid or deemed to be paid (the "Purchase Price") for the shares.
Such dividends will be prior and in preference to any declaration or
payment of any dividends paid on Junior Stock. The Designated Rate is
10% per annum, but upon the occurrence or continuance of a Voting Event
(as defined below), the rate shall be 14% per annum. For the first
eight quarters dividends are due, the board of directors may elect to
make payment in Common Stock.
LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution, or winding up, voluntary or involuntary, the shares of
Series I preferred stock are entitled to preference to the Junior Stock
of a cash amount equal to the Purchase Price plus dividends accumulated
but not paid (the "Liquidation Amount"). A consolidation or merger of
the Company with or into any other entity, or a sale or transfer in a
single transaction or a series of related transactions of all or
substantially all of the Company's assets, shall be deemed to be a
liquidation for purposes hereof.
OPTIONAL REDEMPTION. Upon five business days advance notice,
the Company has the option to redeem any or all of the shares of Series
I preferred stock at any time at a cash redemption price per share
equal to the Liquidated Amount divided by the number of shares of
Series I preferred stock originally issued.
MANDATORY REDEMPTION. If the Series I preferred stock has not
been redeemed within five years of being issued, the Company is
required to redeem the shares at a cash redemption price per share
equal to the Liquidation Amount divided by the number of shares of
Series I preferred stock originally issued. If a qualified public
offering of at least $25 million has not been completed by January 23,
2001, the Series I preferred stock may be put back to the Company for
cash redemption. The holder of the Series I preferred stock has agreed
to waive this put redemption right contingent upon the completion of
the Offering. Redemption of the Series II Preferred Stock will require
either the redemption for cash of the Series I preferred stock or
consent of the holders of the Series I preferred stock.
VOTING RIGHTS. The Series I preferred stock have no voting
rights, except as set forth below. Upon the occurrence of a Voting
Event, the Series I shareholders shall be, voting as a single class,
entitled to elect (i) two directors at any time there are more than
1,200,000 Series I shares outstanding, or (ii) one director if there
are 1,200,000 Series I shares or less. Any director so elected shall
serve until all Voting Events have ceased to be continuing. Voting
Events include: (i) the failure to pay at least two dividends on the
Series I shares as they become due and payable; (ii) the failure to
redeem the Series I shares when required for the put redemption, (iii)
the failure to redeem the Series I preferred stock when required for
the mandatory redemption, (iv) bankruptcy, insolvency, appointment of a
receiver, liquidator or similar official, monetary judgments in excess
of $500,000 not covered by insurance, or writs or warrants of
attachment or similar process against all or a substantial part of our
assets.
SERIES II PREFERRED STOCK
See "Summary - the Offering" and "Comparison of the Notes and Preferred
Stock" for a summary of certain terms of the Preferred Stock. The Certificate of
Designation is attached hereto as Appendix A.
PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND DELAWARE LAW
The Company's Certificate of Incorporation authorizes the board of
directors, without stockholder approval, to establish and to issue shares of one
or more series of preferred stock, each such series having such voting rights,
dividend rates, liquidation, redemption, conversion and other rights as may be
fixed by the board. The Company's Bylaws direct that special meetings of the
stockholders may only be called by a majority of the members of the board of
directors, the chairman of the board of directors, the president or the holders
of not less than 30% of the total voting power of all shares of its capital
stock entitled to vote in the election of directors. The Bylaws further provide
that stockholders' nominations to the board of directors and other stockholder
business proposed to be
66
<PAGE>
transaction at stockholder meetings must be timely received by the Company in
a proper written form which meets the prescribed content requirements.
The above provisions may have the effect of deterring certain tender
offers or hostile takeovers or may delay or prevent changes in control of our
management.
LIMITATION OF DIRECTOR LIABILITY
Section 102(b)(7) of the Delaware General Corporation Law ("Section
102(b)") authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Company's Certificate
of Incorporation limits the liability of its directors or its stockholders (in
their capacity as directors but not in their capacity as officers) to the
fullest extent permitted by Section 102(b). Specifically, the Company's
directors will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional,
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
INDEMNIFICATION
To the maximum extent permitted by law, the Certificate of
Incorporation and Bylaws provide for mandatory indemnification of directors, and
permit indemnification of the Company's officers, employees and agents against
all expense, liability and loss to which they may become subject or which they
may incur as a result of being or having been a director, officer, employee or
agent. In addition, the Company must advance or reimburse directors, and may
advance or reimburse officers, employees and agents, for expenses incurred by
them in connection with indemnifiable claims.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law ("Section 203")
generally provides that a stockholder acquiring more than 15% of the outstanding
voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85% of such stock may not engage in certain
"Business Combinations" with the corporation for a period of three years after
the date on which the stockholder became an Interested Stockholder unless (i)
before such date, the corporation's board of directors approved either the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder, or (ii) the Business Combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Under Section 203, these restrictions will
not apply to certain Business Combinations proposed by an Interested Stockholder
following the earlier of the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who was not an
Interested Stockholder during the previous three years or who became an
Interested Stockholder with the approval of the corporation's board of
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
Interested Stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the Interested
Stockholder, or transactions in which the Interested Stockholder receives
certain other benefits.
The provisions of Section 203, together with the ability of the
Company's board of directors to issue preferred stock without further
stockholder action, could delay or frustrate the removal of incumbent directors
or a change in the Company's control. The provisions also could discourage,
impede or prevent a merger, tender offer or
67
<PAGE>
proxy contest, even if such event would be favorable to the interests of
stockholders. The Company's stockholders, by adopting an amendment to the
Company's Certificate of Incorporation or Bylaws, may elect not to be
governed by Section 203 effective 12 months after such adoption. Neither the
Company's Certificate of Incorporation nor Bylaws currently exclude the
Company from the restrictions imposed by Section 203.
SUBSCRIPTION AND SALE
Pursuant to the terms of the Agency Agreement, the Company will pay the
Agent an advisory fee of $200,000 payable in Common Stock and will reimburse the
Agent for all reasonable out-of-pocket expenses, including legal expenses. In
addition, the Company will pay the Agent a fee payable in cash equal to 8% of
the gross cash proceeds resulting from the sale of the Preferred Stock offered
by the Company pursuant to the terms of this Offering and a fee payable in
Common Stock equal to 4% of the nominal value of the Notes tendered in exchange
for the Preferred Stock. Common Stock issued with respect to the 4% fee shall be
offset against the shares issued to the Agent with respect to the $200,000 fee
referenced above. The Company shall also pay the Agent a fee payable in Common
Stock of $100,000 for advice on structuring and documentation and for ongoing
financial services. All Common Stock issued with respect to the fees referenced
in this paragraph will be valued at a per share price of Cdn. $0.35. The Company
will indemnify the Agent against certain liabilities in connection with the
offer and sale of the Preferred Stock. Pursuant to the terms of the Agency
Agreement, the Company will issue to the Agent phantom common share purchase
warrants with each warrant representing the right to receive a cash payment from
the Company equal to the difference (i) between the closing Market Price of the
Common Stock on the Stock Exchange Business Day prior to the date of exercise
and (ii) the lower of Cdn.$0.35 or the Preferred Conversion Price as of April 1,
2000. The number of warrants issued shall be equal to the quotient of (a) the
sum of 10% of the aggregate cash proceeds of the Offering plus 1% of the nominal
value of Notes exchanged for Preferred Stock divided by (b) Cdn. $0.35. The
warrants will have a term of two years. In addition to the foregoing, in
exchange for the Agent agreeing to provide services as a European conversion
agent, the Company shall pay the Agent an annual fee of $15,000 with the first
payment due on the Closing Date and subsequent payments due on each anniversary
thereof that Preferred Stock remains outstanding.
SELLING RESTRICTIONS
UNITED STATES AND CANADIAN SELLING RESTRICTIONS
The Preferred Stock and the Common Stock issuable on conversion of the
Preferred Stock (and any other Common Stock issued in lieu of dividends or
otherwise in connection with the Preferred Stock) have not been registered under
the Securities Act and until registered under the Securities Act may not be
offered or sold within the United States or to, or for the account or benefit
of, U.S. persons except in certain transactions exempt from the registration
requirements of the Securities Act or pursuant to a registration. Terms used in
this paragraph have the meanings given to them in Regulation S under the
Securities Act. The Company has undertaken to file a registration statement
pursuant to the Securities Act with respect to the Preferred Stock and the
Common Stock issuable on conversion of the Preferred Stock that is declared
effective pursuant to the Securities Act within four months after the Closing
Date.
Each person or entity acquiring the Preferred Stock will be required to
certify, and will be deemed to have represented and agreed, as follows:
1. it is not a "U.S. person", as defined in Regulation S under the
Securities Act, and it is not acquiring the Preferred Stock or the
Common Stock issuable upon exchange of the Preferred Stock
(collectively, the "Securities"), for the account or benefit of any
U.S. person;
2. the Securities have not been registered under the Securities Act, are
being offered only in transactions not involving any public offering
within the meaning of the Securities Act, and may not be offered or
sold within the United States or to, or for the account or benefit of,
U.S. persons except as permitted below;
3. prior to the end of the one year Distribution Compliance Period (as
defined in Regulation S), the Securities may be resold, pledged or
transferred only (i) to the Company, (ii) pursuant to offers and sales
that occur outside the United States in a transaction meeting the
requirements of Rule 904 of Regulation S under the
68
<PAGE>
Securities Act or (iii) pursuant to an effective registration
statement under the Securities Act, in each case in accordance with
any applicable securities laws of the United States;
4. after one year but within two years after the date of original
issuance of the Securities or within three months after it
ceases to be an affiliate (within the meaning of Rule 144 under
the Securities Act) of the Company, the Securities may be resold,
pledged or transferred only (i) to the Company, (ii) pursuant to
offers and sales that occur outside the United States in a
transaction meeting the requirements of Rule 904 of Regulation S
under the Securities Act, (iii) pursuant to an exemption from the
registration requirements of the Securities Act provided by
Rule 144 (if applicable) under the Securities Act or (iv) pursuant
to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of
any state of the United States;
5. hedging transactions are prohibited by Regulation S, unless permitted
by the Securities Act;
6. it understands that the Certificate representing the Preferred Stock
will bear the following legend:
NEITHER THIS PREFERRED STOCK NOR THE COMMON STOCK OF THE ISSUER
ISSUABLE ON CONVERSION OF THIS PREFERRED STOCK (THE "SHARES") HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS PREFERRED
STOCK MAY NOT BE EXCHANGED FOR SHARES BY OR ON BEHALF OF ANY U.S.
PERSON (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) UNLESS
REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM REGISTRATION
IS AVAILABLE. THE HOLDER HEREOF, BY PURCHASING THIS PREFERRED STOCK,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS PREFERRED STOCK AND THE
SHARES MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS
FOLLOWS.
PRIOR TO THE FIRST ANNIVERSARY OF THE ISSUANCE OF THIS PREFERRED STOCK,
THIS PREFERRED STOCK OR THE SHARES MAY NOT BE SO TRANSFERRED OTHER THAN
(1) TO THE ISSUER, (2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS
THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE
REQUIREMENTS OF REGULATION S (RULES 901 THROUGH 905) UNDER THE
SECURITIES ACT, OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
AFTER THE FIRST ANNIVERSARY AND PRIOR TO THE SECOND ANNIVERSARY OF THE
ISSUANCE OF THIS PREFERRED STOCK, THIS PREFERRED STOCK OR THE SHARES
MAY NOT BE SO TRANSFERRED OTHER THAN (1) TO THE ISSUER, (2) PURSUANT TO
OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S
(RULES 901 THROUGH 905) UNDER THE SECURITIES ACT, (3) PURSUANT TO AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR
(4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
IF THE HOLDER OF THIS PREFERRED STOCK OR THE SHARES WAS AN AFFILIATE OF
THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF
ANY SUCH TRANSFER, THE FOREGOING CONDITIONS MUST BE COMPLIED WITH
REGARDLESS OF WHEN SUCH TRANSFER IS MADE.
NO HEDGING TRANSACTIONS INVOLVING THIS PREFERRED STOCK OR THE SHARES
MAY BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.
NEITHER THIS PREFERRED STOCK NOR THE SHARES HAVE BEEN QUALIFIED FOR
DISTRIBUTION UNDER THE SECURITIES LEGISLATION OF BRITISH COLUMBIA OR
ANY PROVINCE OF CANADA. THIS PREFERRED STOCK AND THE SHARES ISSUABLE ON
CONVERSION OF THIS PREFERRED STOCK ARE SUBJECT TO A HOLD PERIOD WHICH
EXPIRES AT 12:00 A.M. (MIDNIGHT) (VANCOUVER TIME) ON [ INSERT DATE
WHICH IS 4 MONTHS FROM DATE OF ISSUANCE OF PREFERRED STOCK] AND MAY NOT
BE TRADED IN
69
<PAGE>
BRITISH COLUMBIA UNTIL SUCH TIME EXCEPT AS PERMITTED BY THE
SECURITIES ACT (BRITISH COLUMBIA) AND THE RULES AND REGULATION MADE
THEREUNDER.
and that the Common Stock will bear the following legend until the
Common Stock has been registered as provided herein:
THE COMMON STOCK (THE "SHARES") OF BENZ ENERGY INC. (THE "CORPORATION")
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT OR
LAWS, OR THE RULES AND REGULATIONS THEREUNDER. THE HOLDER HEREOF AGREES
FOR THE BENEFIT OF THE CORPORATION THAT THE SHARES MAY NOT BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED OTHER THAN (1) TO THE CORPORATION,
(2) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE
THE UNITED STATES IN A TRANSACTION MEETING THE REQUIREMENTS OF
REGULATION S (RULES 901 THROUGH 905) UNDER THE SECURITIES ACT,
(3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE
SECURITIES ACT, OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH
ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
IF THE HOLDER OF THE SHARES WAS AN AFFILIATE OF THE CORPORATION AT ANY
TIME DURING THE THREE MONTHS PRECEDING THE DATE OF ANY SUCH TRANSFER,
THE FOREGOING CONDITIONS MUST BE COMPLIED WITH REGARDLESS OF WHEN SUCH
TRANSFER IS MADE.
NO HEDGING TRANSACTIONS INVOLVING THE SHARES MAY BE CONDUCTED UNLESS IN
COMPLIANCE WITH THE SECURITIES ACT.
THE SHARES ARE SUBJECT TO A HOLD PERIOD WHICH EXPIRES AT 12:00 A.M.
(MIDNIGHT) (VANCOUVER TIME) ON [INSERT DATE WHICH IS 4 MONTHS FROM DATE
OF ISSUANCE OF PREFERRED STOCK] AND MAY NOT BE TRADED IN BRITISH
COLUMBIA UNTIL SUCH TIME EXCEPT AS PERMITTED BY THE SECURITIES ACT
(BRITISH COLUMBIA) AND THE RULES AND REGULATION MADE THEREUNDER;
7. that the Preferred Stock to be acquired in connection with the
Offering, including Preferred Stock acquired in exchange for the Notes
tendered hereby, (i) is being acquired in the ordinary course of
business of the owner of such Notes and (ii) is being acquired for its
own account, not for the benefit of any other person;
8. it is not engaging and does not intend to engage in the distribution of
the Preferred Stock and has no arrangement or understanding with any
person to participate in the distribution of the Preferred Stock.
9. it (i) has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its
prospective investment in the Securities and (ii) has the ability to
bear the economic risks of its prospective investment and can afford
the complete loss of such investment;
10. if the undersigned is in the United Kingdom, it is (i) a person
whose ordinary activities involve it in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes
of its business or has otherwise been offered the Securities in
circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995, and (ii) with respect
to any document received by it in connection with the issue of the
Securities, is a kind of person described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements)(Exemptions)
Order 1996, as amended, or is a person to whom such document may
otherwise be issued or passed on;
11. it understands that prior to receiving any Common Stock upon its
election to convert the Preferred Stock, it may be required to
(i) certify that it is not a U.S. person, is located outside the
United States, acquired the Preferred Stock outside the United
States and is not a person acting on behalf of an affiliate of the
Company, or (ii) provide the Company with an opinion of United
States legal counsel, in form and substance satisfactory to the
Company to the effect that the exchange of the Preferred Stock is
exempt from registration under the Securities Act;
70
<PAGE>
12. it understands that (i) the Preferred Stock may not be converted by, or
on behalf of, a U.S. person, unless an opinion of counsel satisfactory
to the Company is provided that such conversion is registered under the
Securities Act or exempt from registration thereunder and (ii) the
Preferred Stock may not be converted within the United States and the
Common Stock issuable upon the conversion thereof may not be delivered
within the United States, other than in an offering within the meaning
of the definition of "offshore transaction" pursuant to Regulation S
unless such exercise or exchange is registered under the Securities Act
or exempt from registration thereunder;
13. it acknowledges that none of the Notes being purchased by the Company
in exchange for the Preferred Stock have been purchased from persons
who are residents of British Columbia, or any other province of
Canada, or from any holder in British Columbia, or any other
province of Canada and it is not a resident of British Columbia or
any other Province of Canada and is not acquiring the Preferred
Stock for the account or benefit of any resident of British Columbia
or any other Province of Canada and it understands that prior to
receiving any Common Stock upon its election to exchange the
Preferred Stock, it may be required to certify that it is not a
resident of British Canada or any other Province of Canada;
14. it understands that the Company, the Agent and others will rely upon
the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that if any of the
acknowledgments, representations and agreements deemed to have been
made by it by its purchase of the Securities are no longer accurate, it
shall promptly notify the Company and the Agent. If it is acquiring the
Securities as a fiduciary or agent for one or more investor accounts,
it represents that it has full power to make the foregoing
acknowledgments, representations and agreements on behalf of such
account;
15. it acknowledges that no securities commission or similar regulatory
authority has reviewed or passed on the merits of the Preferred Stock;
16. it acknowledges that there is no government or other insurance covering
the Preferred Stock;
17. it acknowledges that there are risks associated with the purchase of
the Preferred Stock;
18. it acknowledges that the Company has advised the purchaser that the
Company is relying on an exemption from the requirements to provide the
purchaser with a prospectus and to sell securities through a person
registered to sell securities under the B.C. Act and, as a consequence
of acquiring securities pursuant to this exemption, certain
protections, rights and remedies provided by the B.C. Act, including
statutory rights of rescission or damages, will not be available to the
purchaser;
19. it acknowledges that there are restrictions on the Purchaser's ability
to resell the Preferred Stock and it is the responsibility of the
Purchaser to find out what those restrictions are and to comply with
them before selling the Preferred Stock; and
20. it will, if requested by the Company, deliver to the Company a
certificate which will confirm the matters referred to in paragraphs 11
to 19 above to the satisfaction of the Company, acting reasonably.
The Company may, in its discretion, revise the selling restrictions on
the Preferred Stock and/or the Common Stock if the Commission should, subsequent
to the date of this Offering Circular, give advice or interpretations respecting
such restrictions imposed by Regulation S or should the Commission amend
Regulation S respecting such restrictions. If the Issuer so revises the selling
restrictions, it will give notice to the holders and will give notice of the
same to the Exchange Agent.
In addition, until one year after the Closing Date, an offer or sale of
Preferred Stock within the United States by any dealer that is not participating
in the offering may violate the registration requirements of the Securities Act.
DEFINITION OF U.S. PERSON UNDER REGULATION S
1. U.S. Person.
(a) "U.S. person" means:
(i) Any natural person resident in the United States;
71
<PAGE>
(ii) Any partnership or corporation organized or
incorporated under the laws of the United States;
(iii) Any estate of which any executor or administrator is
a U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in
the United States;
(vi) Any non-discretionary account or similar account
(other than an estate or trust) held by a dealer or
other fiduciary for the benefit or account of a
U.S. person;
(vii) Any discretionary account or similar account (other
than an estate or trust) held by a dealer or other
fiduciary organized, incorporated, or (if an
individual) resident in the United States; and
(viii) Any partnership or corporation if: (A) organized or
incorporated under the laws of any foreign
jurisdiction; and (B) formed by a U.S. person
principally for the purpose of investing in
securities not registered under the Securities Act,
unless it is organized or incorporated, and owned, by
accredited investors (as defined in Rule 501(a) of
the Securities Act) who are not natural persons,
estates or trusts.
(b) The following are not "U.S. persons":
(i) Any discretionary account or similar account (other
than an estate or trust) held for the benefit or
account of a non-U.S. person by a dealer or other
professional fiduciary organized, incorporated, or
(if an individual) resident in the United States;
(ii) Any estate of which any professional fiduciary acting
as executor or administrator is a U.S. person if:
(A) An executor or administrator of the estate who is
not a U.S. person has sole or shared investment
discretion with respect to the assets of the estate;
and
(B) The estate is governed by foreign law;
(iii) Any trust of which any professional fiduciary acting
as trustee is a U.S. person, if a trustee who is not
a U.S. person has sole or shared investment
discretion with respect to the trust assets, and no
beneficiary of the trust (and no settlor if the trust
is revocable) is a U.S. person;
(iv) An employee benefit plan established and administered
in accordance with the law of a country other than
the United States and customary practices and
documentation of such country;
(v) Any agency or branch of a U.S. person located outside
the United States if:
(A) The agency or branch operates for valid business
reasons; and
(B) The agency or branch is engaged in the business
of insurance or banking and is subject to substantive
insurance or banking regulation, respectively, in the
jurisdiction where located; and
(vi) The International Monetary Fund, the International
Bank for Reconstruction and Development, the
Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the
United Nations, and their agencies, affiliates and
pension
72
<PAGE>
plans, and any other similar international
organizations, their agencies, affiliates and pension
plans.
2. United States. "United States" means the United States of America, its
territories and possessions, any State of the United States, and the
District of Columbia.
UNITED KINGDOM SELLING RESTRICTIONS
No prospectus has been or will be registered in the United Kingdom in
respect of the Preferred Stock and, accordingly, the Preferred Stock may not be
distributed nor may any of the Preferred Stock be offered, in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or who it is reasonable to expect will acquire, hold, manage or
dispose of investments (as principal or agent) for the purposes of their
businesses, or otherwise in circumstances which do not constitute an offer to
the public within the meaning of the Public Offers of Securities Regulations
1995. The Agent has agreed (a) to comply with all applicable provisions of the
Public Offers of Securities Regulations 1995 in connection with anything done by
it in relation to the sale of the Securities in, from or otherwise involving the
United Kingdom, (b) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Securities in, from or otherwise involving the United
Kingdom; and (c) it has only issued or passed on and will only issue or pass on
in the United Kingdom any document received by it in connection with the issue
of the Securities to a person who is a kind of person described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996, as amended, or is a person to whom such document may otherwise
lawfully be issued or passed on.
CANADIAN SELLING RESTRICTIONS
The Preferred Stock is not being offering in Canada. Preferred Stock
(and the Common Stock issued as dividends thereon or on exchange or on exercise
thereof) are being offered and issued to persons who are not resident in Canada,
in reliance upon certain exceptions from the prospectus and registration
requirements of applicable Canadian securities legislation. The foregoing
securities cannot be offered or resold in Canada unless (a) the resale is
qualified by a prospectus, a receipt for which has been issued by the applicable
securities commission in Canada; (b) pursuant to available statutory exemptions
for resale; or (c) pursuant to a discretionary order, and in compliance with
application registration requirements.
ADDITIONAL RESTRICTIONS
No action has been or will be taken that would permit a public offering
of the Preferred Stock or the possession or distribution of this Offering
Circular or any other offering material relating to the Preferred Stock in any
jurisdiction where action for that purpose is required. Accordingly, the
Preferred Stock may not be offered or sold, directly or indirectly, and neither
this Offering Circular nor any circular, prospectus, form of application,
advertisement or other offering material relating to the Preferred Stock may be
distributed in or from or published in any country or jurisdiction, except under
circumstances that will result in compliance with any applicable laws and
regulations.
The distribution of the Offering Circular and the Offering of the
Preferred Stock in certain jurisdictions may be restricted by law. Persons into
whose possession this Offering Circular may come are required by the Company to
inform themselves about and to observe any such restrictions. This Offering
Circular does not relate to any securities other than the Preferred Stock and
the Common Stock acquired as dividends thereon or upon exchange of the Preferred
Stock, and does not constitute an offer to sell or a solicitation of an offer to
buy any of the Preferred Stock or Common Stock in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
Acquisition of the Securities may result in tax or other legal consequences
not discussed herein. Prospective purchasers are not to construe this Offering
Circular or any prior or subsequent communication from the Company or the Agent
or any of their respective directors, officers, agents or employees as legal or
investment or tax advice. Each prospective purchaser should consult with and
rely on such purchaser's own professional advisers, including legal counsel and
tax advisers, as to the consequences of any investment in the Preferred Stock
and the Common Stock acquired as dividends thereon or upon exchange of the
Preferred Stock.
73
<PAGE>
The Preferred Stock is being offered when, as and if issued, and
subject to prior sale or withdrawal, cancellation or modification of the offer
without notice, and subject to the satisfaction of certain legal matters by
counsel and certain other conditions.
TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following are the material United States federal income tax
consequences of an exchange (the "Exchange") of Preferred Stock for Notes
pursuant to the Offering to the Company and to U.S. Holders and Non-U.S. Holders
(as such terms are defined below) and the material United States federal income
and estate tax consequences to Non-U.S. Holders of holding and disposing of the
Notes or Preferred Stock. This discussion is based on the United States Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations ("Regulations") promulgated thereunder, Internal Revenue Services
("IRS") rules and pronouncements, reports of congressional committees, judicial
decisions and current administrative rulings and practice, all as in effect on
the date hereof. This discussion is based on current law, which is subject to
change. Any such change could be retroactive and, accordingly, could modify the
tax consequences discussed herein. No advance ruling from the IRS with respect
to the matters discussed herein has been requested. THIS DISCUSSION OF UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES REPRESENTS COUNSEL'S BEST LEGAL JUDGEMENT
AND IS NOT BINDING ON THE IRS OR ANY COURT AND NO ASSURANCE CAN BE GIVEN THAT
THE IRS WILL NOT CHALLENGE PART OR ALL OF THE CONCLUSIONS REACHED HEREIN OR THAT
A CHALLENGE WOULD NOT BE SUCCESSFUL. FURTHERMORE, THIS DISCUSSION RELIES UPON
AND IS PREMISED UPON THE ACCURACY OF STATEMENTS AND REPRESENTATIONS OF THE
COMPANY.
This discussion does not address tax considerations applicable to U.S.
Holders (as defined below) who actually or constructively own 10% or more (by
vote or value) of the stock of the Company. Furthermore, this discussion does
not address all of the United States federal income tax consequences that may be
relevant to particular shareholders in light of their personal circumstances or
to certain types of shareholders (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions and
tax-exempt entities) who may be subject to special treatment under the federal
income tax laws. This discussion also does not address the federal income tax
consequences to holders of stock options or to shareholders who acquired their
stock of the Company through the exercise of employee stock options or otherwise
as compensation. Furthermore, this discussion does not address any tax
consequences under state, local or foreign law.
For purposes of this discussion, the term "U.S. Holder" means a
beneficial owner of the stock or notes of the Company that is for United States
federal income tax purposes (i) a citizen or resident of the United States; (ii)
a corporation or partnership created or organized in the United States or under
the laws of the United States or of any State thereof; or (iii) an estate or
trust described in Section 7701(a)(3) of the Code. The term "Non-U.S. Holder"
means a beneficial owner of the stock or notes of the Company that is not a U.S.
Holder. Furthermore, the following discussion of the United States federal
income tax consequences is limited to (a) U.S. Holders and Non-U.S. Holders who
hold notes and/or shares of stock and/or will hold notes and/or shares of stock
as "capital assets" within the meaning of Section 1221 of the Code; (b) U.S.
Holders whose ownership, receipt or disposition of stock and/or notes is not
attributable to a permanent establishment in a country other than the United
States for purposes of an income tax treaty to which the United States is a
party; (c) Non-U.S. Holders whose ownership, receipt or disposition of stock
and/or notes is not attributable either to the conduct of a trade or business in
the United States or to a permanent establishment in the United States;
(d) Non-U.S. Holders who do not actually or constructively own (and have not
at any time in the preceding five-year period actually or constructively
owned) five percent or more (by vote or value) of the stock of the Company;
(e) U.S. Holders who are not residents of a country other than the United
States for purposes of an income tax treaty to which the United States is a
party; and (f) Non-U.S. Holders who are not residents of the United States
for purposes of United States federal income tax law or an income tax treaty
to which the United States is a party. U.S. Holders and Non-U.S. Holders who
do not meet one or more of the foregoing criteria are urged to consult their
tax advisors regarding their particular United States federal income tax
consequences.
74
<PAGE>
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH HOLDER OF STOCK, INCLUDING PREFERRED STOCK, OR NOTES IS
ADVISED TO CONSULT HIS TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
EXCHANGE AND OF HOLDING AND DISPOSING OF NOTES OR STOCK OF THE COMPANY INCLUDING
THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS
AND ANY PENDING OR PROPOSED LEGISLATION.
UNITED STATES INCOME TAX CONSEQUENCES OF THE EXCHANGE
EXCHANGE OF THE NOTES FOR PREFERRED STOCK - COMPANY
The transfer of Preferred Stock to the holders of Notes in the Exchange
should constitute a reorganization within the meaning of Section 368(a)(1)(E) of
the Code. The Exchange will give rise to discharge of indebtedness income to the
Company to the extent the issue price of the Notes exceeds the fair market value
of the Preferred Stock. Based on the Company's representations that the issue
price of the Notes will not exceed the fair market value of the Preferred Stock,
the Company should not recognize income from discharge of indebtedness, or
otherwise, in the Exchange.
EXCHANGE OF THE NOTES FOR PREFERRED STOCK - U.S. HOLDERS
Based on the foregoing conclusion that the Exchange will qualify as a
reorganization, a U.S. Holder should not recognize gain or loss upon the
exchange of Notes or Notes and cash for Preferred Stock. The U.S. Holder's tax
basis in shares of Preferred Stock received in the exchange should be the same
as the U.S. Holder's tax basis of the Notes exchanged therefor (increased by the
amount of any cash exchanged and reduced by the portion of such tax basis
allocable to any fractional Preferred Stock interest for which the U.S. Holder
receives a cash payment from the Company). In addition, the holding period of
the Preferred Stock received in the Exchange should include the holding period
of the Notes exchanged therefor (to the extent that Notes, and not cash, were
exchanged). A U.S. Holder generally should recognize gain (or loss) upon the
Exchange to the extent that any cash paid in lieu of a fractional share of
Preferred Stock exceeds (or is less than) such holder's tax basis allocable to
such fractional share. In addition, because the Exchange is not substantially
the same as the receipt of a stock dividend, the Preferred Stock should not be
"section 306 stock."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS OF OWNING AND
DISPOSING OF PREFERRED STOCK OR NOTES
CASH DIVIDENDS PAID ON PREFERRED STOCK
Cash dividends paid on the Preferred Stock will be taxable to a U.S.
Holder as ordinary income, to the extent paid out of the Company's current or
accumulated earnings and profits. Subject to certain restrictions, dividends
received by a corporate U.S. Holder generally should be eligible for the seventy
percent (70%) dividends-received deduction.
IN-KIND DIVIDENDS PAID ON PREFERRED STOCK
In-kind dividends paid on the Preferred Stock in Common Stock will be
taxable to a U.S. Holder as ordinary income. The U.S. Holder's basis in the
Common Stock received will be the value of the shares distributed and the
holding period for such shares will commence on the day ownership of the Common
Stock is acquired by the U.S. Holder. Subject to certain restrictions, dividends
received by a corporate U.S. Holder generally should be eligible for the seventy
percent (70%) dividends-received deduction.
SALE OF PREFERRED STOCK
In general, a U.S. Holder of Preferred Stock who sells or otherwise
disposes of such stock in a taxable transaction will recognize long-term capital
gain or loss on the difference between the cash and the fair market value of any
property received from that sale and the U.S. Holder's tax basis in such
Preferred Stock deemed held for more than twelve (12) months as of the date of
sale or disposition.
75
<PAGE>
CONVERSION OF PREFERRED STOCK TO COMMON STOCK
A U.S. Holder should not recognize gain or loss upon the conversion of
Preferred Stock for Common Stock. The U.S. Holder's tax basis in shares of
Common Stock received in any such conversion should be the same as the U.S.
Holder's tax basis of the Preferred Stock exchanged therefor (reduced by the
portion of such tax basis allocable to any fractional Common Stock interest for
which the U.S. Holder receives a cash payment from the Company). In addition,
the holding period of the Common Stock received in the exchange should include
the holding period of the Preferred Stock that was exchanged therefor. A U.S.
Holder generally should recognize gain (or loss) upon the exchange to the extent
that any cash paid in lieu of a fractional share of Common Stock exceeds (or is
less than) its tax basis allocable to such fractional share.
ADJUSTMENTS TO CONVERSION PRICE
Pursuant to Treasury Regulations promulgated under Section 305 of the
Code, a U.S. Holder of Preferred Stock should be treated as having received a
constructive distribution from the Company upon an adjustment in the conversion
price of the Preferred Stock if (i) as a result of such adjustment, the
proportionate interest of such U.S. Holder in the assets or earnings and profits
of the Company is increased and (ii) the adjustment is not made pursuant to a
bona fide, reasonable antidilution formula. An adjustment in the conversion
price would not be considered made pursuant to such formula if the adjustment
were made to compensate for certain taxable distributions with respect to the
Common Stock into which the Preferred Stock is convertible. Thus, under certain
circumstances, a decrease in the conversion price of the Preferred Stock may be
taxable to a U.S. Holder of Preferred Stock as a dividend to the extent of the
current or accumulated earnings and profits of the Company. In addition, the
failure to adjust fully the conversion price of the Preferred Stock to reflect
distributions of stock dividends with respect to the Common Stock may result in
a taxable dividend to the U.S. Holders of the Common Stock.
TAXATION OF INTEREST ON NOTES
In general, interest paid on the Notes will be taxable to a U.S. Holder
as ordinary interest income in accordance with the holder's method of tax
accounting at the time that such interest is accrued or (actually or
constructively) received.
ORIGINAL ISSUE DISCOUNT ON THE NOTES
The Notes may be initially issued with original issue discount for
United States federal income tax purposes. The amount of original issue discount
with respect to each Note will be equal to the excess of the "stated redemption
price at maturity" of such Note over its "issue price." For these purposes, the
"issue price" of a Note is the initial offering price at which the first Note is
sold. The "stated redemption price at maturity" of each Note will include all
cash payments (other than stated interest to the extent that it is
unconditionally payable at least annually at a single fixed rate ("qualified
stated interest")) required to be made thereunder until maturity. The amount of
original issue discount with respect to a debt instrument is considered to be
zero if such discount is less than one-fourth of one percent of its stated
redemption price at maturity (as defined above) multiplied by the number of
complete years from the issue date to the maturity date of the debt instrument
("de minimis" original issue discount).
TAXATION OF ORIGINAL ISSUE DISCOUNT ON NOTES
If there is more than de minimis original issue discount, each holder
of a Note will be required to include in gross income (as ordinary interest
income) an amount equal to the sum of the "daily portions" of the original issue
discount on the Notes for each day such holder holds a Note. The daily portions
of original issue discount required to be included in a holder's gross income
will be determined on a constant yield basis by allocating to each day during
the taxable year in which the holder holds the Notes a pro rata portion of the
original issue discount thereon which is attributable to the "accrual period."
Thus, such original issue discount may be included in income prior to the
receipt of any cash.
The amount of the original issue discount attributable to each accrual
period will be the product of the "adjusted issue price" of the Notes at the
beginning of such accrual period and the "yield to maturity" of the Notes, less
the amount of any qualified stated interest allocable to the accrual period.
Appropriate adjustments will be made in computing the amount of original issue
discount attributable to the initial accrual period. The adjusted issue price of
the Notes at the beginning of the first accrual period is the issue price.
Thereafter the adjusted issue price of
76
<PAGE>
a Note is the issue price of the Note plus the aggregate amount of original
issue discount that accrued in all prior accrual periods, less payments
(other than payments of qualified stated interest) on the Note. The yield to
maturity of a Note will be the discount rate that, when used to compute the
present value (on a semi-annual compounded basis) of all principal and
interest payments to be made under a Note, produces a present value equal to
the issue price of the Note.
The "accrual periods" of a Note (other than the initial accrual period)
are each of the six-month periods during the term of the Notes that end on March
31 and September 30 of each year.
BOND PREMIUM ON NOTES
If a holder acquires a Note at a premium (as defined below), either at
original issuance or subsequently, the holder may elect to amortize such premium
under recently issued Treasury Regulations. If the election is made, the holder
of a Note generally offsets bond premium allocable to an accrual period against
qualified stated interest income allocable to such accrual period.
Amortizable bond premium in excess of qualified stated interest for an
accrual period is allowed as a bond premium deduction. However, the amount
allowable as a bond premium deduction for any accrual period is limited to the
amount by which the holder's aggregate interest inclusions on the Note for prior
accrual periods exceeds the aggregate bond premium deductions in such prior
accrual periods. Any excess deduction is carried forward as bond premium in
successive accrual periods.
The amortizable bond premium on a Note will generally be equal to the
amount, if any, by which the sum of all amounts payable on a Note (other than
qualified stated interest) exceeds the holder's initial tax basis in such Note.
Under the Regulations, amortizable bond premium deduction will be treated as
accruing in each accrual period under a constant yield method over the term of
such Note. However, in certain circumstances, such as a call or prepayment of a
Note, the offset or deduction for unamortized bond premium may be accelerated.
The "accrual periods" of a Note are each of the six-month periods
during the term of the Notes that end on March 31 and September 30 of each year.
For the above consequences to apply, the holder must make an election
in the manner prescribed in Regulations Section 1.171-4. Such election applies
not only to the Notes, but to all bonds held by the holder during or after the
taxable year to which the election applies, including all bonds thereafter
acquired. The election is binding for all subsequent taxable years may only be
revoked with the consent of the Commissioner of the Internal Revenue Service.
MARKET DISCOUNT
The resale of a Note, or Preferred Stock exchanged for Notes with
"market discount," to a U.S. Holder may be affected by the "market discount"
provisions of the Code. For this purpose, the market discount on a Note will
generally be equal to the amount, if any, by which the stated redemption price
at maturity of the Note immediately after its acquisition exceeds the holder's
tax basis in the Note. Subject to a de minimis exception, these provisions
generally require a U.S. Holder of a Note acquired at a market discount to treat
as ordinary income any principal payment on, or any gain recognized on the
disposition of such Note to the extent of the "accrued market discount" on such
Note at the time of disposition. In general, market discount on a Note will be
treated as accruing on a straight-line basis over the term of such Note, or, at
the election of the holder, under a constant yield method. If a Note exchanged
for Preferred Stock has "market discount," such discount will carry over to the
Preferred Stock and be taxed as interest income when the Preferred stock is
disposed of.
In addition, any U.S. Holder of a Note acquired at a market discount
may be required to defer the deduction of a portion of the interest on any
indebtedness incurred or maintained to purchase or carry the Note until the Note
is disposed of in a taxable transaction. The foregoing rule will not apply if
the holder elects to include accrued market discount in income currently. This
election to include market discount in income currently, once made, applies to
all market discount obligations acquired on or after the first taxable year to
which the election applies and may not be revoked without the consent of the
IRS.
77
<PAGE>
SALE, EXCHANGE OR REDEMPTION OF NOTES
In general, a U.S. Holder of a Note will recognize gain or loss upon
the sale, redemption, retirement or other disposition of a Note measured by the
difference between (i) the amount of cash and the fair market value of any
property received (except to the extent attributable to the payment of accrued
interest) and (ii) the holder's tax basis in the Note. A holder's tax basis in a
Note generally will equal the cost of the Note to the holder increased by the
amount of market discount or original issue discount, if any, previously taken
into income by the holder, or decreased by any bond premium offset or deduction
theretofore allowable to the holder with respect to the Note. Subject to the
market discount rules discussed above, the gain or loss on the disposition of
the Notes will be capital gain or loss and will be long-term gain or loss if the
Notes have been held for more than one year at the time of such disposition.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder of a Note or Preferred Stock may be subject to
information reporting and possible backup withholding. If applicable, backup
withholding would apply at a rate of thirty-one percent (31%) with respect to
interest or dividends on, or the proceeds of a sale, exchange, redemption,
retirement, or other disposition of, such Note or Preferred Stock, as the case
may be, unless (i) such U.S. Holder is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact, or (ii)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable backup
withholding rules.
UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OWNING AND
DISPOSING OF PREFERRED STOCK OR NOTES
DIVIDENDS PAID IN CASH OR COMMON STOCK ON PREFERRED STOCK
In general, dividends paid to a Non-U.S. Holder with respect to
Preferred Stock, including dividends that are paid in Common Stock, will be
subject to United States withholding tax at a rate of 30 percent (or a lower
rate prescribed by an applicable income tax treaty) unless the dividends are
either (i) effectively connected with a trade or business carried on by the
Non-U.S. Holder within the United States, or (ii) if certain income tax treaties
apply, attributable to a permanent establishment in the United States maintained
by the Non-U.S. Holder. Dividends effectively connected with a United States
trade or business or attributable to a United States permanent establishment
generally will not be subject to United States withholding tax if the Non-U.S.
Holder files certain forms with the payor of the dividend, and generally will be
subject to United States federal income tax on a net income basis, in the same
manner as if the Non-U.S. Holder were a resident of the United States. A
Non-U.S. Holder that is a corporation may be subject to an additional branch
profits tax at a rate of 30% (or such lower rate as may be specified by an
applicable income tax treaty). Under the income tax treaty between the United
States and Canada, the withholding tax rate on dividends paid to most
shareholders who are resident in Canada will be 15%. To determine the
applicability of a tax treaty providing for a lower rate of withholding under
the currently effective Regulations (the "Current Regulations"), dividends paid
to an address in a foreign country are presumed to be paid to a resident of that
country absent knowledge to the contrary. Under Regulations issued on October 7,
1997 (the "Final Regulations") generally effective for payments made after
December 31, 1999, a Non-U.S. Holder (including, in certain cases of Non-U.S.
Holders that are fiscally transparent entities, the owner or owners of such
entities) will be required to provide to the payor certain documentation that
such Non-U.S. Holder (or the owner or owners of such fiscally transparent
entities) is a foreign person in order to claim a reduced rate of withholding
pursuant to an applicable income tax treaty. With respect to dividends paid in
Common Stock, the Non-U.S. Holders' tax basis in such shares will be the value
of the shares for purposes of the dividend and the holding period will commence
on the day ownership of the Common Stock is acquired by the holder.
SALE OF PREFERRED STOCK
In general, a Non-U.S. Holder will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
such holder's shares of Preferred Stock unless (i) such gain either is
effectively connected with a trade or business carried on by the Non-U.S. Holder
within the United States or, if certain income tax treaties apply, is
attributable to a permanent establishment in the United States maintained by the
Non-U.S. Holder (and in either case, the branch profits tax discussed above may
also apply if the Non-U.S. Holder is a corporation); (ii) the Non-U.S. Holder is
an individual who holds shares of Preferred Stock as a capital asset and is
78
<PAGE>
present in the United States for at least 183 days during the taxable year of
the disposition, and certain other tests are met; or (iii) the Company is or has
been a "United States real property holding corporation" for federal income tax
purposes, as such term is defined by Section 897(c) of the Code, and the
Non-U.S. Holder owned directly or pursuant to certain attribution rules at any
time during the five-year period ending on the date of disposition more than 5%
of the Company's Common Stock (assuming that the Common Stock is regularly
traded on an established securities market, within the meaning of Section
897(c)(3) of the Code and Regulations Sections 1.897-1(m) and 1.897-9T(d)).
Because the Company believes it has been, and that the Company will be, a United
States real property holding corporation and because the Preferred Stock is
convertible into Common Stock and may pay dividends in Common Stock, certain
provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
discussed below may be relevant to Non-U.S. Holders.
FIRPTA
Although capital gains of Non-U.S. Holders from the sale of stock are
generally not subject to U.S. income tax, gains from the sale of a United States
real property holding corporation ("USRPHC") are taxable to such persons,
subject to certain exceptions. The Company is almost certainly a USRPHC since
the value of its indirectly held U.S. mineral holdings equals or exceeds 50% of
the value of its assets used in a trade or business and its real property
interests. Buyers of USRPHC securities are obligated to obtain certain
certifications from sellers, or withhold tax from the sales proceeds. However,
gain on the sale of securities of a USRPHC that are regularly traded on an
established securities market are not subject to the FIRPTA tax, unless the
seller has held more than 5% of such class of stock during the five years
preceding the sale. Thus, the FIRPTA rules are a concern only for the larger
Non-U.S. Holders. Non-U.S. Holders should also be aware that by conversion of
Preferred Stock to Common Stock or by receipt of Common Stock paid as a dividend
on Preferred Stock, or the combined effect of conversions and dividends, such
holders may become holders of more than 5% of the Company's Common Stock and
thus become subject to the FIRPTA rules.
CONVERSION OF PREFERRED STOCK TO COMMON STOCK
A Non-U.S. Holder should not recognize gain or loss upon the conversion
of the Preferred Stock into Common Stock except with respect to cash received in
lieu of a fractional share. The Non-U.S. Holder's tax basis in Common Stock
should be the same as the Non-U.S. Holder's tax basis of the Preferred Stock
exchanged therefor (reduced by the portion of such tax basis allocable to any
fractional interest for which the Non-U.S. Holder receives a cash payment from
the Company). In addition, the holding period of the Common Stock received in
the exchange should include the holding period of the Preferred Stock was
exchanged therefor. A holder of Notes generally will recognize capital gain or
loss in connection with any cash received in lieu of a fractional share in an
amount equal to the difference between the amount of cash received and the
adjusted basis of such fractional share. Non-U.S. Holders of Common Stock are
subject to the same rules with respect to taxation of dividends and sales as
described above in the case of holders of Preferred Stock.
ADJUSTMENTS TO CONVERSION PRICE
Pursuant to Regulations promulgated under Section 305 of the Code, a
Non-U.S. Holder of Preferred Stock should be treated as having received a
constructive distribution from the Company upon an adjustment in the conversion
price of the Preferred Stock if (i) as a result of such adjustment, the
proportionate interest of such Non-U.S. Holder in the assets or earnings and
profits of the Company is increased and (ii) the adjustment is not made pursuant
to a bona fide, reasonable antidilution formula. An adjustment in the conversion
price would not be considered made pursuant to such formula if the adjustment
were made to compensate for certain taxable distributions with respect to the
Common Stock into which the Preferred Stock is convertible. Thus, under certain
circumstances, a decrease in the conversion price of the Preferred Stock may be
taxable to a Non-U.S. Holder of Preferred Stock as a dividend to the extent of
the current or accumulated earnings and profits of the Company. In addition, the
failure to adjust fully the conversion price of the Preferred Stock to reflect
distributions of stock dividends with respect to the Common Stock may result in
a taxable dividend to the Non-U.S. Holders of the Common Stock.
INTEREST ON NOTES
Interest that is paid to a Non-U.S. Holder on a Note that is not United
States trade or business income will not be subject to United States tax if the
interest qualifies as "portfolio interest."
79
<PAGE>
Generally, interest on Notes in bearer form that is paid by the Company
will qualify as portfolio interest if (i) arrangements were made to ensure that
the Notes would be sold (or resold in connection with the original issue of the
Notes) only to persons that are not U.S. persons; (ii) interest on the Notes is
payable only outside the United States and its possessions; and (iii) the face
of the Notes bears a prescribed legend to the effect that any U.S. persons
holding the Notes will be subject to certain United States tax laws.
The Company has represented that (i) the Notes were sold only to
persons who were not U.S. persons, (ii) interest on the Notes is payable only
outside the United States and its possessions, and (iii) there will be affixed
to the Notes the following statement: "Any United States person who holds this
obligation will be subject to limitations under the United States income tax
laws, including the limitations provided in section 165(j) and 1287(a) of the
Internal Revenue Code." Based on these representations, interest paid on the
Notes issued in bearer form should qualify for the "portfolio interest"
exception. If a Non-U.S. Holder of Notes owns ten percent or more of the total
combined voting power of all classes of the Company entitled to vote, such
Non-U.S. Holder will not qualify for the portfolio interest exception. Ownership
of stock may occur indirectly, by attribution of ownership of shares held by
other persons and Non-U.S. Holders of Notes should consult their tax advisors in
this regard.
Generally, interest on notes in registered form will qualify as
portfolio interest if (i) the Non-U.S. Holder does not own, actually or
constructively, 10% or more of the total combined voting power of all classes of
stock of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder; (ii) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the Company through actual or
constructive stock ownership; (iii) the Non-U.S. Holder is not a bank which
acquired the notes in consideration for an extension of credit made pursuant to
a loan agreement entered into in the ordinary course of business; and (iv) the
Company, or its paying agent, receives a properly executed certification as set
forth in Section 871(h) and 881(c) of the Code and the regulations thereunder,
signed under penalties of perjury that the beneficial owner is not a "U.S.
person" for United States federal income tax purposes and which provides the
beneficial owner's name and address.
Payments of interest, including original issue discount, to a Non-U.S.
Holder that do not qualify for the portfolio interest exception discussed above
and which are not effectively connected with a United States trade or business
will be subject to withholding of United States federal income tax at a rate of
30% unless a United States income tax treaty applies to reduce the rate of
withholding. To claim a treaty reduced rate or an exemption from withholding
because the interest is effectively connected with a United States trade or
business, the Non-U.S. Holder must provide a properly executed Form 1001 (or
successor form) or Form 4224 (or successor form), respectively.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of Notes, generally will not be subject to United States federal
income tax provided that (i) such gain is not effectively connected with a
United States trade or business; (ii) the Non-U.S. Holder is not an individual
who is present in the United States for 183 days or more in the taxable year of
the disposition and meets certain other requirements; and (iii) the Non-U.S.
Holder is not subject to tax pursuant to the provisions of United States tax law
applicable to certain United States expatriates.
ESTATE TAX
Preferred Stock or Common Stock owned (or treated as owned) by an
individual who, at the time of death, is neither a citizen or a domiciliary of
the United States will be includable in his gross estate for United States
federal estate tax purposes and thus may be subject to United States estate tax,
unless an applicable estate tax treaty provides otherwise. Notes held (or
treated as held) by an individual who is a Non-U.S. Holder at the time of his
death (or theretofore transferred subject to certain retained rights or powers)
will not be subject to United States federal estate tax provided that any
interest thereon would be exempt as portfolio interest if such interest were
received by the Non-U.S. Holder at the time of his death. Such individual's
estate may be subject to United States federal estate tax on the property
includable in the estate for United federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to
each shareholder the amount of cash proceeds paid as a result of the Exchange
and dividends paid to, and the tax withheld with respect to, each
80
<PAGE>
shareholder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of
a specific treaty or agreement with the tax authorities in the country in
which a Non-U.S. Holder resides or is established.
Under the Current Regulations, United States backup withholding tax
(which generally is imposed at the rate of 31% on certain payments to persons
that fail to furnish the information required under the United States
information reporting requirements) and information reporting requirements
(other than those discussed above under "Dividends Paid in Cash or Common Stock
on Preferred Stock") generally will not apply to dividends paid on Preferred
Stock or Common Stock to a Non-U.S. Holder at an address outside the United
States. Backup withholding and information reporting generally will apply,
however, to dividends paid on shares of Preferred Stock or Common Stock to a
Non-U.S. Holder at an address in the United States, if such holder fails to
establish an exemption or to provide certain other information to the payor.
Under the Current Regulations, the payment of proceeds from the
disposition of Notes or Preferred Stock to or through a United States office of
a broker will be subject to information reporting and backup withholding unless
the beneficial owner, under penalties of perjury, certifies, among other things,
its status as a Non-U.S. Holder or otherwise establishes an exemption. The
payment of proceeds from the disposition of Notes or Preferred Stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting except as noted below. In the case
of proceeds from a disposition of Notes or Preferred Stock paid to or through a
non-U.S. office of a broker that is (i) a United States person, (ii) a
"controlled foreign corporation" for United States federal income tax purposes,
or (iii) a foreign person 50% or more of whose gross income from certain periods
is effectively connected with a United States trade or business, information
reporting (but not backup withholding) will apply unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder or the
broker otherwise establishes an exemption, provided such broker does not have
actual knowledge that the owner is a U.S. Holder.
Under the Final Regulations, the payment of dividends, interest, or the
payment of proceeds from the disposition of Notes or Preferred Stock to a
Non-U.S. Holder may be subject to information reporting and backup withholding
unless such recipient provides to the payor certain documentation as to its
status as a Non-U.S. Holder or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from a payment to a Non-U.S. Holder will be
refunded or credited against the Non-U.S. Holder's United States federal income
tax liability, if any, provided that the required information is furnished to
the Internal Revenue Service in a timely manner.
LEGAL OPINIONS OF COMPANY COUNSEL
Certain matters pertaining to the issuance of the securities offered
hereby will be passed upon for the Company by Montpellier McKeen Varabioff
Talbot & Giuffre and Porter & Hedges, LLP.
ADDITIONAL INFORMATION
The Company extends to each prospective purchaser the opportunity,
prior to the consummation of the sale of the securities offered hereby, to ask
questions of, and receive answers from, the Company concerning the Preferred
Stock, its Common Stock and the terms and conditions of this Offering and to
obtain any additional information he or she may consider necessary in making an
informed investment decision and any information in order to verify the accuracy
of the information set forth herein, to the extent the Company possesses the
same or can acquire it without unreasonable effort or expense and can make such
information available without divulging information deemed by the Company, in
its absolute discretion, to be proprietary and confidential. All such requests
shall be in writing, and an offeree shall not rely upon any such responses
unless in writing from a duly authorized officer of the Company. Requests for
such additional information can be directed to Benz Energy Inc., 1000 Louisiana
Street, Suite 1500, Houston, Texas 77002, U.S.A., attention: Robert S. Herlin
(tel. 1-713-739-0351); or RP&C International Limited, 56 Green Street, London
W1Y 3RH, attention: David P. Quint (tel. 44-171-491-2434); or the office of
the Exchange Agent.
81
<PAGE>
BENZ ENERGY INC.
1000 Louisiana Street
Suite 1500
Houston, Texas 77002 U.S.A.
(Tel: 1 713 739 0351)
TRUSTEE
Montreal Trust Company
7th Floor, 530-8th Avenue S.W.
Calgary, Alberta T2P 3S8
Canada
COMPANY REGISTRAR
AS TO THE PREFERRED STOCK
American Stock Transfer & Trust Company
40 Wall Street
New York, N.Y. 10005
U.S.A.
AGENT
RP&C International
56 Green Street
London W1Y 3RH
(Tel : 44 171 491 2434)
LEGAL ADVISORS
TO THE COMPANY
Porter & Hedges LLP
700 Louisiana, 38th Floor
Houston, Texas 77002-2764
U.S.A.
McKeen Varabioff Talbot & Giuffre
Suite 2323, Three Bentall Centre
595 Burrard Street
Vancouver, B.C., V7X 1K8
Canada
TO THE AGENT
Bracewell & Patterson LLP
33 Davies Street
London W1Y 1FN
INDEPENDENT AUDITORS
Merdinger, Fruchter, Rosen & Corso P.C.
888 Seventh Avenue
New York, New York 10106
U.S.A.
EXCHANGE AGENT
Midland Bank plc
Mariner House
Pepys Street
London EC3N 4DA
82
<PAGE>
EXECUTION COPY
==============================================================================
CREDIT AGREEMENT
-------------------------------------------------------
TEXSTAR PETROLEUM, INC.,
as Borrower,
BENZ ENERGY LTD.
and
CALIBRE ENERGY, L.L.C.,
as Guarantors,
and
ENCAP ENERGY CAPITAL FUND III, L.P.
as Lender
-------------------------------------------------------
$12,000,000
October 9, 1997
==============================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
CREDIT AGREEMENT................................................................................................ 1
ARTICLE I - Definitions and References.......................................................................... 1
Section 1.1. Defined Terms............................................................................ 1
Section 1.2. Exhibits and Schedules; Additional Definitions........................................... 10
Section 1.3. Amendment of Defined Instruments......................................................... 10
Section 1.4. References and Titles.................................................................... 10
Section 1.5. Calculations and Determinations.......................................................... 10
ARTICLE II - The Loan........................................................................................... 11
Section 2.1. Commitment to Lend; Note................................................................. 11
Section 2.2. Requests for Loans....................................................................... 11
Section 2.3. Use of Proceeds.......................................................................... 11
Section 2.4. Arrangement Fee.......................................................................... 12
Section 2.5. Optional Prepayments..................................................................... 12
ARTICLE III - Payments to Lender................................................................................ 12
Section 3.1. General Procedures....................................................................... 12
Section 3.2. Reimbursable Taxes....................................................................... 13
ARTICLE IV - Conditions Precedent to Lending.................................................................... 13
Section 4.1. Documents to be Delivered................................................................ 13
Section 4.2. Additional Conditions Precedent.......................................................... 15
Section 4.3. Post-Closing Conditions.................................................................. 16
ARTICLE V - Representations and Warranties...................................................................... 16
Section 5.1. No Default............................................................................... 17
Section 5.2. Organization and Good Standing........................................................... 17
Section 5.3. Authorization............................................................................ 17
Section 5.4. No Conflicts or Consents................................................................. 17
Section 5.5. Enforceable Obligations.................................................................. 17
Section 5.6. Initial Financial Statements............................................................. 17
Section 5.7. Other Obligations and Restrictions. ..................................................... 18
Section 5.8. Full Disclosure.......................................................................... 18
Section 5.9. Litigation............................................................................... 18
Section 5.10. Labor Disputes and Acts of God.......................................................... 18
Section 5.11. ERISA Plans and Liabilities............................................................. 19
Section 5.12. Environmental and Other Laws............................................................ 19
Section 5.13. Names and Places of Business............................................................ 19
Section 5.14. Borrower's Subsidiaries................................................................. 20
Section 5.15. Title to Properties; Licenses........................................................... 20
Section 5.16. Government Regulation................................................................... 20
Section 5.17. Officers, Directors and Shareholders.................................................... 20
i
<PAGE>
<S> <C>
ARTICLE VI - Affirmative Covenants of Borrower.................................................................. 20
Section 6.1. Payment and Performance.................................................................. 21
Section 6.2. Books, Financial Statements and Reports.................................................. 21
Section 6.3. Other Information and Inspections........................................................ 22
Section 6.4. Notice of Material Events and Change of Address.......................................... 23
Section 6.5. Maintenance of Properties................................................................ 23
Section 6.6. Maintenance of Existence and Qualifications.............................................. 23
Section 6.7. Payment of Trade Liabilities, Taxes, etc................................................. 24
Section 6.8. Insurance................................................................................ 24
Section 6.9. Performance on Restricted Person's Behalf................................................ 24
Section 6.10. Interest................................................................................ 24
Section 6.11. Compliance with Agreements and Law...................................................... 24
Section 6.12. Environmental Matters; Environmental Reviews............................................ 25
Section 6.13. Evidence of Compliance.................................................................. 25
Section 6.14. Solvency................................................................................ 25
Section 6.15. Agreement to Deliver Security Documents................................................. 25
Section 6.16. Perfection and Protection of Security Interests and Liens............................... 26
Section 6.17. Offset.................................................................................. 26
Section 6.18. Guaranties of Benz Energy's Subsidiaries................................................ 26
Section 6.19. Production Proceeds..................................................................... 26
ARTICLE VII - Negative Covenants of Restricted Persons.......................................................... 27
Section 7.1. Indebtedness............................................................................. 27
Section 7.2. Limitation on Liens...................................................................... 27
Section 7.3. Limitation on Mergers, Issuances of Securities........................................... 28
Section 7.4. Limitation on Sales of Property.......................................................... 28
Section 7.5. Limitation on Dividends and Redemptions.................................................. 28
Section 7.6. Limitation on Investments and New Businesses............................................. 29
Section 7.7. Limitation on Credit Extensions.......................................................... 29
Section 7.8. Transactions with Affiliates............................................................. 29
Section 7.9. Certain Contracts; Amendments; Multiemployer ERISA Plans................................. 29
ARTICLE VIII - Events of Default and Remedies................................................................... 30
Section 8.1. Events of Default........................................................................ 30
Section 8.2. Remedies................................................................................. 32
ii
<PAGE>
<S> <C>
ARTICLE IX - Miscellaneous...................................................................................... 33
Section 9.1. Waivers and Amendments; Acknowledgements................................................. 33
Section 9.2. Survival of Agreements; Cumulative Nature................................................ 34
Section 9.3. Notices.................................................................................. 34
Section 9.4. Payment of Expenses; Indemnity........................................................... 35
Section 9.5. Joint and Several Liability; Parties in Interest; Assignments............................ 36
Section 9.6. Confidentiality.......................................................................... 36
Section 9.7. Governing Law; Submission to Process..................................................... 36
Section 9.8. Limitation on Interest................................................................... 37
Section 9.9. Termination; Limited Survival............................................................ 38
Section 9.10. Severability............................................................................ 38
Section 9.11. Counterparts............................................................................ 38
Section 9.12. Waiver of Jury Trial, Punitive Damages, etc............................................. 38
</TABLE>
SCHEDULES AND EXHIBITS:
- -----------------------
Schedule 1 - Disclosure Schedule
Schedule 2 - Security Schedule
Schedule 3 - Oakvale Properties and Old Ocean Properties
Schedule 4 - Acquisition/Development Plan
Schedule 5 - Insurance Schedule
Exhibit A - Promissory Note
Exhibit B - Loan Request
Exhibit C - Certificate Accompanying Financial Statements
Exhibit D-1 - Opinion of Porter & Hedges, counsel for Borrower, Calibre, Benz
Properties, Texstar Holdings and Tomlinson
Exhibit D-2 - Opinion of Veale, Kilpatrick, Austring, Fendrick & Fairman,
Yukon Territory counsel for Benz Energy
Exhibit D-3 - Opinion of Montpellier McKeen Varabioff Talbot & Giuffre,
Canadian counsel for Benz Energy
Exhibit D-4 - Opinion of Fizer, Beck, counsel for the Slattery Trust and Trustee
Exhibit E - NPI Conveyance
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made as of October 9, 1997, by and among
Texstar Petroleum, Inc., a Texas corporation ("Borrower"), Benz Energy Ltd.,
a corporation existing under the laws of the Yukon Territory, Canada ("Benz
Energy") and Calibre Energy, L.L.C., a Texas limited liability company
("Calibre"), and EnCap Energy Capital Fund III, L.P. ("Lender"). In
consideration of the mutual covenants and agreements contained herein the
parties hereto agree as follows:
ARTICLE I - Definitions and References
Section 1.1. DEFINED TERMS. As used in this Agreement, each of the
following terms has the meaning given it in this Section 1.1 or in the
sections and subsections referred to below:
"AFFILIATE" means, as to any Person, each other Person that directly
or indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person. A Person shall
be deemed to be "controlled by" any other Person if such other Person
possesses, directly or indirectly, power
(a)to vote 20% or more of the securities (on a fully diluted
basis) having ordinary voting power for the election of directors or
managing general partners; or
(b)to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"AGREEMENT" means this Credit Agreement.
"BANK ONE CREDIT FACILITY" means the credit facilities under those
certain Letter Loan Agreement dated July 17, 1997 between Bank One, Texas, N.A.
and Borrower and Bank One, Texas, N.A. and Calibre., each in the maximum
principal amount of $10,000,000.
"BENZ ENERGY" means Benz Energy Ltd., a corporation existing under the
laws of the Yukon Territory, Canada.
"BENZ PROPERTIES" means Benz Properties Ltd., a Colorado corporation.
"BORROWER" means Texstar Petroleum, Inc., a Texas corporation.
"BORROWER'S AND GUARANTORS' OIL AND GAS PROPERTIES" means the interest
in oil, gas and/or mineral leases or properties owned by Borrower or any
Guarantor at the time in question and such Person's interest in equipment and
other assets directly associated with the production thereon.
"BUSINESS DAY" means a day, other than a Saturday or Sunday, on which
commercial banks are open for business with the public in Houston, Texas.
1
<PAGE>
"CALIBRE" means Calibre Energy, L.L.C., a Texas limited liability
company.
"CASH EQUIVALENTS" means investments in:
(a) marketable obligations, maturing within 12 months after
acquisition thereof, issued or unconditionally guaranteed by the United
States of America or an instrumentality or agency thereof and entitled to the
full faith and credit of the United States of America.
(b) demand deposits, and time deposits (including certificates of
deposit) maturing within 12 months from the date of deposit thereof, with a
domestic office of any national or state bank or trust company which is
organized under the Laws of the United States of America or any state
therein, which has capital, surplus and undivided profits of at least
$500,000,000, and whose certificates of deposit have at least the third
highest credit rating given by either Rating Agency.
(c) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (a) above entered
into with any commercial bank meeting the specifications of clause (b) above.
(d) open market commercial paper, maturing within 270 days after
acquisition thereof, which has the highest or second highest credit rating
given by either Rating Agency.
(e) investments in money market or other mutual funds substantially
all of whose assets comprise securities of the types described in clauses (a)
through (d) above.
"CHANGE OF CONTROL" means the occurrence of any of the following
events: (i) any Person or two or more Persons acting as a group shall acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Act of 1934, as amended, and
including holding proxies to vote for the election of directors other than
proxies held by Benz Energy's management or their designees to be voted in
favor of Persons nominated by Benz Energy's Board of Directors) of 35% or
more of the outstanding voting securities of Benz Energy, measured by voting
power (including both common stock and any preferred stock or other equity
securities entitling the holders thereof to vote with the holders of common
stock in elections for directors of Benz Energy), (ii) one-third or more of
the directors of Benz Energy shall consist of Persons not nominated by Benz
Energy's Board of Directors (not including as Board nominees any directors
which the Board is obligated to nominate pursuant to shareholders agreements,
voting trust arrangements or similar arrangements), (iii) Benz Energy shall
cease to own all of the outstanding capital stock of Borrower, (iv) Prentis
B. Tomlinson, Jr. shall cease to be actively engaged in the management and
operations of Borrower.
"COLLATERAL" means all property of any kind which is subject to a
Lien in favor of Lender or which, under the terms of any Security Document,
is purported to be subject to such a Lien.
"CONSOLIDATED" refers to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated
2
<PAGE>
financial statements, financial position, financial condition, liabilities,
etc. refer to the consolidated financial statements, financial position,
financial condition, liabilities, etc. of such Person and its properly
consolidated subsidiaries.
"DEFAULT" means any Event of Default and any default, event or
condition which would, with the giving of any requisite notices and the
passage of any requisite periods of time, constitute an Event of Default.
"DISCLOSURE REPORT" means either a notice given by Borrower under
Section 6.4 or a certificate given by Borrower's chief financial officer
under Section 6.2(b).
"DISCLOSURE SCHEDULE" means Schedule 1 hereto.
"DISTRIBUTION" means (a) any dividend or other distribution made by
a Restricted Person on or in respect of any stock, partnership interest, or
other equity interest in such Restricted Person (including any option or
warrant to buy such an equity interest), or (b) any payment made by a
Restricted Person to purchase, redeem, acquire or retire any stock,
partnership interest, or other equity interest in such Restricted Person
(including any such option or warrant).
"ENVIRONMENTAL LAWS" means any and all Laws relating to the
environment or to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment including ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA AFFILIATE" means Borrower and all members of a controlled
group of corporations and all trades or businesses (whether or not
incorporated) under common control that, together with Borrower, are treated
as a single employer under Section 414 of the Internal Revenue Code of 1986,
as amended.
"ERISA PLAN" means any employee pension benefit plan subject to
Title IV of ERISA maintained by any ERISA Affiliate with respect to which any
Restricted Person has a fixed or contingent liability.
"ESCROW AGREEMENT" means that certain Escrow Agreement dated
September 15, 1997 among the Slattery Trust, other security holders named
therein, Escrow Trustee, and Benz Energy.
"ESCROW TRUSTEE" means Montreal Trust Company of Canada, in its
capacity as trustee under the Escrow Agreement, and its successors and
assigns.
"Event of Default" has the meaning given it in Section 8.1.
3
<PAGE>
"FISCAL QUARTER" means a three-month period ending on November 30,
February 28, May 31 or August 31 of any year.
"FISCAL YEAR" means a twelve-month period ending on August 31 of any
year.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of
Borrower and its Consolidated subsidiaries, are applied for all periods after
the date hereof in a manner consistent with the manner in which such
principles and practices were applied to the audited Initial Financial
Statements; PROVIDED, that with respect to Benz Energy, "GAAP" means such
generally accepted accounting principles and practices as recognized by the
Canadian financial accounting standard board equivalent. If any change in any
accounting principle or practice is required by the Financial Accounting
Standards Board or Canadian financial accounting standards board equivalent
(or any such successor) in order for such principle or practice to continue
as a generally accepted accounting principle or practice, all reports and
financial statements required hereunder with respect to Restricted Persons or
with respect to Restricted Persons and their Consolidated subsidiaries may be
prepared in accordance with such change, but all calculations and
determinations to be made hereunder may be made in accordance with such
change only after notice of such change is given to Lender and Lender agrees
to such change insofar as it affects the accounting of Restricted Persons or
of any Restricted Persons and their Consolidated subsidiaries.
"GUARANTOR" means Benz Energy, Calibre, Benz Properties, Prentis B.
Tomlinson, Jr., Trustee and any other Person who has guaranteed some or all
of the Obligations pursuant to a guaranty listed on the Security Schedule or
any other Person who has guaranteed some or all of the Obligations and who
has been accepted by Lender as a Guarantor, or any Subsidiary of Borrower
which now or hereafter executes and delivers a guaranty to Lender pursuant to
Section 6.18.
"HAZARDOUS MATERIALS" means any substances regulated under any
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise.
"HIGHEST LAWFUL RATE" means the maximum nonusurious rate of interest
that Lender is permitted under applicable Law to contract for, take, charge,
or receive with respect to the Loans.
"INDEBTEDNESS" of any Person means Liabilities in any of the
following categories:
(a) Liabilities for borrowed money,
(b) Liabilities constituting an obligation to pay the deferred
purchase price of property or services,
(c) Liabilities evidenced by a bond, debenture, note or similar
instrument,
4
<PAGE>
(d) Liabilities which (i) would under GAAP be shown on such
Person's balance sheet as a liability, and (ii) is payable more than one year
from the date of creation thereof (other than reserves for taxes and reserves
for contingent obligations),
(e) Liabilities arising under futures contracts, forward contracts,
swap, cap or collar contracts, option contracts, hedging contracts, other
derivative contracts, or similar agreements,
(f) Liabilities constituting principal under leases capitalized in
accordance with GAAP,
(g) Liabilities arising under conditional sales or other title
retention agreements,
(h) Liabilities owing under direct or indirect guaranties of
Liabilities of any other Person or constituting obligations to purchase or
acquire or to otherwise protect or insure a creditor against loss in respect
of Liabilities of any other Person (such as obligations under working capital
maintenance agreements, agreements to keep-well, or agreements to purchase
Liabilities, assets, goods, securities or services), but excluding
endorsements in the ordinary course of business of negotiable instruments in
the course of collection,
(i) Liabilities (for example, repurchase agreements) consisting of
an obligation to purchase securities or other property, if such Liabilities
arises out of or in connection with the sale of the same or similar
securities or property,
(j) Liabilities with respect to letters of credit or applications
or reimbursement agreements therefor,
(k) Liabilities with respect to payments received in consideration
of oil, gas, or other minerals yet to be acquired or produced at the time of
payment (including obligations under "take-or-pay" contracts to deliver gas
in return for payments already received and the undischarged balance of any
production payment created by such Person or for the creation of which such
Person directly or indirectly received payment), or
(l) Liabilities with respect to other obligations to deliver goods or
services in consideration of advance payments therefor;
provided, however, that the "Indebtedness" of any Person shall not include
Liabilities that were incurred by such Person on ordinary trade terms to
vendors, suppliers, or other Persons providing goods and services for use by
such Person in the ordinary course of its business, unless and until such
Liabilities are outstanding more than 90 days past the original invoice or
billing date therefor.
"INSURANCE SCHEDULE" means Schedule 5 attached hereto.
"INITIAL FINANCIAL STATEMENTS" means (i) the audited annual
Consolidated financial statements of Benz Energy, f/k/a Benz Equities Ltd.,
dated as of August 31, 1996, (ii) the unaudited quarterly Consolidated financial
statements of Benz Energy dated as of May 31,
5
<PAGE>
1997, and (iii) the unaudited Consolidated financial statements of Benz
Energy dated as of July 31, 1997.
"INITIAL RESERVE REPORT" means the draft Reserve Report concerning
Borrower's and Guarantor's Oil and Gas Properties, effective as of August 1,
1997 and to be dated on or about October __, 1997, prepared by Ryder Scott
Company.
"INTEREST RATE" means ten percent (10%) per annum; PROVIDED, that
upon the occurrence and during the continuance of a Default, "Interest Rate"
shall mean eighteen percent (18%) per annum; PROVIDED, FURTHER, in no event
shall the Interest Rate exceed the Highest Lawful Rate.
"INVESTMENT" means any investment, in cash or by delivery of
property made, directly or indirectly in any Person, whether by acquisition
of shares of capital stock, indebtedness or other obligations or securities
or by loan, advance, capital contribution or otherwise.
"LAW" means any statute, law, regulation, ordinance, rule, treaty,
judgment, order, decree, permit, concession, franchise, license, agreement or
other governmental restriction of the United States or any state or political
subdivision thereof or of any foreign country or any department, province or
other political subdivision thereof.
"LENDER" means EnCap Energy Capital Fund III, L.P., and its
successors and assigns as holders of the Note.
"LIABILITIES" means, as to any Person, all indebtedness, liabilities
and obligations of such Person, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent, and whether or not required to be considered pursuant to GAAP.
"LIEN" means, with respect to any property or assets, any right or
interest therein of a creditor to secure Liabilities owed to him or any other
arrangement with such creditor which provides for the payment of such
Liabilities out of such property or assets or which allows him to have such
Liabilities satisfied out of such property or assets prior to the general
creditors of any owner thereof, including any lien, mortgage, security
interest, pledge, deposit, production payment, rights of a vendor under any
title retention or conditional sale agreement or lease substantially
equivalent thereto, tax lien, mechanic's or materialman's lien, or any other
charge or encumbrance for security purposes, whether arising by Law or
agreement or otherwise, but excluding any right of offset which arises
without agreement in the ordinary course of business. "LIEN" also means any
filed financing statement, any registration of a pledge (such as with an
issuer of uncertificated securities), or any other arrangement or action
which would serve to perfect a Lien described in the preceding sentence,
regardless of whether such financing statement is filed, such registration is
made, or such arrangement or action is undertaken before or after such Lien
exists.
"LOANS" has the meaning given it in Section 2.1.
6
<PAGE>
"LOAN DOCUMENTS" means this Agreement, the Note, the Security
Documents, the NPI Conveyances, the Put/Call Agreement and all other
agreements, certificates, documents, instruments and writings at any time
delivered in connection herewith or therewith (exclusive of term sheets,
commitment letters, correspondence and similar documents used in the
negotiation hereof, except to the extent the same contain information about
Borrower or its Affiliates, properties, business or prospects).
"LOAN REQUEST" means a written or telephonic request, or a written
confirmation, made by Borrower which meets the requirements of Section 2.2.
"MATERIAL ADVERSE CHANGE" means a material and adverse change, from
the state of affairs presented in the Initial Financial Statements, to (a)
Borrower's or Benz Energy's financial condition, in each case taken on a
Consolidated basis, (b) the operations or properties of Borrower or Benz
Energy, in each case taken on a Consolidated basis, or (c) Borrower's or any
Guarantor's ability to timely pay or perform the Obligations.
"MATURITY DATE" means December 31, 1998.
"MORTGAGED PROPERTY" means all oil and gas properties and other real
property subject to any Security Document.
"NATURAL GAS" means all gaseous hydrocarbons, including, but not
limited to, oil well gas, gas well gas, casinghead gas and all products
refined therefrom or produced in association therewith, including condensate,
distillate and other liquid hydrocarbons produced from gaseous hydrocarbons.
"NPI" means a net profits overriding royalty interest granted under
an NPI Conveyance.
"NPI CONVEYANCE" means a Conveyance of Net Profits Overriding
Royalty Interest given by Borrower from time to time to Lender and its
affiliates in the form of Exhibit E.
"NOTE" has the meaning given it in Section 2.1.
"OAKVALE ACQUISITION DOCUMENTS" means (a) the Purchase and Sale
Agreement dated on or about October 10, 1997 between Bean Industries, Inc.
and Bean Resources, Inc., as sellers, and Borrower, as buyer, (b) the
Assignments and Bills of Sale by Bean Industries, Inc. and Bean Resources,
Inc., as assignors, in favor of Borrower, as assignee, covering the Oakvale
Properties, and (c) all other agreements or instruments delivered in
connection therewith to consummate the acquisition contemplated thereby.
"OAKVALE PROPERTIES" means those oil and gas properties described as
the "Oakvale Properties" as set forth on Schedule 3 attached hereto, to be
acquired by Borrower pursuant to the Oakvale Acquisition Documents.
7
<PAGE>
"OBLIGATIONS" means all Liabilities from time to time owing by any
Restricted Person to any Lender under or pursuant to any of the Loan
Documents. "OBLIGATION" means any part of the Obligations.
"OLD OCEAN ACQUISITION DOCUMENTS" means (a) that certain Letter
Agreement, Old Ocean Prospect, Matagorda and Brazoria Counties, Texas, dated
September 25, 1997 by and between Borrower and Cheyenne Petroleum Company,
and (b) all other agreements or instruments delivered in connection therewith
to consummate the acquisition contemplated thereby.
"OLD OCEAN PROPERTIES" means those oil and gas properties described
as the "Old Ocean Properties" as set forth on Schedule 3 attached hereto, to
be acquired by Borrower pursuant to the Old Ocean Acquisition Documents.
"PERMITTED LIEN" has the meaning given to such term in Section 7.2.
"PERSON" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee
thereof, estate or executor thereof, unincorporated organization or joint
venture, Tribunal, or any other legally recognizable entity.
"PROPERTY" means any interest in any kind of property or asset,
whether real, personal or mixed, tangible or intangible.
"PROVED RESERVES" means "Proved Reserves" as defined in the
Definitions for Oil and Gas Reserves promulgated by the Society of Petroleum
Engineers (or any generally recognized successor) as in effect at the time in
question. "PDP RESERVES" means Proved Reserves which are categorized as both
"Developed" and "Producing" in such Definitions, "PDNP RESERVES" means Proved
Reserves which are categorized as both "Developed" and "Nonproducing" in such
Definitions, and "PUD RESERVES" means Proved Reserves which are categorized
as "Undeveloped" in such Definitions.
"PUT/CALL AGREEMENT" means that certain Put/Call Agreement of even
date herewith among Texstar Holdings, Trustee, Lender and its affiliates.
"RATING AGENCY" means either Standard & Poor's Ratings Group (a
division of McGraw Hill, Inc.) or Moody's Investors Service, Inc., or their
respective successors.
"REGISTRATION RIGHTS AGREEMENT" means that certain Piggy Back
Registration Rights Agreement of even date herewith among Benz Energy, Lender
and its affiliates.
"RESERVE REPORT" means an oil and gas reserve report prepared by
Ryder Scott Company or other independent petroleum engineers chosen by Benz
Energy or Borrower and acceptable to Lender concerning Borrower's and
Guarantors' Oil and Gas Properties. The term "Reserve Report" includes the
Initial Reserve Report and any other such report hereafter delivered pursuant
to Section 6.2(d). Each such other report:
8
<PAGE>
(a) shall report without deduction for the NPIs.
(b) to the extent applicable, shall contain information and
analysis comparable in form and scope to that contained in the Initial
Reserve Report (including projected production profiles), shall be
prepared in accordance with the guidelines of the Society of Petroleum
Engineers, and shall otherwise be satisfactory to Lender in form and
substance.
(c) shall separately report on PDP Reserves, PDNP Reserves
and PUD Reserves.
"RESTRICTED PERSON" means any of Borrower, Benz Energy, Calibre,
Texstar Holdings and each Subsidiary of Borrower, Benz Energy or Calibre.
"SECURITY DOCUMENTS" means the instruments listed in the Security
Schedule and all other security agreements, deeds of trust, mortgages,
chattel mortgages, pledges, guaranties, financing statements, continuation
statements, extension agreements and other agreements or instruments now,
heretofore, or hereafter delivered by any Restricted Person to Lender in
connection with this Agreement or any transaction contemplated hereby to
secure or guarantee the payment of any part of the Obligations or the
performance of any Restricted Person's other duties and obligations under the
Loan Documents.
"SECURITY SCHEDULE" means Schedule 2 hereto.
"SLATTERY TRUST" means the Slattery Trust created by Trust Agreement
dated January 14, 1987 by Marjorie J. Tomlinson, as grantor, and Prentis B.
Tomlinson, Jr., as trustee.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association, partnership, joint venture, or other business or corporate
entity, enterprise or organization which is directly or indirectly (through
one or more intermediaries) controlled by or owned fifty percent or more by
such Person.
"TERMINATION EVENT" means (a) the occurrence with respect to any
ERISA Plan of (i) a reportable event described in Sections 4043(b)(5) or (6)
of ERISA or (ii) any other reportable event described in Section 4043(b) of
ERISA other than a reportable event not subject to the provision for 30-day
notice to the Pension Benefit Guaranty Corporation pursuant to a waiver by
such corporation under Section 4043(a) of ERISA, or (b) the withdrawal of any
ERISA Affiliate from an ERISA Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the
filing of a notice of intent to terminate any ERISA Plan or the treatment of
any ERISA Plan amendment as a termination under Section 4041 of ERISA, or (d)
the institution of proceedings to terminate any ERISA Plan by the Pension
Benefit Guaranty Corporation under Section 4042 of ERISA, or (e) any other
event or condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
ERISA Plan.
9
<PAGE>
"TEXSTAR HOLDINGS" means Texstar Holdings, L.L.C., f/k/a Texstar
Petroleum, L.L.C., a Texas limited liability company.
"TRIBUNAL" means any government, any arbitration panel, any court or
any governmental department, commission, board, bureau, agency or
instrumentality of the United States of America or any state, province,
commonwealth, nation, territory, possession, county, parish, town, township,
village or municipality, whether now or hereafter constituted and/or existing.
"TRUSTEE" means Prentis B. Tomlinson, Jr., in his capacity as
trustee of the Slattery Trust.
Section 1.2. EXHIBITS AND SCHEDULES; ADDITIONAL DEFINITIONS. All
Exhibits and Schedules attached to this Agreement are a part hereof for all
purposes. Reference is hereby made to the Security Schedule for the meaning
of certain terms defined therein and used but not defined herein, which
definitions are incorporated herein by reference.
Section 1.3. AMENDMENT OF DEFINED INSTRUMENTS. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in
this Agreement which refer to a particular agreement, instrument or document
also refer to and include all renewals, extensions, modifications, amendments
and restatements of such agreement, instrument or document, provided that
nothing contained in this section shall be construed to authorize any such
renewal, extension, modification, amendment or restatement.
Section 1.4. REFERENCES AND TITLES. All references in this Agreement
to Exhibits, Schedules, articles, sections, subsections and other
subdivisions refer to the Exhibits, Schedules, articles, sections,
subsections and other subdivisions of this Agreement unless expressly
provided otherwise. Titles appearing at the beginning of any subdivisions are
for convenience only and do not constitute any part of such subdivisions and
shall be disregarded in construing the language contained in such
subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly
so limited. The phrases "this section" and "this subsection" and similar
phrases refer only to the sections or subsections hereof in which such
phrases occur. The word "or" is not exclusive, and the word "including" (in
its various forms) means "including without limitation". Pronouns in
masculine, feminine and neuter genders shall be construed to include any
other gender, and words in the singular form shall be construed to include
the plural and vice versa, unless the context otherwise requires.
Section 1.5. CALCULATIONS AND DETERMINATIONS. All calculations under
the Loan Documents of interest chargeable with respect to Loans and of fees
shall be made on the basis of actual days elapsed (including the first day
but excluding the last) and a year of 360 days. Each determination by Lender
of amounts to be paid under Section 3.2 or any other matters which are to be
determined hereunder by Lender (such as any Business Day) shall, in the
absence of manifest error, be conclusive and binding. Unless otherwise
expressly provided herein or unless Lender otherwise consents, all financial
statements and reports
10
<PAGE>
furnished to any Lender hereunder shall be prepared and all financial
computations and determinations pursuant hereto shall be made in accordance
with GAAP.
ARTICLE II - The Loans
Section 2.1. COMMITMENT TO LEND; NOTE. Subject to the terms and
conditions hereof, upon Borrower's request from time to time prior December
31, 1997, Lender agrees to make loans to Borrower (collectively, the "LOANS")
as follows: (a) a loan in an amount of up to $8,000,000 to finance the
acquisition of the Oakvale Properties, and (b) one or more additional loans
in an aggregate amount of up to $4,000,000 pursuant to and as set forth in
Schedule 4 attached hereto. The amount of each Loan must be greater than or
equal to $500,000. The obligation of Borrower to repay to Lender the
aggregate amount of all Loans made by Lender, together with interest accruing
in connection therewith, shall be evidenced by a single promissory note (the
"Note") made by Borrower payable to the order of Lender in the form of
Exhibit A with appropriate insertions. The amount of principal owing on the
Note at any given time shall be the aggregate amount of all Loans theretofore
made by Lender minus all payments of principal theretofore received by Lender
on the Note. Interest on the Note shall accrue and be due and payable as
provided herein and therein, with Loans bearing interest at the rate set
forth in the Note (as limited by the provisions of Section 9.8). Borrower may
NOT borrow, repay, and reborrow hereunder.
Section 2.2. REQUESTS FOR LOANS. Borrower must give to Lender
written notice (or telephonic notice promptly confirmed in writing) of any
requested Loan to be advanced by Lender. Each such notice constitutes a "Loan
Request" hereunder and must:
(a) specify the aggregate amount of any such new Loan and
the date on which such Loan is to be advanced; and
(b) be received by Lender not later than 10:00 a.m.,
Houston, Texas time, on the day on which any such Loan is to be
made.
Each such written request or confirmation must be made in the form and
substance of the "Loan Request" attached hereto as Exhibit B, duly completed.
Each such telephonic request shall be deemed a representation, warranty,
acknowledgment and agreement by Borrower as to the matters which are required
to be set out in such written confirmation. If all conditions precedent to
such Loan have been met, Lender shall promptly make such Loan available to
Borrower.
Section 2.3. USE OF PROCEEDS. Borrower shall use the first Loan to
finance the acquisition of the Oakvale Properties and any additional Loans to
finance additional acquisition and development-related capital expenditures
pursuant to and as set forth in Schedule 4 attached hereto. In no event shall
the funds from any Loan be used directly or indirectly by any Person for
personal, family, household or agricultural purposes or for the purpose,
whether immediate, incidental or ultimate, of purchasing, acquiring or
carrying any "margin stock" or any "margin securities" (as such terms are
defined respectively in Regulation U and Regulation G promulgated by the
Board of Governors of the Federal Reserve System) or to extend credit to
others directly or indirectly for the purpose of
11
<PAGE>
purchasing or carrying any such margin stock or margin securities. Borrower
represents and warrants that Borrower is not engaged principally, or as one
of Borrower's important activities, in the business of extending credit to
others for the purpose of purchasing or carrying such margin stock or margin
securities.
Section 2.4. ARRANGEMENT FEE. In consideration of Lender's
commitment to make Loans, Borrower will pay to EnCap Investments, L.C. an
arrangement fee in the amount of $200,000, due and payable on the date hereof.
Section 2.5. OPTIONAL PREPAYMENTS. Borrower may, upon five Business
Days' notice to Lender, from time to time and without premium or penalty
prepay the Note, in whole or in part, so long as the aggregate amounts of all
partial prepayments of principal on the Note equals $500,000 or any higher
integral multiple of $100,000, and so long as Borrower does not make any
prepayments which would reduce the unpaid principal balance of the Loan to
less than $100,000 without first either (a) terminating this Agreement or (b)
providing assurance satisfactory to Lender in its discretion that Lender's
legal rights under the Loan Documents are in no way affected by such
reduction. Each prepayment of principal under this section shall be
accompanied by all interest then accrued and unpaid on the principal so
prepaid. Any principal or interest prepaid pursuant to this section shall be
in addition to, and not in lieu of, all payments otherwise required to be
paid under the Loan Documents at the time of such prepayment.
ARTICLE III - PAYMENTS TO LENDER
Section 3.1. GENERAL PROCEDURES. Each payment which Borrower owes
under the Loan Documents to Lender must be received by Lender not later than
11:00 a.m., Houston, Texas time on the date such payment becomes due and
payable, in lawful money of the United States of America, without set-off,
deduction or counterclaim, and in immediately available funds. Any payment
received by Lender after such time will be deemed to have been made on the
next following Business Day. Should any such payment become due and payable
on a day other than a Business Day, the maturity of such payment shall be
extended to the next succeeding Business Day, and, in the case of a payment
of principal or past due interest, interest shall accrue and be payable
thereon for the period of such extension as provided in the Loan Document
under which such payment is due. Each payment under a Loan Document shall be
due and payable at the place provided therein and, if no specific place of
payment is provided, shall be due and payable at the place of payment of the
Note. When Lender collects or receives money on account of the Obligations,
Lender shall apply all such money so distributed, as follows:
(a) first, for the payment of all Obligations which are
then due (and if such money is insufficient to pay all such
Obligations, first to any reimbursements due Lender under Section
6.9 or 9.4 and then to the partial payment of all other Obligations
then due in proportion to the amounts thereof);
(b) then for the prepayment of principal on the Note,
together with accrued and unpaid interest on the principal so
prepaid; and
12
<PAGE>
(c) last, for the payment or prepayment of any other
Obligations.
All payments applied to principal or interest on the Note shall be applied
first to any interest then due and payable, then to principal then due and
payable, and last to any prepayment of principal and interest in compliance
with Section 2.5.
Section 3.2. REIMBURSABLE TAXES. Borrower covenants and agrees
that:
(a) Borrower will indemnify Lender against and reimburse
Lender for all present and future stamp and other taxes, levies,
costs and charges whatsoever imposed, assessed, levied or collected
on or in respect of this Agreement (whether or not legally or
correctly imposed, assessed, levied or collected), excluding,
however, any taxes imposed on or measured by the overall net income
of Lender by any jurisdiction in which Lender is located (all such
non-excluded taxes, levies, costs and charges being collectively
called "Reimbursable Taxes" in this section). Such indemnification
shall be on an after-tax basis, taking into account any taxes
imposed on the amounts paid as indemnity.
(b) All payments on account of the principal of, and
interest on, Lender's Loans and Note, and all other amounts payable
by Borrower to Lender hereunder, shall be made in full without
set-off or counterclaim and shall be made free and clear of and
without deductions or withholdings of any nature by reason of any
Reimbursable Taxes, all of which will be for the account of
Borrower. In the event of Borrower being compelled by Law to make
any such deduction or withholding from any payment to Lender,
Borrower shall pay on the due date of such payment, by way of
additional interest, such additional amounts as are needed to cause
the amount receivable by Lender after such deduction or withholding
to equal the amount which would have been receivable in the absence
of such deduction or withholding. If Borrower should make any
deduction or withholding as aforesaid, Borrower shall within 60 days
thereafter forward to Lender an official receipt or other official
document evidencing payment of such deduction or withholding.
ARTICLE IV - CONDITIONS PRECEDENT TO LENDING
Section 4.1. DOCUMENTS TO BE DELIVERED. Lender has no obligation to
make its first Loan unless Lender shall have received all of the following,
at Lender's office in Houston, Texas, duly executed and delivered and in
form, substance and date satisfactory to Lender:
(a) This Agreement and the Note.
(b) Each Security Document listed in the Security Schedule
and a Partial Release by Bank One, Texas, N.A. releasing any prior
liens or security interests on the Oakvale Properties.
(c) An NPI Conveyance covering the Oakvale Properties, the
Put/Call Agreement and the Registration Rights Agreement.
13
<PAGE>
(d) Certain certificates of Borrower including:
(i) An "Omnibus Certificate" of the Secretary and of the
Chairman of Borrower, which shall contain the names and
signatures of the officers of Borrower authorized to execute
Loan Documents and which shall certify to the truth,
correctness and completeness of the following exhibits
attached thereto: (1) a copy of resolutions duly adopted by
the Board of Directors of Borrower and in full force and
effect at the time this Agreement is entered into,
authorizing the execution of this Agreement and the other
Loan Documents delivered or to be delivered in connection
herewith and the consummation of the transactions
contemplated herein and therein, (2) a copy of the charter
documents of Borrower and all amendments thereto, certified
by the appropriate official of Borrower's state of
organization, and (3) a copy of any bylaws of Borrower; and
(ii) A "Compliance Certificate" of the chief executive
officers and of the chief financial officers of Borrower,
Benz Energy and Calibre, of even date with such Loan, in
which such officers certify to the satisfaction of the
conditions set out in subsections (a), (b), (c) and (d) of
Section 4.2.
(e) A certificate (or certificates) of the due formation,
valid existence and good standing of Borrower in its state of
organization, issued by the appropriate authorities of such
jurisdiction, and certificates of Borrower's good standing and due
qualification to do business, issued by appropriate officials in
Mississippi, Louisiana and any other states in which Borrower owns
property subject to Security Documents.
(f) Documents similar to those specified in subsections
(d)(i) and (e) of this section with respect to each Guarantor and
the execution by it of its guaranty of Borrower's Obligations.
(g) Solvency Certificates with respect to Borrower, Benz
Energy, Calibre, Benz Properties, Texstar Holdings and the Slattery
Trust.
(h) Favorable opinions of (i) Messrs. Porter & Hedges,
counsel for Borrower, Calibre, Benz Properties, Benz Holdings and
Tomlinson, (ii) Veale, Kilpatrick, Austring, Fendrick & Fairman,
Yukon Territory counsel for Benz Energy, (iii) Montpellier McKeen
Varabioff Talbot & Giuffre, Canadian counsel for Benz Energy, and
(iv) Fizer, Beck, Webster, Bentley & Scroggins, counsel for the
Slattery Trust and Trustee, substantially in the forms set forth in
Exhibits D-1, D-2, D-3 and D-4 attached hereto.
(i) The Initial Reserve Report and the Initial Financial
Statements.
(j) Certificates or binders evidencing Restricted Persons'
insurance in effect on the date hereof.
14
<PAGE>
(k) A Phase One environmental report containing an
environmental assessment of the Oakvale Properties and any other
properties constituting Collateral, in scope and results acceptable
to Lender.
(l) Title opinions in form, substance and authorship
satisfactory to Lender, or other title information and review
satisfactory to Lender, concerning the Oakvale Properties, a
favorable title review concerning any other properties constituting
Collateral, in scope and results acceptable to Lender, and lien
searches against Borrower and each Guarantor in each jurisdiction in
which Borrower or such Guarantor owns property subject to Security
Documents.
(m) Payment of all fees required to be paid to Lender
pursuant to any Loan Documents or any commitment agreement
heretofore entered into, including without limitation attorney's
fees of Thompson & Knight, P.C., counsel for Lender.
(n) A certified copy of each Oakvale Acquisition Document,
duly executed and delivered by each party thereto, and the
consummation of Borrower's acquisition of the Oakvale Properties.
(o) A certified copy of the Escrow Agreement.
Section 4.2. ADDITIONAL CONDITIONS PRECEDENT. Lender has no
obligation to make any Loan (including its first), unless the following
conditions precedent have been satisfied:
(a) All representations and warranties made by any
Borrower or any Guarantor in any Loan Document shall be true on and
as of the date of such Loan (except to the extent that the facts
upon which such representations are based have been changed by the
extension of credit hereunder) as if such representations and
warranties had been made as of the date of such Loan.
(b) No Default shall exist at the date of such Loan.
(c) No Material Adverse Change shall have occurred to, and
no event or circumstance shall have occurred that could reasonably
be expected to cause a Material Adverse Change to, Borrower's or any
Guarantor's Consolidated financial condition or businesses since the
date of this Agreement.
(d) Borrower and each Guarantor shall have performed and
complied with all agreements and conditions required in the Loan
Documents to be performed or complied with by it on or prior to the
date of such Loan.
(e) The making of such Loan shall not be prohibited by any
Law and shall not subject Lender to any penalty or other onerous
condition under or pursuant to any such Law.
(f) Lender shall have received all documents and
instruments which Lender has then requested, in addition to those
described in Section 4.1 (including opinions of
15
<PAGE>
legal counsel for Borrower, Guarantors and Lender; corporate
documents and records; documents evidencing governmental
authorizations, consents, approvals, licenses and exemptions; and
certificates of public officials and of officers and representatives
of Borrower, Guarantors and other Persons), as to (i) the accuracy
and validity of or compliance with all representations, warranties
and covenants made by Borrower or any Guarantor in this Agreement
and the other Loan Documents, (ii) the satisfaction of all
conditions contained herein or therein, and (iii) all other matters
pertaining hereto and thereto. All such additional documents and
instruments shall be satisfactory to Lender in form, substance and
date.
(g) Borrower shall, prior to the making of the first Loan
(or using the proceeds thereof), have deposited $5,000 with Thompson
& Knight, P.C., counsel for Lender, to be held by such counsel and
applied toward payment of costs and expenses for recordation of the
Security Documents, as provided pursuant to Section 9.4(a). If such
deposit exceeds the amount of such costs and expenses, the excess
shall be returned to Borrower. If such deposit is less than such
costs and expenses, the deficit shall be paid by Borrower pursuant
to Section 9.4(a).
Section 4.3. POST-CLOSING CONDITIONS. Contemporaneously with the
consummation of the acquisition of the Old Ocean Properties pursuant to the
Old Ocean Acquisition Documents, Borrower shall deliver all of the following,
at Lender's office in Houston, Texas, duly executed and delivered and in
form, substance and date satisfactory to Lender:
(a) A deed of trust, mortgage, assignment, security
agreement and financing statement by Borrower in favor of Lender
granting a first lien upon the Old Ocean Properties, together with
UCC-1 financing statements naming Borrower as debtor and Lender as
secured party and covering the Collateral described therein.
(b) An NPI Conveyance covering the Old Ocean Properties in
the form of Exhibit E attached hereto.
(c) A "Supplemental Omnibus Certificate" of the Secretary
and of the Chairman of Borrower, which shall certify to the
continuing truth and completeness of the Omnibus Certificate
delivered pursuant to Section 4.2(d)(i).
(d) An environmental report containing an environmental
assessment of the Old Ocean Properties, in scope and results
acceptable to Lender.
(e) A copy of each Old Ocean Acquisition Document, duly
executed and delivered by each party thereto.
ARTICLE V - REPRESENTATIONS AND WARRANTIES
To confirm Lender's understanding concerning Borrower's and
Guarantors' businesses, properties and obligations and to induce Lender to
enter into this Agreement and to extend credit hereunder, Borrower, Benz
Energy and Calibre jointly and severally represent and warrant to Lender that:
16
<PAGE>
Section 5.1. NO DEFAULT. Neither Borrower nor any Guarantor is in
default in the performance of any of the covenants and agreements contained
in any Loan Document. No event has occurred and is continuing which
constitutes a Default.
Section 5.2. ORGANIZATION AND GOOD STANDING. Borrower and each
Guarantor is duly organized, validly existing and in good standing under the
Laws of its jurisdiction of organization, having all powers required to carry
on its business and enter into and carry out the transactions contemplated
hereby. Each Restricted Person is duly qualified, in good standing, and
authorized to do business in all other jurisdictions within the United States
wherein the character of the properties owned or held by it or the nature of
the business transacted by it makes such qualification necessary, except
where the failure so to qualify will not cause a Material Adverse Change.
Section 5.3. AUTHORIZATION. Borrower and each Guarantor has duly
taken all action necessary to authorize the execution and delivery by it of
the Loan Documents to which it is a party and to authorize the consummation
of the transactions contemplated thereby and the performance of its
obligations thereunder. Borrower is duly authorized to borrow funds hereunder.
Section 5.4. NO CONFLICTS OR CONSENTS. The execution and delivery by
Borrower and each Guarantor of the Loan Documents to which each is a party,
the performance by each of its obligations under such Loan Documents, and the
consummation of the transactions contemplated by the various Loan Documents,
do not and will not (i) conflict with any provision of (1) any Law, (2) the
organizational documents of any Restricted Person or the Slattery Trust, or
(3) any agreement, judgment, license, order or permit applicable to or
binding upon any Borrower or any Guarantor, (ii) result in the acceleration
of any Indebtedness owed by any Borrower or any Guarantor, or (iii) result in
or require the creation of any Lien upon any assets or properties of Borrower
or any Guarantor except as expressly contemplated in the Loan Documents.
Except as expressly contemplated in the Loan Documents no consent, approval,
authorization or order of, and no notice to or filing with, any Tribunal or
third party is required in connection with the execution, delivery or
performance by Borrower or any Guarantor of any Loan Document or to
consummate any transactions contemplated by the Loan Documents.
Section 5.5. ENFORCEABLE OBLIGATIONS. This Agreement is, and the
other Loan Documents when duly executed and delivered will be, legal, valid
and binding obligations of Borrower and each Guarantor which is a party
hereto or thereto, enforceable in accordance with their terms except as such
enforcement may be limited by bankruptcy, insolvency or similar Laws of
general application relating to the enforcement of creditors' rights.
Section 5.6. INITIAL FINANCIAL STATEMENTS. Borrower has heretofore
delivered to Lender true, correct and complete copies of the Initial
Financial Statements. The Initial Financial Statements fairly present Benz
Energy's and Borrower's Consolidated financial position at the respective
dates thereof and the Consolidated results of Benz Energy's and Borrower's
operations and Benz Energy's and Borrower's Consolidated cash flows for the
respective periods thereof. Since the date of the annual Initial Financial
Statements no
17
<PAGE>
Material Adverse Change has occurred. All Initial Financial Statements were
prepared in accordance with GAAP.
Section 5.7. OTHER OBLIGATIONS AND RESTRICTIONS. No Restricted
Person has any outstanding Liabilities of any kind (including contingent
obligations, tax assessments, and unusual forward or long-term commitments)
which is, in the aggregate, material to Benz Energy or Borrower or material
with respect to Benz Energy's or Borrower's Consolidated financial condition
and not shown in the Initial Financial Statements or disclosed in the
Disclosure Schedule or a Disclosure Report. Except as shown in the Initial
Financial Statements or disclosed in the Disclosure Schedule or a Disclosure
Report, no Restricted Person is subject to or restricted by any franchise,
contract, deed, charter restriction, or other instrument or restriction which
could cause a Material Adverse Change.
Section 5.8. FULL DISCLOSURE. No certificate, statement or other
information delivered herewith or heretofore by Borrower or any Guarantor to
Lender in connection with the negotiation of this Agreement or in connection
with any transaction contemplated hereby contains any untrue statement of a
material fact or omits to state any material fact known to Borrower or any
Guarantor (other than industry-wide risks normally associated with the types
of businesses conducted by Restricted Persons) necessary to make the
statements contained herein or therein not misleading as of the date made or
deemed made. There is no fact known to Borrower or any Guarantor that has not
been disclosed to Lender in writing which could cause a Material Adverse
Change. There are no statements or conclusions in any Reserve Report which
are based upon or include misleading information or fail to take into account
material information regarding the matters reported therein, it being
understood that each Reserve Report is necessarily based upon professional
opinions, estimates and projections and that none of Borrower, Benz Energy or
Calibre warrants that such opinions, estimates and projections will
ultimately prove to have been accurate. Borrower has heretofore delivered to
Lender true, correct and complete copies of the Initial Reserve Report.
Section 5.9. LITIGATION. Except as disclosed in the Initial
Financial Statements or in the Disclosure Schedule: (i) there are no actions,
suits or legal, equitable, arbitrative or administrative proceedings pending,
or to the knowledge of Borrower or any Guarantor, threatened, against
Borrower or any Guarantor before any Tribunal which could cause a Material
Adverse Change, and (ii) there are no outstanding judgments, injunctions,
writs, rulings or orders by any such Tribunal against Borrower or any
Guarantor or any Restricted Person's stockholders, partners, directors or
officers which could cause a Material Adverse Change.
Section 5.10. LABOR DISPUTES AND ACTS OF GOD. Except as disclosed in
the Disclosure Schedule or a Disclosure Report, neither the business nor the
properties of any Restricted Person has been affected by any fire, explosion,
accident, strike, lockout or other labor dispute, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy or other casualty
(whether or not covered by insurance), which could cause a Material Adverse
Change.
18
<PAGE>
Section 5.11. ERISA PLANS AND LIABILITIES. All currently existing ERISA
Plans are listed in the Disclosure Schedule or a Disclosure Report. Except as
disclosed in the Initial Financial Statements or in the Disclosure Schedule or a
Disclosure Report, no Termination Event has occurred with respect to any ERISA
Plan and all ERISA Affiliates are in compliance with ERISA in all material
respects. No ERISA Affiliate is required to contribute to, or has any other
absolute or contingent liability in respect of, any "multiemployer plan" as
defined in Section 4001 of ERISA. Except as set forth in the Disclosure Schedule
or a Disclosure Report: (i) no "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) exists with
respect to any ERISA Plan, whether or not waived by the Secretary of the
Treasury or his delegate, and (ii) the current value of each ERISA Plan's
benefits does not exceed the current value of such ERISA Plan's assets available
for the payment of such benefits by more than $500,000.
Section 5.12. ENVIRONMENTAL AND OTHER LAWS. Except as disclosed in the
Disclosure Schedule or a Disclosure Report: (a) Restricted Persons are
conducting their businesses in material compliance with all applicable Laws,
including Environmental Laws, and have and are in compliance with all licenses
and permits required under any such Laws; (b) none of the operations or
properties of any Restricted Person is the subject of federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Materials into the environment or to the
improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (c) no Restricted Person (and to the best
knowledge of Borrower, Benz Energy and Calibre, no other Person) has filed any
notice under any Law indicating that any Restricted Person is responsible for
the improper release into the environment, or the improper storage or disposal,
of any material amount of any Hazardous Materials or that any Hazardous
Materials have been improperly released, or are improperly stored or disposed
of, upon any property of any Restricted Person; (d) no Restricted Person has
transported or arranged for the transportation of any Hazardous Material to any
location which is (i) listed on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, listed for possible inclusion on such National Priorities List by the
Environmental Protection Agency in its Comprehensive Environmental Response,
Compensation and Liability Information System List, or listed on any similar
state list or (ii) the subject of federal, state or local enforcement actions or
other investigations which may lead to claims against any Restricted Person for
clean-up costs, remedial work, damages to natural resources or for personal
injury claims (whether under Environmental Laws or otherwise); and (e) no
Restricted Person otherwise has any known material contingent liability under
any Environmental Laws or in connection with the release into the environment,
or the storage or disposal, of any Hazardous Materials.
Section 5.13. NAMES AND PLACES OF BUSINESS. Neither Borrower nor any
Guarantor has, during the preceding five years, had, been known by, or used any
other trade or fictitious name, except as disclosed in the Disclosure Schedule.
Except as otherwise indicated in the Disclosure Schedule or a Disclosure Report,
the chief executive office and principal place of business of each Restricted
Person are (and for the preceding five years have been) located at the address
of Borrower set out in Section 9.3. Except as indicated in
19
<PAGE>
the Disclosure Schedule or a Disclosure Report, no Restricted Person has any
other office or place of business.
Section 5.14. BORROWER'S SUBSIDIARIES. Borrower does not presently have
any Subsidiary or own any stock in any other corporation or association except
those listed in the Disclosure Schedule or a Disclosure Report. Neither Borrower
nor any Restricted Person is a member of any general or limited partnership,
joint venture or association of any type whatsoever except those listed in the
Disclosure Schedule or a Disclosure Report and associations, joint ventures or
other relationships (i) which are established pursuant to a standard form
operating agreement or similar agreement or which are partnerships for purposes
of federal income taxation only, (ii) which are not corporations or partnerships
(or subject to the Uniform Partnership Act) under applicable state Law, AND
(iii) whose businesses are limited to the exploration, development and operation
of oil, gas or mineral properties and interests owned directly by the parties in
such associations, joint ventures or relationships. Except as otherwise revealed
in a Disclosure Report, Borrower owns, directly or indirectly, the equity
interest in each of its Subsidiaries which is indicated in the Disclosure
Schedule.
Section 5.15. TITLE TO PROPERTIES; LICENSES. Borrower and each
Guarantor has good and defensible title to all of its material properties and
assets, free and clear of all Liens other than Permitted Liens and of all
impediments to the use of such properties and assets in such Person's business,
except that no representation or warranty is made with respect to any oil, gas
or mineral property or interest to which no proved oil or gas reserves are
properly attributed. Each Restricted Person possesses all licenses, permits,
franchises, patents, copyrights, trademarks and trade names, and other
intellectual property (or otherwise possesses the right to use such intellectual
property without violation of the rights of any other Person) which are
necessary to carry out its business as presently conducted and as presently
proposed to be conducted hereafter, and no Restricted Person is in violation in
any material respect of the terms under which it possesses such intellectual
property or the right to use such intellectual property.
Section 5.16. GOVERNMENT REGULATION. Neither Borrower nor any other
Restricted Person owing Obligations is subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Investment
Company Act of 1940 (as any of the preceding acts have been amended) or any
other Law which regulates the incurring by such Person of Indebtedness,
including Laws relating to common contract carriers or the sale of electricity,
gas, steam, water or other public utility services.
Section 5.17. OFFICERS, DIRECTORS AND SHAREHOLDERS. Except as disclosed
in the Disclosure Schedule, the officers and directors of Benz Energy are those
persons disclosed in the definitive proxy statement prepared by Benz Energy and
filed with the appropriate Canadian securities authorities in connection with
Benz Energy's most recent annual meeting, copies of which proxy statement have
been previously furnished in connection with the negotiation hereof.
ARTICLE VI - AFFIRMATIVE COVENANTS OF BORROWER, BENZ ENERGY AND CALIBRE
20
<PAGE>
To conform with the terms and conditions under which Lender is willing
to have credit outstanding to Borrower, and to induce Lender to enter into this
Agreement and extend credit hereunder, Borrower, Benz Energy and Calibre jointly
and severally warrant, covenant and agree that until the full and final payment
of the Obligations and the termination of this Agreement:
Section 6.1. PAYMENT AND PERFORMANCE. Borrower and each Guarantor will
pay all amounts due under the Loan Documents in accordance with the terms
thereof and will observe, perform and comply with every covenant, term and
condition expressed or implied in the Loan Documents. Borrower, Benz Energy and
Calibre will cause each other Restricted Person and Guarantor to observe,
perform and comply with every such term, covenant and condition.
Section 6.2. BOOKS, FINANCIAL STATEMENTS AND REPORTS. Each Restricted
Person will at all times maintain full and accurate books of account and
records. Benz Energy will maintain and will cause its Subsidiaries to maintain a
standard system of accounting, will maintain its Fiscal Year, and will furnish
the following statements and reports to Lender at Borrower's or Benz Energy's
expense:
(a) As soon as available, and in any event within one hundred
forty (140) days after the end of each Fiscal Year, complete
Consolidated (and, upon the request of Lender, consolidating) financial
statements of Benz Energy together with all notes thereto, prepared in
reasonable detail in accordance with GAAP, together with an unqualified
opinion, based on an audit using generally accepted auditing standards,
by Dyke and Howard, Chartered Accountants, or other independent
certified public accountants selected by Benz Energy and acceptable to
Lender, stating that such Consolidated financial statements have been
so prepared. These financial statements shall contain a Consolidated
balance sheet as of the end of such Fiscal Year and Consolidated
statements of earnings, of cash flows, and of changes in owners' equity
for such Fiscal Year, each setting forth in comparative form the
corresponding figures for the preceding Fiscal Year.
(b) As soon as available, and in any event within forty-five
(45) days after the end of each Fiscal Quarter, Benz Energy's
Consolidated (and, upon the request of Lender, consolidating) balance
sheet as of the end of such Fiscal Quarter and Consolidated statements
of Benz Energy's earnings and cash flows for the period from the
beginning of the then current Fiscal Year to the end of such Fiscal
Quarter, all in reasonable detail and prepared in accordance with GAAP,
subject to changes resulting from normal year-end adjustments. In
addition Borrower, Benz Energy and Calibre will, together with each
such set of financial statements and each set of financial statements
furnished under subsection (a) of this section, furnish a certificate
in the form of Exhibit D signed by the chief financial officers thereof
stating that such financial statements are accurate and complete
(subject to normal year-end adjustments), stating that they have
reviewed the Loan Documents and stating that no Default exists at the
end of such Fiscal Quarter or at the time of such certificate or
specifying the nature and period of existence of any such Default.
21
<PAGE>
(c) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by any
Restricted Person to its stockholders and all registration statements,
periodic reports and other statements and schedules filed by any
Restricted Person with any securities exchange, any Canadian securities
authority or any similar governmental authority.
(d) As soon as available, the final version of the Initial
Reserve Report, and as soon as available, and in any event by March 31
of each year, a Reserve Report, effective as of December 31 of the
prior year.
(e) As soon as available, and in any event within ninety (90)
days after the end of each Fiscal Year, a business and financial plan
for Benz Energy and Borrower (in form reasonably satisfactory to
Lender), prepared by a senior financial officer thereof, setting forth
for the first year thereof, quarterly financial projections and budgets
for Benz Energy and Borrower, and thereafter yearly financial
projections and budgets.
(f) As soon as available, and in any event within thirty (30)
days after the end of each month, a report describing by lease or unit,
by owner and on a well-by-well basis, the gross volume of production
and sales attributable to production during such month from the
properties described in subsection (d) above and describing the related
severance taxes, other taxes, and leasehold operating expenses and
capital costs attributable thereto and incurred during such month and
general and administrative costs incurred by each such owner during
such month.
(g) As soon as available, and in any event within forty-five
days after the end of each Fiscal Quarter, a list, by name and address,
of those Persons who have purchased production during such Fiscal
Quarter from the Mortgaged Properties, giving each such purchaser's
owner number for Borrower and each other grantor of a Lien on Mortgaged
Properties and each such purchaser's property number for each such
Mortgaged Property.
Section 6.3. OTHER INFORMATION AND INSPECTIONS. Borrower and each
Guarantor will furnish to Lender any information which Lender may from time to
time request in writing concerning any covenant, provision or condition of the
Loan Documents or any matter in connection with Borrower's or such Guarantor's
businesses and operations. Borrower and each Guarantor will permit
representatives appointed by Lender (including independent accountants,
auditors, agents, attorneys, appraisers and any other Persons), with reasonable
notice prior to the occurrence of an Event of Default, to visit and inspect
during normal business hours any of such Person's property, including its books
of account, other books and records, and any facilities or other business
assets, and to make extra copies therefrom and photocopies and photographs
thereof, and to write down and record any information such representatives
obtain, and Borrower and each Guarantor shall permit Lender or its
representatives to investigate and verify the accuracy of the information
furnished to Lender in connection with the Loan Documents and to discuss all
such matters with its officers, employees and representatives.
22
<PAGE>
Section 6.4. NOTICE OF MATERIAL EVENTS AND CHANGE OF ADDRESS. Borrower
will promptly notify Lender in writing, stating that such notice is being given
pursuant to this Agreement, of:
(a) the occurrence of any Material Adverse Change,
(b) the occurrence of any Default,
(c) the acceleration of the maturity of any Indebtedness owed
by Borrower or any Guarantor or of any default by Borrower or any
Guarantor under any indenture, mortgage, agreement, contract or other
instrument to which any of them is a party or by which any of them or
any of their properties is bound, if such acceleration or default could
cause a Material Adverse Change,
(d) the occurrence of any Termination Event,
(e) any claim of $10,000 or more, any notice of potential
liability under any Environmental Laws which might exceed such amount,
or any other material adverse claim asserted against Borrower or any
Guarantor or with respect to any of their properties, and
(f) the filing of any suit or proceeding against any
Restricted Person in which an adverse decision could cause a Material
Adverse Change.
Upon the occurrence of any of the foregoing Borrower and each Guarantor will
take all necessary or appropriate steps to remedy promptly any such Material
Adverse Change, Default, acceleration, default or Termination Event, to protect
against any such adverse claim, to defend any such suit or proceeding, and to
resolve all controversies on account of any of the foregoing. Borrower will also
notify Lender and Lender's counsel in writing at least twenty Business Days
prior to the date that Borrower or any Guarantor changes its name or the
location of its chief executive office or principal place of business or the
place where it keeps its books and records concerning the Collateral, furnishing
with such notice any necessary financing statement amendments or requesting
Lender and its counsel to prepare the same.
Section 6.5. MAINTENANCE OF PROPERTIES. Borrower and each Guarantor
will maintain, preserve, protect, and keep, and shall cause to be maintained,
preserved, protected and kept, all Collateral and all other property used or
useful in the conduct of its business in good condition and in compliance with
all applicable Laws, and will from time to time make all repairs, renewals and
replacements needed to enable the business and operations carried on in
connection therewith to be promptly and advantageously conducted at all times.
Section 6.6. MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. Borrower and
each Guarantor will maintain and preserve its existence and its rights and
franchises in full force and effect and will qualify to do business in all
states or jurisdictions where required by applicable Law, except where the
failure so to qualify will not cause a Material Adverse Change.
23
<PAGE>
Section 6.7. PAYMENT OF TRADE LIABILITIES, TAXES, ETC. Each Restricted
Person will (a) timely file all required tax returns; (b) timely pay all taxes,
assessments, and other governmental charges or levies imposed upon it or upon
its income, profits or property; (c) within ninety (90) days after the same
becomes due pay all Liabilities owed by it on ordinary trade terms to vendors,
suppliers and other Persons providing goods and services used by it in the
ordinary course of its business; (d) pay and discharge when due all other
Liabilities now or hereafter owed by it; and (e) maintain appropriate accruals
and reserves for all of the foregoing in accordance with GAAP. Each Restricted
Person may, however, delay paying or discharging any of the foregoing so long as
it is in good faith contesting the validity thereof by appropriate proceedings
and has set aside on its books adequate reserves therefor.
Section 6.8. INSURANCE. Each Restricted Person will keep or cause to be
kept insured by financially sound and reputable insurers its property in
accordance with the Insurance Schedule. Borrower will maintain the additional
insurance coverage as described in the respective Security Documents. Upon
demand by Lender any insurance policies covering Collateral shall be endorsed
(a) to provide for payment of losses to Lender as its interests may appear, (b)
to provide that such policies may not be cancelled or reduced or affected in any
material manner for any reason without thirty days prior notice to Lender, (c)
to provide for any other matters specified in any applicable Security Document
or which Lender may reasonably require; and (d) to provide for insurance against
fire, casualty and any other hazards normally insured against, in the amount of
the full value (less a reasonable deductible not to exceed amounts customary in
the industry for similarly situated businesses and properties) of the property
insured. Each Restricted Person shall at all times maintain insurance against
its liability for injury to persons or property in accordance with the Insurance
Schedule, which insurance shall be by financially sound and reputable insurers.
Without limiting the foregoing, each Restricted Person shall at all time
maintain liability insurance in the amounts set out on the Insurance Schedule.
Section 6.9. PERFORMANCE ON RESTRICTED PERSON'S BEHALF. If any
Restricted Person fails to pay any taxes, insurance premiums, expenses,
attorneys' fees or other amounts it is required to pay under any Loan Document,
Lender may pay the same. Borrower shall within two Business Days after demand
reimburse Lender for any such payments and each amount paid by Lender shall
constitute an Obligation owed hereunder which is due and payable on the date
such amount is paid by Lender.
Section 6.10. INTEREST. Borrower hereby promises to Lender to pay
interest at the rate as specified in the Note on all Obligations (including
Obligations to pay fees or to reimburse or indemnify Lender) which Borrower has
in this Agreement promised to pay to Lender and which are not paid when due.
Such interest shall accrue from the date such Obligations become due until they
are paid.
Section 6.11. COMPLIANCE WITH AGREEMENTS AND LAW. Borrower and each
Guarantor will perform all material obligations it is required to perform under
the terms of each indenture, mortgage, deed of trust, security agreement, lease,
franchise, agreement, contract or other instrument or obligation to which it is
a party or by which it or any of its properties
24
<PAGE>
is bound. Borrower and each Guarantor will conduct its business and affairs in
compliance with all Laws applicable thereto.
Section 6.12. ENVIRONMENTAL MATTERS; ENVIRONMENTAL REVIEWS.
(a) Borrower and each Guarantor will comply in all material respects
with all Environmental Laws now or hereafter applicable to such Person and shall
obtain, at or prior to the time required by applicable Environmental Laws, all
environmental, health and safety permits, licenses and other authorizations
necessary for its operations and will maintain such authorizations in full force
and effect.
(b) Borrower, Benz Energy and Calibre will promptly furnish to Lender
all written notices of violation, orders, claims, citations, complaints, penalty
assessments, suits or other proceedings received by it, or of which it has
notice, pending or threatened against it, by any governmental authority with
respect to any alleged violation of or non-compliance with any Environmental
Laws or any permits, licenses or authorizations in connection with its ownership
or use of its properties or the operation of its business.
(c) Borrower, Benz Energy and Calibre will promptly furnish to Lender
all requests for information, notices of claim, demand letters, and other
notifications, received by it in connection with its ownership or use of its
properties or the conduct of its business, relating to potential responsibility
with respect to any investigation or clean-up of Hazardous Material at any
location.
Section 6.13. EVIDENCE OF COMPLIANCE. Borrower and each Guarantor will
furnish to Lender at such Person's or Borrower's expense all evidence which
Lender from time to time reasonably requests in writing as to the accuracy and
validity of or compliance with all representations, warranties and covenants
made by any Person in the Loan Documents, the satisfaction of all conditions
contained therein, and all other matters pertaining thereto.
Section 6.14. SOLVENCY. Upon giving effect to the issuance of the Note,
the execution of the Loan Documents by Borrower and Guarantors, and the
consummation of the transactions contemplated hereby, Borrower and each
Guarantor will be solvent (as such term is used in applicable bankruptcy,
liquidation, receivership, insolvency or similar laws).
Section 6.15. AGREEMENT TO DELIVER SECURITY DOCUMENTS. Borrower, Benz
Energy and Calibre agree to deliver and to cause each other Restricted Person or
Guarantor to deliver, to further secure the Obligations whenever requested by
Lender in its sole and absolute discretion, deeds of trust, mortgages, chattel
mortgages, security agreements, financing statements and other Security
Documents in form and substance satisfactory to Lender for the purpose of
granting, confirming, and perfecting first and prior liens or security interests
in any real or personal property now owned or hereafter acquired by any
Restricted Person, subject to Permitted Liens. Borrower also agrees to deliver,
whenever requested by Lender in its sole and absolute discretion, favorable
title opinions from legal counsel acceptable to Lender with respect to
Borrower's or any Guarantor's properties and interests designated by Lender,
based upon abstract or record examinations to dates acceptable to Lender and (a)
stating that such Person has good and defensible title to such
25
<PAGE>
properties and interests, free and clear of all Liens other than Permitted
Liens, (b) confirming that such properties and interests are subject to Security
Documents securing the Obligations that constitute and create legal, valid and
duly perfected first deed of trust or mortgage liens in such properties and
interests and first priority assignments of and security interests in the oil
and gas attributable to such properties and interests and the proceeds thereof,
and (c) covering such other matters as Lender may request.
Section 6.16. PERFECTION AND PROTECTION OF SECURITY INTERESTS AND
LIENS. Borrower, Benz Energy and Calibre will from time to time deliver, and
will cause each other Restricted Person or Guarantor from time to time to
deliver, to Lender any financing statements, continuation statements, extension
agreements and other documents, properly completed and executed (and
acknowledged when required) by such Persons in form and substance satisfactory
to Lender, which Lender requests for the purpose of perfecting, confirming, or
protecting any Liens or other rights in Collateral securing any Obligations.
Section 6.17. OFFSET. To secure the repayment of the Obligations, each
of Borrower, Benz Energy and Calibre hereby grants to Lender a security
interest, a lien, and a right of offset, each of which shall be in addition to
all other interests, liens, and rights of Lender at common law, under the Loan
Documents, or otherwise, and each of which shall be upon and against (a) any and
all moneys, securities or other property (and the proceeds therefrom) of such
Person now or hereafter held or received by or in transit to Lender from or for
the account of such Person, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, and (b) any other credits and claims of
such Person at any time existing against Lender. At any time and from time to
time after the occurrence of any Default, Lender is hereby authorized to
foreclose upon, or to offset against the Obligations then due and payable (in
either case without notice to Borrower or any Guarantor), any and all items
hereinabove referred to. The remedies of foreclosure and offset are separate and
cumulative, and either may be exercised independently of the other without
regard to procedures or restrictions applicable to the other.
Section 6.18. GUARANTIES OF BENZ ENERGY'S SUBSIDIARIES. Each Subsidiary
of Benz Energy now existing or created, acquired or coming into existence after
the date hereof shall, promptly upon request by Lender, execute and deliver to
Lender an absolute and unconditional guaranty of the timely repayment of the
Obligations and the due and punctual performance of the obligations of Borrower
hereunder, which guaranty shall be satisfactory to Lender in form and substance.
Borrower will cause each of its Subsidiaries to deliver to Lender,
simultaneously with its delivery of such a guaranty, written evidence
satisfactory to Lender and its counsel that such Subsidiary has taken all
corporate or partnership action necessary to duly approve and authorize its
execution, delivery and performance of such guaranty and any other documents
which it is required to execute.
Section 6.19. PRODUCTION PROCEEDS. Notwithstanding that, by the terms
of the various Security Documents, Borrower and Guarantors are and will be
assigning to Lender all of the "Production Proceeds" (as defined therein)
accruing to the property covered thereby, so long as no Default has occurred
such assignor may continue to receive from the purchasers of production all such
Production Proceeds, subject, however, to the Liens created under the Security
Documents, which Liens are hereby affirmed and ratified. Upon
26
<PAGE>
the occurrence of a Default, Lender may exercise all rights and remedies granted
under the Security Documents, including the right to obtain possession of all
Production Proceeds then held by Borrower or any Guarantor or to receive
directly from the purchasers of production all other Production Proceeds. In no
case shall any failure, whether purposed or inadvertent, by Lender to collect
directly any such Production Proceeds constitute in any way a waiver, remission
or release of any of its rights under the Security Documents, nor shall any
release of any Production Proceeds by Lender to Borrower or any Guarantor
constitute a waiver, remission, or release of any other Production Proceeds or
of any rights of Lender to collect other Production Proceeds thereafter.
ARTICLE VII - NEGATIVE COVENANTS OF RESTRICTED PERSONS
To conform with the terms and conditions under which Lender is willing
to have credit outstanding to Borrower, and to induce Lender to enter into this
Agreement and make the Loans, Borrower, Benz Energy and Calibre jointly and
severally warrant, covenant and agree that until the full and final payment of
the Obligations and the termination of this Agreement:
Section 7.1. INDEBTEDNESS. No Restricted Person will in any manner owe
or be liable for Indebtedness except:
(a) the Obligations.
(b) Indebtedness under the Bank One Credit Facility.
(c) purchase money Indebtedness and Indebtedness under leases of such
Restricted Person as lessee which are capitalized in accordance with GAAP,
provided such purchase money Indebtedness and Indebtedness under capital leases
required to be paid in any Fiscal Year do not in the aggregate exceed $100,000.
(d) Indebtedness arising from endorsing negotiable instruments for
collection in the ordinary course of business.
(e) Indebtedness constituting deposits to secured the performance of
bids, trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds and performance bonds and other obligations
of a like nature that are incurred in the ordinary course of business.
(f) Indebtedness constituting indemnities under agreements entered into
by Restricted Persons arising in the ordinary course of business.
Section 7.2. LIMITATION ON LIENS. No Restricted Person or Guarantor
will create, assume or permit to exist any Lien upon any of the properties or
assets which it now owns or hereafter acquires, except, to the extent not
otherwise forbidden by the Security Documents the following ("PERMITTED LIENS"):
(a) Liens which secure Obligations only.
27
<PAGE>
(b) Liens on Borrower's and Guarantors' Oil and Gas Properties securing
Indebtedness under the Bank One Credit Facility; PROVIDED, any such Liens on the
Oakvale Properties, Old Ocean Properties or any other Oil and Gas Properties
acquired after the date hereof with proceeds of the Loans shall be subordinated,
in form and substance satisfactory to Lender, to the Liens in favor of Lender
under the Security Documents.
(c) statutory Liens for taxes, statutory mechanics' and materialmen's
Liens incurred in the ordinary course of business, and other similar Liens
incurred in the ordinary course of business, provided such Liens do not secure
Indebtedness and secure only Liabilities which are not delinquent or which are
being contested as provided in Section 6.7.
(d) as to property which is Collateral, any Liens expressly permitted
to encumber such Collateral under any Security Document covering such
Collateral.
Section 7.3. LIMITATION ON MERGERS, ISSUANCES OF SECURITIES. Except as
expressly provided in this subsection no Restricted Person will merge or
consolidate with or into any other business entity. Any Subsidiary of Borrower
may, however, be merged into or consolidated with (i) another Subsidiary of
Borrower, so long as a Guarantor is the surviving business entity, or (ii)
Borrower, so long as Borrower is the surviving business entity. Borrower will
not issue any securities other than shares of its common stock and any options
or warrants giving the holders thereof only the right to acquire such shares. No
Subsidiary of Borrower will issue any additional shares of its capital stock or
other securities or any options, warrants or other rights to acquire such
additional shares or other securities except to Borrower and only to the extent
not otherwise forbidden under the terms hereof. No Subsidiary of Borrower which
is a partnership will allow any diminution of Borrower's interest (direct or
indirect) therein.
Section 7.4. LIMITATION ON SALES OF PROPERTY. No Restricted Person will
sell, transfer, lease, exchange, alienate or dispose of any Collateral or any of
its material assets or properties or any material interest therein except, to
the extent not otherwise forbidden under the Security Documents:
(a) equipment which is worthless or obsolete or which is replaced by
equipment of equal suitability and value.
(b) inventory (including oil and gas sold as produced and seismic data)
which is sold in the ordinary course of business on ordinary trade terms.
Neither Borrower nor any of Borrower's Subsidiaries will sell, transfer or
otherwise dispose of capital stock of any of Borrower's Subsidiaries except that
any Subsidiary of Borrower may sell or issue its own capital stock to the extent
not otherwise prohibited hereunder. No Restricted Person will discount, sell,
pledge or assign any notes payable to it, accounts receivable or future income
except to the extent expressly permitted under the Loan Documents.
Section 7.5. LIMITATION ON DIVIDENDS AND REDEMPTIONS. No Restricted
Person will declare or pay any dividends on, or make any other distribution in
respect of, any class of its
28
<PAGE>
capital stock or any partnership or other interest in it, nor will any
Restricted Person directly or indirectly make any capital contribution to or
purchase, redeem, acquire or retire any shares of the capital stock of or
partnership interests in any Restricted Person (whether such interests are now
or hereafter issued, outstanding or created), or cause or permit any reduction
or retirement of the capital stock of any Restricted Person, except as expressly
provided in this section. Such dividends, distributions, contributions,
purchases, redemptions, acquisitions, retirements or reductions may be made by
Borrower and the Guarantors (i) without limitation to Borrower; (ii) to
Guarantors which are Subsidiaries of Borrower, to the extent permitted under the
investment restrictions of Section 7.6. So long as no Default has occurred: (A)
prior to the receipt by Benz Energy of cumulative proceeds of at least
$25,000,000 CND pursuant to one or more equity offerings, Calibre may make
dividends or distributions in an aggregate amount not to exceed $500,000, and
(B) following the receipt by Benz Energy of at least $25,000,000 CND pursuant to
one or more equity offerings, Calibre may make unlimited dividends or
distributions. In addition to the foregoing each Restricted Person may declare
and pay to any Persons dividends payable only in its common stock, so long as
neither Borrower's nor any Guarantor's interest in any of its Subsidiaries is
not thereby reduced.
Section 7.6. LIMITATION ON INVESTMENTS AND NEW BUSINESSES. No
Restricted Person will (i) make any expenditure or commitment or incur any
obligation or enter into or engage in any transaction except in the ordinary
course of business, (ii) engage directly or indirectly in any business or
conduct any operations except in connection with or incidental to its present
businesses and operations, (iii) make any acquisitions of or capital
contributions to or other investments in any Person, other than Cash
Equivalents, or (iv) make any significant acquisitions or investments in any
properties other than oil and gas properties.
Section 7.7. LIMITATION ON CREDIT EXTENSIONS. Except for Cash
Equivalents, no Restricted Person will extend credit, make advances or make
loans other than (i) normal and prudent extensions of credit to customers buying
goods and services in the ordinary course of business, including extensions of
credit to Affiliates buying goods and services in the ordinary course of
business and permitted under Section 7.8, which extensions shall not be for
longer periods than those extended by similar businesses operated in a normal
and prudent manner, and (ii) loans to Borrower.
Section 7.8. TRANSACTIONS WITH AFFILIATES. No Restricted Person will
engage in any material transaction with any of its Affiliates on terms which are
less favorable to it than those which would have been obtainable at the time in
arm's-length dealing with Persons other than such Affiliates.
Section 7.9. CERTAIN CONTRACTS; AMENDMENTS; MULTIEMPLOYER ERISA PLANS.
Except as expressly provided for in the Loan Documents, no Restricted Person
will, directly or indirectly, enter into, create, or otherwise allow to exist
any contract or other consensual restriction on the ability of any Subsidiary of
Borrower to: (i) pay dividends or make other distributions to Borrower, (ii) to
redeem equity interests held in it by Borrower, (iii) to repay loans and other
indebtedness owing by it to Borrower, or (iv) to transfer any of its assets to
Borrower. No Restricted Person will amend or permit any amendment to any
contract or lease which releases, qualifies, limits, makes contingent or
otherwise detrimentally affects the
29
<PAGE>
rights and benefits of Lender under or acquired pursuant to any Security
Documents. No ERISA Affiliate will incur any obligation to contribute to any
"multiemployer plan" as defined in Section 4001 of ERISA. The Bank One Credit
Facility shall not be amended, extended, renewed or increased without the prior
written consent of Lender.
Section 7.10. GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated general
and administrative expenses of Benz Energy and Calibre shall not exceed
$3,500,000 in any Fiscal Year.
Section 7.11. CERTAIN BOARD APPROVALS. Benz Energy shall not adopt any
of the following without the approval of at least seventy-five percent (75%) of
the members of its board of directors: (a) annual general and administrative and
capital spending budgets; (b) annual executive compensation budgets; (c)
deviations from annual capital spending budgets, (d) acquisition or development
projects greater than $500,000 in the aggregate with respect to a particular oil
and gas property within any 12-month period; (e) issuance of debt and/or equity;
and (f) material changes in its operating or management strategy or its
geographic orientation.
ARTICLE VIII - EVENTS OF DEFAULT AND REMEDIES
Section 8.1. EVENTS OF DEFAULT. Each of the following events
constitutes an Event of Default under this Agreement:
(a) Any Restricted Person or Guarantor fails to pay the principal
component of any Obligation when due and payable, whether at a date for the
payment of a fixed installment or as a contingent or other payment becomes due
and payable or as a result of acceleration or otherwise;
(b) Any Restricted Person or Guarantor fails to pay any Obligation
(other than the Obligations in clause (a) above) when due and payable, whether
at a date for the payment of a fixed installment or as a contingent or other
payment becomes due and payable or as a result of acceleration or otherwise,
within three Business Days after the same becomes due;
(c) Any "default" or "event of default" occurs under any Loan Document
which defines either such term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document;
(d) Any Restricted Person or Guarantor fails to duly observe, perform
or comply with any covenant, agreement or provision of Section 6.4 or Article
VII;
(e) Any Restricted Person or Guarantor fails (other than as referred to
in subsections (a), (b), (c) or (d) above) to duly observe, perform or comply
with any covenant, agreement, condition or provision of any Loan Document, and
such failure remains unremedied for a period of thirty (30) days after notice of
such failure is given by Lender to Borrower;
(f) Any representation or warranty previously, presently or hereafter
made in writing by or on behalf of any Restricted Person or Guarantor in
connection with any Loan
30
<PAGE>
Document shall prove to have been false or incorrect in any material and adverse
respect on any date on or as of which made, or any Loan Document at any time
ceases to be valid, binding and enforceable as warranted in Section 5.5 for any
reason other than its release or subordination by Lender;
(g) Any Restricted Person or Guarantor fails to duly observe, perform
or comply with any agreement with any Person or any term or condition of any
loan document relating to the Bank One Credit Facility or any other agreement or
instrument, if such agreement or instrument is materially significant to
Borrower or any Guarantor, and such failure is not remedied within the
applicable period of grace (if any) provided in such agreement or instrument;
(h) Any Restricted Person or Guarantor (i) fails to pay any portion,
when such portion is due, of any of its Indebtedness in excess of $75,000, or
(ii) breaches or defaults in the performance of any agreement or instrument by
which any such Indebtedness is issued, evidenced, governed, or secured, and any
such failure, breach or default continues beyond any applicable period of grace
provided therefor;
(i) Either (i) any "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess of
$10,000 exists with respect to any ERISA Plan, whether or not waived by the
Secretary of the Treasury or his delegate, or (ii) any Termination Event occurs
with respect to any ERISA Plan and the then current value of such ERISA Plan's
benefit liabilities exceeds the then current value of such ERISA Plan's assets
available for the payment of such benefit liabilities by more than $100,000 (or
in the case of a Termination Event involving the withdrawal of a substantial
employer, the withdrawing employer's proportionate share of such excess exceeds
such amount); and
(j) Any Restricted Person or Guarantor:
(i) suffers the entry against it of a judgment, decree or
order for relief by a Tribunal of competent jurisdiction in an
involuntary proceeding commenced under any applicable bankruptcy,
insolvency or other similar Law of any jurisdiction now or hereafter in
effect, including the federal Bankruptcy Code, as from time to time
amended, or has any such proceeding commenced against it which remains
undismissed for a period of thirty days; or
(ii) commences a voluntary case under any applicable
bankruptcy, insolvency or similar Law now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time amended;
or applies for or consents to the entry of an order for relief in an
involuntary case under any such Law; or makes a general assignment for
the benefit of creditors; or fails generally to pay (or admits in
writing its inability to pay) its debts as such debts become due; or
takes corporate or other action to authorize any of the foregoing; or
(iii) suffers the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of all or a substantial part of its assets or of any
part of the Collateral in a proceeding brought against or
31
<PAGE>
initiated by it, and such appointment or taking possession is neither
made ineffective nor discharged within thirty days after the making
thereof, or such appointment or taking possession is at any time
consented to, requested by, or acquiesced to by it; or
(iv) suffers the entry against it of a final judgment for the
payment of money in excess of $100,000 (not covered by insurance
satisfactory to Lender in its discretion), unless the same is
discharged within thirty days after the date of entry thereof or an
appeal or appropriate proceeding for review thereof is taken within
such period and a stay of execution pending such appeal is obtained; or
(v) suffers a writ or warrant of attachment or any similar
process to be issued by any Tribunal against all or any substantial
part of its assets or any part of the Collateral, and such writ or
warrant of attachment or any similar process is not stayed or released
within thirty days after the entry or levy thereof or after any stay is
vacated or set aside; and
(k) Any Change in Control occurs; and
(l) Any Material Adverse Change occurs.
Upon the occurrence of an Event of Default described in subsection (j)(i),
(j)(ii) or (j)(iii) of this section with respect to Borrower, all of the
Obligations shall thereupon be immediately due and payable, without demand,
presentment, notice of demand or of dishonor and nonpayment, protest, notice of
protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Guarantor who at any time ratifies
or approves this Agreement. Upon any such acceleration, any obligation of Lender
to make any further Loans shall be permanently terminated. During the
continuance of any other Event of Default, Lender at any time and from time to
time may without notice to Borrower or any other Guarantor, do either or both of
the following: (1) terminate any obligation of Lender to make Loans hereunder,
and (2) declare any or all of the Obligations immediately due and payable, and
all such Obligations shall thereupon be immediately due and payable, without
demand, presentment, notice of demand or of dishonor and nonpayment, protest,
notice of protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Guarantor who at any time ratifies
or approves this Agreement.
Section 8.2. REMEDIES. If any Default shall occur and be continuing,
Lender may protect and enforce its rights under the Loan Documents by any
appropriate proceedings, including proceedings for specific performance of any
covenant or agreement contained in any Loan Document, and Lender may enforce the
payment of any Obligations due it or enforce any other legal or equitable right
which it may have. All rights, remedies and powers conferred upon Lender under
the Loan Documents shall be deemed cumulative and not exclusive of any other
rights, remedies or powers available under the Loan Documents or at Law or in
equity.
32
<PAGE>
ARTICLE IX - MISCELLANEOUS
Section 9.1. WAIVERS AND AMENDMENTS; ACKNOWLEDGEMENTS.
(a) WAIVERS AND AMENDMENTS. No failure or delay (whether by course of
conduct or otherwise) by Lender in exercising any right, power or remedy which
Lender may have under any of the Loan Documents shall operate as a waiver
thereof or of any other right, power or remedy, nor shall any single or partial
exercise by Lender of any such right, power or remedy preclude any other or
further exercise thereof or of any other right, power or remedy. No waiver of
any provision of any Loan Document and no consent to any departure therefrom
shall ever be effective unless it is in writing and signed as provided below in
this section, and then such waiver or consent shall be effective only in the
specific instances and for the purposes for which given and to the extent
specified in such writing. No notice to or demand on any Restricted Person shall
in any case of itself entitle any Restricted Person to any other or further
notice or demand in similar or other circumstances. This Agreement and the other
Loan Documents set forth the entire understanding between the parties hereto
with respect to the transactions contemplated herein and therein and supersede
all prior discussions and understandings with respect to the subject matter
hereof and thereof, and no waiver, consent, release, modification or amendment
of or supplement to this Agreement or the other Loan Documents shall be valid or
effective against any party hereto unless the same is in writing and signed by
such party.
(b) ACKNOWLEDGEMENTS AND ADMISSIONS. Borrower hereby represents,
warrants, acknowledges and admits that (i) it has been advised by counsel in the
negotiation, execution and delivery of the Loan Documents to which it is a
party, (ii) it has made an independent decision to enter into this Agreement and
the other Loan Documents to which it is a party, without reliance on any
representation, warranty, covenant or undertaking by Lender or Lender, whether
written, oral or implicit, other than as expressly set out in this Agreement or
in another Loan Document delivered on or after the date hereof, (iii) there are
no representations, warranties, covenants, undertakings or agreements by Lender
as to the Loan Documents except as expressly set out in this Agreement or in
another Loan Document delivered on or after the date hereof, (iv) no Lender has
any fiduciary obligation toward Borrower with respect to any Loan Document or
the transactions contemplated thereby, (v) the relationship pursuant to the Loan
Documents between Borrower and the other Restricted Persons, on one hand, and
Lender, on the other hand, is and shall be solely that of debtor and creditor,
respectively, (vi) no partnership or joint venture exists with respect to the
Loan Documents between any Restricted Person and Lender, (vii) should an Event
of Default or Default occur or exist, Lender will determine in its sole
discretion and for its own reasons what remedies and actions it will or will not
exercise or take at that time, (viii) without limiting any of the foregoing,
Borrower is not relying upon any representation or covenant by Lender, or any
representative thereof, and no such representation or covenant has been made,
that Lender will, at the time of an Event of Default or Default, or at any other
time, waive, negotiate, discuss, or take or refrain from taking any action
permitted under the Loan Documents with respect to any such Event of Default or
Default or any other provision of the Loan Documents, and (ix) all Lender have
relied upon the truthfulness of the acknowledgements in this section in deciding
to execute and deliver this Agreement and to become obligated hereunder.
33
<PAGE>
(c) REPRESENTATION BY LENDER. Lender hereby represents that it will
acquire its Note for its own account in the ordinary course of its commercial
lending business; however, the disposition of Lender's property shall at all
times be and remain within its control and, in particular and without
limitation, Lender may sell or otherwise transfer the Note as provided in
Section 9.5.
(d) JOINT ACKNOWLEDGMENT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 9.2. SURVIVAL OF AGREEMENTS; CUMULATIVE NATURE. All of
Restricted Persons' various representations, warranties, covenants and
agreements in the Loan Documents shall survive the execution and delivery of
this Agreement and the other Loan Documents and the performance hereof and
thereof, including the making or granting of the Loans and the delivery of the
Notes and the other Loan Documents, and shall further survive until all of the
Obligations are paid in full to Lender and all of Lender' obligations to
Borrower are terminated. All statements and agreements contained in any
certificate or other instrument delivered by any Restricted Person to Lender
under any Loan Document shall be deemed representations and warranties by
Borrower or agreements and covenants of Borrower under this Agreement. The
representations, warranties, indemnities, and covenants made by Restricted
Persons in the Loan Documents, and the rights, powers, and privileges granted to
Lender in the Loan Documents, are cumulative, and, except for expressly
specified waivers and consents, no Loan Document shall be construed in the
context of another to diminish, nullify, or otherwise reduce the benefit to
Lender of any such representation, warranty, indemnity, covenant, right, power
or privilege. In particular and without limitation, no exception set out in this
Agreement to any representation, warranty, indemnity, or covenant herein
contained shall apply to any similar representation, warranty, indemnity, or
covenant contained in any other Loan Document, and each such similar
representation, warranty, indemnity, or covenant shall be subject only to those
exceptions which are expressly made applicable to it by the terms of the various
Loan Documents.
Section 9.3. NOTICES. All notices, requests, consents, demands and
other communications required or permitted under any Loan Document shall be in
writing, unless otherwise specifically provided in such Loan Document (provided
that Lender may give telephonic notices to the other Lender), and shall be
deemed sufficiently given or furnished if delivered by personal delivery, by
telecopy or telex, by delivery service with proof of delivery, or by registered
or certified United States mail, postage prepaid, to Borrower and Restricted
Persons at the address of Borrower specified on the signature pages hereto and
to Lender at its address specified on the signature pages hereto (unless changed
by similar notice in writing given by the particular Person whose address is to
be changed). Any such notice or communication shall be deemed to have been given
(a) in the case of personal delivery or delivery service, as of the date of
first attempted delivery during normal business
34
<PAGE>
hours at the address provided herein, (b) in the case of telecopy or telex, upon
receipt, or (c) in the case of registered or certified United States mail, three
days after deposit in the mail; provided, however, that no Loan Request shall
become effective until actually received by Lender.
Section 9.4. PAYMENT OF EXPENSES; INDEMNITY.
(a) PAYMENT OF EXPENSES. Whether or not the transactions contemplated
by this Agreement are consummated, Borrower will promptly (and in any event,
within 30 days after any invoice or other statement or notice) pay: (i) all
transfer, stamp, mortgage, documentary or other similar taxes, assessments or
charges levied by any governmental or revenue authority in respect of this
Agreement or any of the other Loan Documents or any other document referred to
herein or therein, (ii) all reasonable costs and expenses incurred by or on
behalf of Lender (including attorneys' fees, consultants' fees and engineering
fees, travel costs and miscellaneous expenses) in connection with (1) the
negotiation, preparation, execution and delivery of the Loan Documents, and any
and all consents, waivers or other documents or instruments relating thereto,
(2) the filing, recording, refiling and re-recording of any Loan Documents and
any other documents or instruments or further assurances required to be filed or
recorded or refiled or re-recorded by the terms of any Loan Document, (3) the
borrowings hereunder and other action reasonably required in the course of
administration hereof, (4) monitoring or confirming (or preparation or
negotiation of any document related to) Borrower's compliance with any covenants
or conditions contained in this Agreement or in any Loan Document, and (iii) all
reasonable costs and expenses incurred by or on behalf of Lender (including
attorneys' fees, consultants' fees and accounting fees) in connection with the
defense or enforcement of any of the Loan Documents (including this section) or
the defense of Lender's exercise of its rights thereunder. In addition to the
foregoing, until and all Obligations have been paid in full, Borrower will also
pay or reimburse Lender for all reasonable out-of-pocket costs and expenses of
Lender or its agents or employees in connection with the continuing
administration of the Loans and the related due diligence of Lender, including
travel and miscellaneous expenses and fees and expenses of Lender's outside
counsel, reserve engineers and consultants engaged in connection with the Loan
Documents.
(b) INDEMNITY. Borrower agrees to indemnify Lender, upon demand, from
and against any and all liabilities, obligations, claims, losses, damages,
penalties, fines, actions, judgments, suits, settlements, costs, expenses or
disbursements (including reasonable fees of attorneys, accountants, experts and
advisors) of any kind or nature whatsoever (in this section collectively called
"liabilities and costs") which to any extent (in whole or in part) may be
imposed on, incurred by, or asserted against Lender growing out of, resulting
from or in any other way associated with any of the Collateral, the Loan
Documents and the transactions and events (including the enforcement or defense
thereof) at any time associated therewith or contemplated therein (including any
violation or noncompliance with any Environmental Laws by any Restricted Person
or any liabilities or duties of any Restricted Person or Lender with respect to
Hazardous Materials found in or released into the environment).
35
<PAGE>
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM
OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY KIND BY LENDER,
provided only that no Lender shall be entitled under this section to receive
indemnification for that portion, if any, of any liabilities and costs which is
proximately caused by its own individual gross negligence or willful misconduct,
as determined in a final judgment. If any Person (including Borrower or any of
its Affiliates) ever alleges such gross negligence or willful misconduct by
Lender, the indemnification provided for in this section shall nonetheless be
paid upon demand, subject to later adjustment or reimbursement, until such time
as a court of competent jurisdiction enters a final judgment as to the extent
and effect of the alleged gross negligence or willful misconduct. As used in
this section the term "Lender" shall refer not only to the Persons designated as
such in Section 1.1 but also to each director, officer, agent, attorney,
employee, representative and Affiliate of such Persons.
Section 9.5. JOINT AND SEVERAL LIABILITY; PARTIES IN INTEREST;
ASSIGNMENTS. All Obligations which are incurred by two or more Restricted
Persons shall be their joint and several obligations and liabilities. All
grants, covenants and agreements contained in the Loan Documents shall bind and
inure to the benefit of the parties thereto and their respective successors and
assigns; provided, however, that no Restricted Person may assign or transfer any
of its rights or delegate any of its duties or obligations under any Loan
Document without the prior consent of Lender. Lender may sell or otherwise
transfer the Note, any participation interest or other interest therein, or any
of its other rights and obligations under the Loan Documents without the consent
of Borrower or any Guarantor.
Section 9.6. CONFIDENTIALITY. Lender agrees that it will take all
reasonable steps to keep confidential any proprietary information given to it by
any Restricted Person, provided, however, that this restriction shall not apply
to information which (i) has at the time in question entered the public domain,
(ii) is required to be disclosed by Law (whether valid or invalid) of any
Tribunal, (iii) is disclosed to Lender's Affiliates, auditors, attorneys, or
agents, (iv) is furnished to any other Lender or to any purchaser or prospective
purchaser of participations or other interests in any Loan or Loan Document, or
(v) is disclosed in the course of enforcing its rights and remedies during the
existence of an Event of Default.
Section 9.7. GOVERNING LAW; SUBMISSION TO PROCESS. EXCEPT TO THE EXTENT
THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A LOAN DOCUMENT,
THE LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS
OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF
AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. CHAPTER 15 OF TEXAS
REVISED CIVIL STATUTES ANNOTATED ARTICLE 5069 (WHICH REGULATES CERTAIN REVOLVING
CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) DOES NOT APPLY TO THIS
AGREEMENT OR TO THE
36
<PAGE>
NOTES. BORROWER HEREBY IRREVOCABLY SUBMITS ITSELF AND EACH OTHER RESTRICTED
PERSON TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING
IN THE STATE OF TEXAS AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE
MADE UPON IT OR ANY RESTRICTED PERSON IN ANY LEGAL PROCEEDING RELATING TO THE
LOAN DOCUMENTS OR THE OBLIGATIONS BY ANY MEANS ALLOWED UNDER TEXAS OR FEDERAL
LAW.
Section 9.8. LIMITATION ON INTEREST. Lender, Restricted Persons and any
other parties to the Loan Documents intend to contract in strict compliance with
applicable usury law from time to time in effect. In furtherance thereof such
Persons stipulate and agree that none of the terms and provisions contained in
the Loan Documents shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum amount
of interest permitted to be charged by applicable law from time to time in
effect. Neither any Restricted Person nor any present or future guarantors,
endorsers, or other Persons hereafter becoming liable for payment of any
Obligation shall ever be liable for unearned interest thereon or shall ever be
required to pay interest thereon in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this section shall control over all other provisions of the Loan
Documents which may be in conflict or apparent conflict herewith. Lender
expressly disavow any intention to charge or collect excessive unearned interest
or finance charges in the event the maturity of any Obligation is accelerated.
If (a) the maturity of any Obligation is accelerated for any reason, (b) any
Obligation is prepaid and as a result any amounts held to constitute interest
are determined to be in excess of the legal maximum, or (c) Lender or any other
holder of any or all of the Obligations shall otherwise collect moneys which are
determined to constitute interest which would otherwise increase the interest on
any or all of the Obligations to an amount in excess of that permitted to be
charged by applicable law then in effect, then all sums determined to constitute
interest in excess of such legal limit shall, without penalty, be promptly
applied to reduce the then outstanding principal of the related Obligations or,
at Lender's or holder's option, promptly returned to Borrower or the other payor
thereof upon such determination. In determining whether or not the interest paid
or payable, under any specific circumstance, exceeds the maximum amount
permitted under applicable law, Lender and Restricted Persons (and any other
payors thereof) shall to the greatest extent permitted under applicable law, (i)
characterize any non-principal payment as an expense, fee or premium rather than
as interest, (ii) exclude voluntary prepayments and the effects thereof, and
(iii) amortize, prorate, allocate, and spread the total amount of interest
throughout the entire contemplated term of the instruments evidencing the
Obligations in accordance with the amounts outstanding from time to time
thereunder and the maximum legal rate of interest from time to time in effect
under applicable law in order to lawfully charge the maximum amount of interest
permitted under applicable law. In the event applicable law provides for an
interest ceiling under Texas Revised Civil Statutes Annotated article 5069-1.04,
that ceiling shall be the indicated rate ceiling and shall be used when
appropriate in determining the Highest Lawful Rate. As used in this section the
term "applicable Law" means the Laws of the State of Texas or the Laws of the
United States of America, whichever Laws allow the greater interest, as such
Laws now exist or may be changed or amended or come into effect in the future.
37
<PAGE>
Section 9.9. TERMINATION; LIMITED SURVIVAL. In its sole and absolute
discretion Borrower may at any time that no Obligations are owing elect in a
written notice delivered to Lender to terminate this Agreement. Upon receipt by
Lender of such a notice, if no Obligations are then owing this Agreement and all
other Loan Documents shall thereupon be terminated and the parties thereto
released from all prospective obligations thereunder. Notwithstanding the
foregoing or anything herein to the contrary, any waivers or admissions made by
any Restricted Person in any Loan Document, any Obligations under Section 3.2,
and any obligations which any Person may have to indemnify or compensate Lender
shall survive any termination of this Agreement or any other Loan Document. At
the request and expense of Borrower, Lender shall prepare and execute all
necessary instruments to reflect and effect such termination of the Loan
Documents. Lender is hereby authorized to execute all such instruments on behalf
of all Lender, without the joinder of or further action by Lender.
Section 9.10. SEVERABILITY. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable all other terms and
provisions of the Loan Documents shall nevertheless remain effective and shall
be enforced to the fullest extent permitted by applicable Law.
Section 9.11. COUNTERPARTS. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
Section 9.12. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. BORROWER AND
LENDER HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY (A) WAIVES,
TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY
TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR ANY
TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH, BEFORE OR AFTER
MATURITY; (B) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT
MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY "SPECIAL DAMAGES", AS
DEFINED BELOW, (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR
AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION, "SPECIAL
DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES
(REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS WHICH ANY
PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER PARTY HERETO.
38
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
TEXSTAR PETROLEUM, INC.
Borrower
By: /s/ Prentis B. Tomlinson, Jr.,
------------------------------------------
Prentis B. Tomlinson, Jr.,
Chief Executive Officer
BENZ ENERGY LTD.
Guarantor
By: /s/ Prentis B. Tomlinson, Jr.,
------------------------------------------
Prentis B. Tomlinson, Jr., Chairman
CALIBRE ENERGY, L.L.C.
Guarantor
By: /s/ L.E. Walker
------------------------------------------
L.E. Walker, Manager and President
Address:
1000 Louisiana, Suite 3950
Houston, Texas 77002
Attention: Todd E. Grabois
Telephone: (713) 739-0351
Telecopy: (713) 739-8402
39
<PAGE>
ENCAP ENERGY CAPITAL FUND III, L.P.
Lender
By: EnCap Investments L.C.,
its general partner
By: /s/ Robert L. Zorich
------------------------------------------
Robert L. Zorich, Managing Director
Address:
1100 Louisiana, Suite 3150
Houston, Texas 77002
Attention: Robert L. Zorich
Telephone: (713) 659-6100
Telecopy: (713) 659-6130
40
<PAGE>
Exhibit 10.28
[BENZ ENERGY, LTD. LETTERHEAD]
November 10, 1998
Mr. Joe U. Flores
Mobil Exploration & Production U.S. Inc.
12450 Greenspoint Drive
Houston, Texas 77060-1991
RE: Old Ocean
Matagorda and Brazoria County, Texas
Dear Mr. Flores:
Pursuant to our discussion of November 9, 1998, Benz Energy, Ltd.
("Benz") hereby offers the sum of Two Million Dollars ($2,000,000), net of
any other consideration or credit as hereinafter provided, for the
acquisition of all rights, title and interests in and to any mineral
interest, real or beneficial, that Mobil Producing Texas & New Mexico Inc.
("Mobil") owns: (i) below the base of the deepest unitized formation in the
Old Ocean Unit, which is defined in that certain Old Ocean Field Unitization
Agreement dated January 30, 1947 and recorded in Volume 176 at page 55 of the
Deed Records of Matagorda County, Texas. The deepest producing formation is
commonly referred to as the "Larsen Sand," which is identified by electric
log as the interval between 10,320' and 10,690' measured depth, in the J.S.
Abercrombie Co. and Magnolia Petroleum Co. BRLD - #16 (currently referred to
as Old Ocean Unit Well #79), and (ii) in that certain unrecorded Agreement,
by and between Mobil Producing Texas & New Mexico Inc., Amoco Production
Company and Cheyenne Petroleum Company and dated by amendment effective
October 15, 1997, governing operations for a geophysical 3D survey and
exploration for oil and gas. For purposes of this offer it is the
understanding of Benz that Mobil's undivided working interest is not less than
39.325 Armstrong Zone 36% of 8/8ths interest in the leasehold estate covering
the Old Ocean Unit. Any representation of offer by Benz is contingent upon
Mobil selling all of its rights, title and interests in (i) and (ii) above to
Benz.
As additional consideration Benz will provide Mobil with a seismic
license to the 3D survey currently being acquired covering lands defined as
the Old Ocean Unit and provide adequate "tails" to ensure a sufficient amount
of coverage for interpretation of the shallow rights reserved by Mobil. Said
license will be transferable one (1) time to any party who acquires all of
the rights, title
<PAGE>
and interests of Mobil from the surface of the earth to the base of the
Larsen Sand in the Old Ocean Unit and will cover only those lands defined as
the Old Ocean Unit.
Any conveyance of interest by Mobil would be subject to the following:
1. Mobil will retain an overriding royalty interest on any mineral
interest covering the Old Ocean Unit equal to the difference between twenty
percent (20%) and burdens, but in no event greater than three percent (3%) of
8/8ths.
2. Mobil will retain overriding royalty interest on any oil, gas and
mineral leases acquired by Benz covering lands outside the Old Ocean Unit but
within the AMI boundary of the Agreement, which Mobil is selling to Benz of
two percent (2%) of 8/8ths. By previous letter dated July 17, 1998 Mobil
elected to participate for its proportionate share in certain Geophysical
Option Agreements acquired by Benz within the AMI pursuant to the above
referenced Agreement. Pursuant to the terms and conditions of this letter
proposal, Benz shall credit Mobil for its proportionate share of the option
election in the amount of $565,035.53.
3. Sale of Mobil's mineral interest in the Old Ocean Unit below the
base of the Larsen Sand will be conveyed by means of a Term Assignment and
Sublease. The "Term Assignment and Sublease" will be for a period of ten (10)
years from the effective date of such assignment. Upon termination of the ten
(10) year term all lands within the Old Ocean Unit previously assigned and
subleased by Mobil to Benz not allocated to a Development Area, not to exceed
2,000 acres in size, unless otherwise mutually agreed to by Mobil and Benz
shall automatically revert to Mobil. For definition purposes, a "Development
Area" shall be defined as any number of acres reasonably attributable and
supporting development of a particular well which is completed as a producer
in paying quantities from depths below the Larsen Sand.
4. Upon execution of this letter and when contractually permitted,
Mobil will provide Benz access to, and copies of, all geological and
subsurface (well and reservoir) information in its possession covering the
Old Ocean Unit. Benz will have the right to disclose such information to
third parties without restriction.
This offer will expire at the close of business Tuesday, November 10,
1998 in the event Mobil fails to accept this offer as hereinafter provided.
-2-
<PAGE>
Upon acceptance as herein provided the parties shall immediately begin
negotiating in good faith to formalize a "Purchase and Sale Agreement" which
will be executed within ten (10) business days. The Term Assignment and
Sublease will be executed simultaneously with closing which will occur on or
before December 15, 1998.
Should you have any questions or comments, please advise.
Very truly yours,
/s/ R. Hiram Lucius
- -------------------------------------
R. Hiram Lucius, CPL
Coordinator and Contract Negotiations
AGREED TO AND ACCEPTED THIS 10TH DAY OF NOVEMBER, 1998.
---- --------
Mobil Exploration & Production U.S. Inc.
As Agent for Mobil Producing Texas & New Mexico Inc.
/s/ K. R. Hemrighaus
- -----------------------------------------
By: K. R. Hemrighaus
--------------------------------------
Title: Producing Manager--South Texas
----------------------------------
-3-
<PAGE>
================================================================================
PURCHASE AND SALE AGREEMENT
by and between
LASCO ENERGY PARTNERS, L.P.,
as Seller
and
BENZ ENERGY LTD.,
as Buyer
Dated January 23, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS, REFERENCES AND CONSTRUCTION............................................................ 1
Section 1.1. Certain Defined Terms..................................................................... 1
Section 1.2. References and Construction............................................................... 7
ARTICLE II PROPERTY TO BE SOLD AND PURCHASED.................................................................. 8
ARTICLE III PURCHASE PRICE.................................................................................... 9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER........................................................... 9
Section 4.1. Organization and Existence................................................................ 9
Section 4.2. Power and Authority....................................................................... 9
Section 4.3. Valid and Binding Agreement............................................................... 10
Section 4.4. Non-Contravention......................................................................... 10
Section 4.5. Approvals................................................................................. 10
Section 4.6. Pending Litigation........................................................................ 11
Section 4.7. No AFE Items or Well Abandonments, No P&A Liabilities..................................... 11
Section 4.8. Production Marketing...................................................................... 11
Section 4.9. Compliance with Applicable Laws.......................................................... 11
Section 4.10. Tax Partnerships.......................................................................... 12
Section 4.11. Permits................................................................................... 12
Section 4.12. Condition of Assets....................................................................... 12
Section 4.13. Investment Intent......................................................................... 12
Section 4.14. Investment Experience..................................................................... 12
Section 4.15. Restricted Securities..................................................................... 13
Section 4.16. Legend.................................................................................... 13
Section 4.17. Full Disclosure........................................................................... 13
Section 4.18. Disclaimer of Warranties.................................................................. 14
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER............................................................. 14
Section 5.1. Organization and Existence................................................................ 14
Section 5.2. Power and Authority....................................................................... 14
Section 5.3. Valid and Binding Agreement............................................................... 15
Section 5.4. Non-Contravention......................................................................... 15
Section 5.5. Approvals................................................................................. 15
Section 5.6. Pending Litigation........................................................................ 15
Section 5.7. Knowledgeable Purchaser................................................................... 16
Section 5.8. Capital Stock............................................................................. 16
Section 5.9. Authorization of the Note................................................................. 16
Section 5.10. Reservation of Shares..................................................................... 16
Section 5.11. Initial Financial Statements.............................................................. 16
<PAGE>
Section 5.12. Full Disclosure........................................................................... 16
Section 5.13. Labor Disputes and Acts of God............................................................ 17
Section 5.14. ERISA Plans and Liabilities............................................................... 17
Section 5.15. Environmental and Other Laws.............................................................. 17
Section 5.16. Names and Places of Business.............................................................. 18
Section 5.17. Buyer's Subsidiaries...................................................................... 18
Section 5.18. Title to Properties; Licenses............................................................. 18
Section 5.19. Government Regulation..................................................................... 18
Section 5.20. Officers, Directors and Shareholders...................................................... 19
ARTICLE VI COVENANT RE ACCESS................................................................................. 19
ARTICLE VII DUE DILIGENCE EXAMINATION......................................................................... 19
Section 7.1. Inspection and Assertion of Defects....................................................... 19
Section 7.2. Certain Price Adjustments................................................................. 21
Section 7.3. Waiver.................................................................................... 23
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES; TERMINATION RIGHTS ...................... 23
Section 8.1. Conditions Precedent to the Obligations of Buyer.......................................... 23
Section 8.2. Conditions Precedent to the Obligations of Seller......................................... 24
ARTICLE IX CLOSING OF TRANSACTION............................................................................. 25
Section 9.1. The Closing............................................................................... 25
Section 9.2. Seller's Closing Obligations.............................................................. 25
Section 9.3. Buyer's Closing Obligations............................................................... 25
Section 9.4. Delivery of Files......................................................................... 26
ARTICLE X CERTAIN ACCOUNTING ADJUSTMENTS...................................................................... 26
Section 10.1. Adjustments............................................................................... 26
Section 10.2. Closing and Post-Closing Accounting Settlements........................................... 27
ARTICLE XI ASSUMPTION AND INDEMNIFICATION .................................................................... 27
ARTICLE XII SELLER'S SPECIAL POST-CLOSING INDEMNIFICATION..................................................... 28
Section 12.1. Indemnification for Certain Lawsuits...................................................... 28
Section 12.2. Indemnification for Certain Title Related Items........................................... 28
Section 12.3. Certain Provisions........................................................................ 29
ARTICLE XIII CONVERSION OF NOTE............................................................................... 31
Section 13.1. Shares Issuable Upon Conversion........................................................... 31
Section 13.2. Delivery of Note; Issuance of Shares...................................................... 32
ARTICLE XIV CERTAIN POST-CLOSING AFFIRMATIVE COVENANTS OF BUYER............................................... 32
Section 14.1. Books, Financial Statements and Reports................................................... 32
<PAGE>
Section 14.2. Other Information and Inspections......................................................... 33
Section 14.3. Notice of Material Events and Change of Address........................................... 33
Section 14.4. Maintenance of Properties................................................................. 34
Section 14.5. Maintenance of Existence and Qualifications............................................... 34
Section 14.6. Payment of Taxes.......................................................................... 35
Section 14.7. Insurance................................................................................. 35
Section 14.8. Compliance with Agreements and Law........................................................ 35
ARTICLE XV CERTAIN POST-CLOSING NEGATIVE COVENANTS OF BUYER................................................... 35
Section 15.1. Indebtedness.............................................................................. 35
Section 15.2. Limitation on Liens....................................................................... 36
Section 15.3. Limitations on Investments and New Businesses............................................. 36
Section 15.4. Transactions with Affiliates.............................................................. 36
Section 15.5. Limitation on Dividends and Redemptions................................................... 36
Section 15.6. Certain Contracts; Amendments; Multiemployer ERISA Plans.................................. 37
Section 15.7. Coverage Ratio............................................................................ 37
ARTICLE XVI NOTICES........................................................................................... 37
ARTICLE XVII COMMISSIONS...................................................................................... 38
ARTICLE XVIII MISCELLANEOUS MATTERS........................................................................... 38
Section 18.1. Survival of Provisions.................................................................... 38
Section 18.2. Further Assurances........................................................................ 39
Section 18.3. Binding Effect; Successors and Assigns.................................................... 39
Section 18.4. Imbalances................................................................................ 39
Section 18.5. Expenses; Sales Taxes; Filings and Recording Fees......................................... 39
Section 18.6. Entire Agreement.......................................................................... 40
Section 18.7. Public Statements......................................................................... 40
Section 18.8. Injunctive Relief......................................................................... 40
Section 18.9. Deceptive Trade Practices................................................................. 40
Section 18.10. Amendments................................................................................ 41
Section 18.11. Additional Representations, Covenants and Agreements of
Buyer Regarding Vancouver Exchange Acceptance and
Preferred Share Approval.................................................................. 41
Section 18.12. Additional Covenant and Agreement of Seller Regarding Existing and Net Worth.............. 41
Section 18.13. Governing Law............................................................................. 42
Section 18.14. Counterparts.............................................................................. 42
</TABLE>
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT dated January 23, 1998, is made by and
among Lasco Energy Partners, L.P., a Texas limited partnership ("SELLER"), and
Benz Energy Ltd., a corporation existing under the laws of the Yukon Territory,
Canada ("BUYER").
WITNESSETH:
WHEREAS, Seller desires to sell, assign and convey to Buyer, and Buyer
desires to purchase and accept from Seller, certain oil and gas properties and
related assets; and
WHEREAS, Seller and Buyer deem it in their mutual best interests to
execute and deliver this Agreement; and
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants and agreements contained herein, Seller and Buyer do hereby
agree as follows:
ARTICLE I
DEFINITIONS, REFERENCES AND CONSTRUCTION
SECTION 1.1. CERTAIN DEFINED TERMS. When used in this Agreement, the
following terms shall have the respective meanings assigned to them in this
SECTION 1.1 or in the section, subsections or other subdivisions referred to
below:
"AFFILIATE" shall mean, as to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with, such Person. A
Person shall be deemed to be "controlled by" any other Person if such other
Person possesses, directly or indirectly, power (a) to vote 20% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
election of directors or managing general partners; or (b) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.
"AGREEMENT" shall mean this Agreement, as hereafter changed, amended or
modified in accordance with the terms hereof.
"APPLICABLE NON-ENVIRONMENTAL LAWS" shall mean any statute, law, rule,
ordinance, or regulation or any judgement, order, writ, injunction, or decree of
any governmental entity to which a specified Person or property is subject, but
shall not include any Environmental Law.
-1-
<PAGE>
"ASSERTED DEFECT" shall have the meaning assigned to such term in
SECTION 7.1(a).
"ASSIGNMENTS" shall have the meaning assigned to such term in SECTION
9.2(a).
"AVERAGE CLOSING PRICE" shall be equal to U.S. $1.18.
"BASE PURCHASE PRICE" shall have the meaning assigned to such term in
ARTICLE III.
"BUYER" shall have the meaning assigned to such term in the
introductory paragraph to this Agreement.
"CLOSING" and "CLOSING DATE" shall have the meanings assigned to such
terms in SECTION 9.1.
"COMMISSION" shall mean the Securities and Exchange Commission (or any
successor body thereto).
"COMMON PORTION OF THE PURCHASE PRICE" shall mean $3,000,000, subject
to adjustment as provided in SECTIONS 7.2(e) and SECTION 10.2.
"COMMON SHARES" shall mean the Common Shares of Buyer, no par value,
and any securities of Buyer for or into which such Common Shares are exchanged,
reclassified or converted.
"CONSOLIDATED" shall refer to the consolidation of any Person, in
accordance with GAAP, with its properly consolidated subsidiaries. References
herein to a Person's Consolidated financial statements, financial position,
financial condition, liabilities, etc. refer to the consolidated financial
statements, financial position, financial condition, liabilities, etc. of such
Person and its properly consolidated subsidiaries.
"DEFECT" shall have the meaning assigned to such term in SECTION
7.1(b).
"EFFECTIVE DATE" shall have the meaning assigned to such term in
SECTION 9.2(a).
"ENVIRONMENTAL LAWS" shall mean any and all laws relating to the
environment or to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment including ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, together with all rules and regulations
promulgated with respect thereto.
-2-
<PAGE>
"ERISA AFFILIATE" shall mean Buyer and all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control that, together with Buyer, are treated as a single employer
under Section 414 of the Internal Revenue Code of 1986, as amended.
"ERISA PLAN" shall mean any employee pension benefit plan subject to
Title IV of ERISA maintained by any ERISA Affiliate with respect to which any
Restricted Person has a fixed or contingent liability.
"FISCAL QUARTER" shall mean a three-month period ending on March 31,
June 30, September 30 or December 31 of any year.
"FISCAL YEAR" shall mean a twelve-month period ending on December 31 of
any year.
"FUND III CREDIT AGREEMENT" shall mean that certain Credit Agreement
dated October 9, 1997, by and among Texstar Petroleum, Inc., Benz Energy Ltd.,
Calibre Energy, L.L.C., and EnCap Energy Capital Fund III, L.P.
"GAAP" shall mean those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of Buyer
and its Consolidated subsidiaries, are applied for all periods after the date
hereof in a manner consistent with the manner in which such principles and
practices were applied to the audited Initial Financial Statements; PROVIDED,
that with respect to Buyer, "GAAP" means such generally accepted accounting
principles and practices as recognized by the Canadian financial accounting
standard board equivalent. If any change in any accounting principle or practice
is required by the Financial Accounting Standards Board or Canadian financial
accounting standards board equivalent (or any such successor) in order for such
principle or practice to continue as a generally accepted accounting principle
or practice, all reports and financial statements required hereunder with
respect to Buyer and its Consolidated subsidiaries may be prepared in accordance
with such change, but all calculations and determinations to be made hereunder
may be made in accordance with such change only after notice of such change is
given to Seller and Seller agrees to such change insofar as it affects the
accounting of Buyer and its Consolidated subsidiaries.
"HAZARDOUS MATERIALS" shall mean any substance regulated under
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise.
"INDEBTEDNESS" of any Person shall mean Liabilities in any of the
following categories: (a) Liabilities for borrowed money, (b) Liabilities
constituting an obligation to pay the deferred purchase price of property or
services, (c) Liabilities evidenced by a bond, debenture, note or similar
instrument, (d) Liabilities which would under GAAP be shown on such Person's
balance sheet as a liability, and is payable more than one year from the date of
creation thereof (other than reserves for taxes and reserves for contingent
obligations), (e) Liabilities arising under
-3-
<PAGE>
futures contracts, forward contracts, swap, cap or collar contracts, option
contracts, hedging contracts, other derivative contracts, or similar agreements,
(f) Liabilities constituting principal under leases capitalized in accordance
with GAAP, (g) Liabilities arising under conditional sales or other title
retention agreements, (h) Liabilities owing under direct or indirect guaranties
of Liabilities of any other Person or constituting obligations to purchase or
acquire or to otherwise protect or insure a creditor against loss in respect of
Liabilities of any other Person (such as obligations under working capital
maintenance agreements, agreements to keep-well, or agreements to purchase
Liabilities, assets, goods, securities or services), but excluding endorsements
in the ordinary course of business of negotiable instruments in the course of
collection, (i) Liabilities (for example, repurchase agreements) consisting of
an obligation to purchase securities or other property, if such Liabilities
arises out of or in connection with the sale of the same or similar securities
or property, (j) Liabilities with respect to letters of credit or applications
or reimbursement agreements therefor, (k) Liabilities with respect to payments
received in consideration of oil, gas, or other minerals yet to be acquired or
produced at the time of payment (including obligations under "take-or-pay"
contracts to deliver gas in return for payments already received and the
undischarged balance of any production payment created by such Person or for the
creation of which such Person directly or indirectly received payment), or (l)
Liabilities with respect to other obligations to deliver goods or services in
consideration of advance payments therefor; provided, however, that the
"Indebtedness" of any Person shall not include Liabilities that were incurred by
such Person on ordinary trade terms to vendors, suppliers, or other Persons
providing goods and services for use by such Person in the ordinary course of
its business, unless and until such Liabilities are outstanding more than 90
days past the original invoice or billing date therefor.
"INDEMNIFIED ITEM" shall mean a Defect or other item or matter with
respect to which Seller has agreed to provide indemnification under the terms of
ARTICLE XII.
"INITIAL FINANCIAL STATEMENTS" shall mean (a) the audited annual
Consolidated financial statements of Benz Energy, Ltd. f/k/a Benz Equities Ltd.,
dated as of August 31, 1997 and (ii) the unaudited quarterly Consolidated
financial statements of Benz Energy, Ltd. dated as of November 30, 1997.
"LIABILITIES" shall mean, as to any Person, all indebtedness,
liabilities and obligations of such Person, whether matured or unmatured,
liquidated or unliquidated, primary or secondary, direct or indirect, absolute,
fixed or contingent, and whether or not required to be considered pursuant to
GAAP.
"MATERIAL ADVERSE CHANGE" shall mean a material and adverse change,
from the state of affairs presented in the Initial Financial Statements, to (a)
Buyer's or any of its Subsidiaries' financial condition taken on a Consolidated
basis, (b) the operations or properties of Buyer or any of its Subsidiaries
taken on a Consolidated basis, or (c) Buyer's ability to timely pay or perform
the Note or Buyer's obligations with respect to the Preferred Shares issuable
upon conversion of the Note.
-4-
<PAGE>
"NOTE" shall have the meaning assigned to such term in SECTION 9.3(a).
"OIL AND GAS PROPERTIES" shall have the meaning assigned to such term
in ARTICLE II.
"PERMITTED ENCUMBRANCES" shall mean any of the following: (a) liens for
taxes not yet delinquent; (b) materialmen's, mechanic's and other similar liens,
or a lien under an operating agreement or similar agreement, to the extent the
same relates to expenses incurred which are not yet due; (c) the terms and
conditions of all contracts and agreements relating to the Oil and Gas
Properties; (d) rights reserved to or vested in any governmental authority to
control or regulate any of the Properties; (e) easements, rights-of-way,
servitudes, permits, and other similar rights granted to or reserved for third
parties on, over or in respect of the Properties, to the extent such matters do
not materially interfere with the operation of the Property burdened thereby;
(f) conventional rights of reassignment arising immediately prior to termination
or expiration of an oil and gas lease or upon a decision or election by the
owner of an oil and gas lease to surrender or abandon all or any portion of
same; (g) preferential rights to purchase and required third party consents to
assignments and similar agreements with respect to which prior to the Closing
(i) waivers or consents are obtained from the appropriate parties or (ii)
required notices have been given to the holders of such rights and the
appropriate time period for asserting such rights has expired without an
exercise of such rights or approvals required to be obtained from governmental
entities who are lessors under leases forming a part of the Oil and Gas
Properties (or who administer such leases on behalf of such lessors) which are
customarily obtained post-closing; and (h) statutory liens securing payment of
the proceeds of production to third parties, to the extent such payments are not
yet delinquent; provided, however, that any encumbrance listed in this
definition shall not be a Permitted Encumbrance if it (A) operates to (x) reduce
the net revenue interest of Seller in a well below the "NRI" for such well set
forth in EXHIBIT 7.1(b)(i) or (y) increase the working interest of Seller in a
well above the "WI" for such well set forth in EXHIBIT 7.1(b)(i) (unless the
share of production from such well to which Seller is entitled is
proportionately larger than the "NRI" for such well on EXHIBIT 7.1(b)(i) or (B)
causes Seller to be in material breach of any representation or warranty made by
it in this Agreement or in the Assignment; provided, further, that an agreement,
document or instrument which provides for terms, conditions, exceptions,
reservations, limitations, or other matters contained in such agreement,
document or instrument which are not customary to currently accepted industry
standards and which materially and adversely restricts or limits Buyer's ability
to produce oil and/or gas from the Properties shall not be a Permitted
Encumbrance.
"PERMITTED LIEN" shall mean, when used with respect to Buyer or any
Subsidiary thereof, a lien permitted under SECTION 7.2 of the Fund III Credit
Agreement.
"PERSON" shall mean an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture, or any
other legally recognizable entity.
"POST-CLOSING EXAMINATION POINT" shall have the meaning assigned to
such term in SECTION 7.1(a).
-5-
<PAGE>
"PREFERRED PORTION OF THE PURCHASE PRICE" shall mean $12,000,000,
subject to adjustment as provided in SECTIONS 7.2(e) and SECTION 10.2.
"PREFERRED SHARE APPROVAL" shall have the meaning assigned to it in
SECTION 18.11.
"PREFERRED SHARES" shall mean Preferred Shares of Buyer having the
terms, rights and preferences summarized in EXHIBIT 2.1--PREFERRED SHARES.
"PROPERTIES" shall have the meaning assigned to such term in ARTICLE
II.
"PURCHASE PRICE" shall have the meaning assigned to such term in
ARTICLE III.
"SECURITIES ACT" shall mean the U.S. Securities Act of 1933, as
amended, and all rules and regulations under such Act.
"SELLER" shall have the meaning assigned to such term in the
introductory paragraph to this Agreement.
"SENIOR CREDIT FACILITY" shall mean (a) the credit facilities under
those certain Letter Loan Agreements dated July 17, 1997 between Bank One,
Texas, N.A. and Texstar Petroleum, Inc. and Bank One, Texas, N.A. and Calibre
Energy, L.L.C., each in the maximum principal amount of $10,000,000, or (b) any
credit facility or facilities of Buyer or any Subsidiary in substitution thereof
with respect to senior bank indebtedness.
"SHARES" shall mean the Common Shares and the Preferred Shares.
"SUBSIDIARY" shall mean, with respect to any Person, any corporation,
association, partnership, joint venture, or other business or corporate entity,
enterprise or organization which is directly or indirectly (through one or more
intermediaries) controlled by or owned fifty percent or more by such Person.
"TERMINATION EVENT" shall mean (a) the occurrence with respect to any
ERISA Plan of (i) a reportable event described in Sections 4043(b)(5) or (6) of
ERISA or (ii) any other reportable event described in Section 4043(b) of ERISA
other than a reportable event not subject to the provision for 30-day notice to
the Pension Benefit Guaranty Corporation pursuant to a waiver by such
corporation under Section 4043(a) of ERISA, or (b) the withdrawal of any ERISA
Affiliate from an ERISA Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a
notice of intent to terminate any ERISA Plan or the treatment of any ERISA Plan
amendment as a termination under Section 4041 of ERISA, or (d) the institution
of proceedings to terminate any ERISA Plan by the Pension Benefit Guaranty
Corporation under Section 4042 of ERISA, or (e) any other event or condition
which might constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any ERISA Plan.
-6-
<PAGE>
"VANCOUVER EXCHANGE ACCEPTANCE" shall mean the receipt by Buyer from
the Vancouver Stock Exchange of notice in writing that the transactions
contemplated by this Agreement are acceptable to the Vancouver Stock Exchange.
SECTION 1.2. REFERENCES AND CONSTRUCTION.
(a) All references in this Agreement to articles, sections,
subsections and other subdivisions refer to corresponding articles, sections,
subsections and other subdivisions of this Agreement unless expressly
provided otherwise.
(b) Titles appearing at the beginning of any of such subdivisions
are for convenience only and shall not constitute part of such subdivisions
and shall be disregarded in construing the language contained in such
subdivisions.
(c) The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly
so limited.
(d) Words in the singular form shall be construed to include the
plural and VICE VERSA, unless the context otherwise requires. Pronouns in
masculine, feminine and neuter genders shall be construed to include any
other gender.
(e) Unless the context otherwise requires or unless otherwise
provided herein, the terms defined in this Agreement which refer to a
particular agreement, instrument or document also refer to and include all
renewals, extensions, modifications, amendments or restatements of such
agreement, instrument or document, provided that nothing contained in this
subsection shall be construed to authorize such renewal, extension,
modification, amendment or restatement.
(f) Examples shall not be construed to limit, expressly or by
implication, the matter they illustrate.
(g) The word "includes" and its derivatives means "includes, but is
not limited to" and corresponding derivative expressions.
(h) No consideration shall be given to the fact or presumption that
one party had a greater or lesser hand in drafting this Agreement.
(i) Unless otherwise indicated, all references herein to "$" or
"dollars" shall refer to U.S. Dollars.
(j) EXHIBITS 2.1--PREFERRED SHARES, II, 4.4, 4.6, 4.8, 5.8, 5.14,
5.16, 5.17, 5.20, 7.1(b)(i), 7.1(b)(v), 8.2(d), 9.2(a), 9.2(d) and 9.3(a) are
attached hereto. Each such Exhibit is incorporated herein by reference for
all purposes and references to this Agreement shall also include such Exhibit
unless the context in which used shall otherwise require.
-7-
<PAGE>
ARTICLE II
PROPERTY TO BE SOLD AND PURCHASED
Seller agrees to sell and Buyer agrees to purchase, for the
consideration hereinafter set forth, and subject to the terms and provisions
herein contained, the following described properties, rights and interests:
(a) All right, title and interest of Seller in and to the oil,
gas and/or mineral leases described in EXHIBIT II hereto (and any
ratification and/or amendments to such leases, whether or not such
ratifications or amendments are described on EXHIBIT II) insofar as
such leases (and such ratifications and amendments ) cover the lands
and depths described on such EXHIBIT II; and
(b) Without limiting the foregoing, all other right, title and
interest (of whatever kind or character, whether legal or equitable,
and whether vested or contingent) of Seller in and to the oil, gas and
other minerals in and under or that may be produced from the lands and
depths described on EXHIBIT II (including interests in oil, gas and/or
mineral leases covering such lands and depths, overriding royalties,
production payments and net profits interests in such lands or such
leases, and fee mineral interests, fee royalty interests and all other
interests of any kind or character in such oil, gas and other
minerals); and
(c) All rights, titles and interests of Seller in and to all
permits; licenses; servitudes; easements; rights-of-way; orders;
farm-in and farm-out agreements; bottom hole agreements; crude oil,
condensate and natural gas purchase and sale, gathering, transportation
and marketing agreements; hydrocarbon storage agreements; acreage
contribution agreements; operating agreements; balancing agreements;
pooling agreements; unitization agreements; processing agreements;
saltwater disposal agreements; options; facility ore equipment leases;
and other contracts, agreements, and rights owned by Seller, in whole
or in part, to the extent that they are (i) appurtenant to or affect
the properties described in SUBSECTIONS (a) and (b) above or (ii) used
or held for use in connection with the ownership or operation of the
properties described in SUBSECTIONS (a) and (b) above or the production
or treatment of oil, gas, and other hydrocarbons and associated
products on or produced from the properties described in SUBSECTIONS
(a) and (b) above, or the sale or disposal of water, oil, gas and other
hydrocarbons and associated products; and
(d) All rights, titles and interests of Seller in and to all
materials, supplies, machinery, equipment, improvements and other
personal property and fixtures (including, but not by way of
limitation, all wells, saltwater disposal wells, wellhead equipment,
compression equipment, flow lines, pipelines, gathering systems,
processing and separation systems, and other equipment) whether or not
located on the properties described in SUBSECTIONS (a), (b) and (c)
above and used in connection with the exploration, development,
operation or maintenance thereof and all oil, gas and other
hydrocarbons produced from or allocated thereto; and
-8-
<PAGE>
(e) All of the files, records, information, and data, whether
written or electronically stored, relating to the interests of Seller
in the properties described in SUBSECTIONS (a), (b) and (c) above,
including without limitation: (i) land and title records (including
abstracts of title, title opinions, and title curative documents);
(ii) contract files; (iii) correspondence; (iv) operations,
environmental, production and accounting records (but not including
general financial accounting or tax accounting records); (v) facility
and well records; and (vi) geological, geophysical and other
scientific and technical data and information relating to the
properties described in SUBSECTIONS (a), (b) and (c) above that is
nonproprietary and that Seller has the unencumbered right to transfer.
The properties and interests specified in the foregoing SUBSECTIONS (a), (b) and
(c) are herein sometimes collectively called the "OIL AND GAS PROPERTIES," and
the properties and interests specified in the foregoing SUBSECTIONS (a),(b),(c),
(d) and (e) are herein sometimes collectively called the "PROPERTIES". It is the
intention of Seller to sell, and the intention of Buyer to purchase, all
property of every kind and character, whether real, personal or mixed, owned by
Seller and situated in Claiborne Parish, Louisiana, Rusk County, Texas, or Gregg
County, Texas, whether such property is correctly or incorrectly described on,
or was inadvertently omitted from, EXHIBIT II.
ARTICLE III
PURCHASE PRICE
The purchase price for the properties shall equal $15,000,000 (the
"BASE PURCHASE PRICE"). The Base Purchase Price may be adjusted as provided in
SECTION 7.2 (the Base Purchase Price, as so adjusted, and as the same may be
otherwise adjusted by the mutual agreement of the parties, being called the
"PURCHASE PRICE").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
SECTION 4.1. ORGANIZATION AND EXISTENCE. Seller is a limited
partnership duly formed and validly existing under the laws of the State of
Texas.
SECTION 4.2. POWER AND AUTHORITY. Seller has full partnership power and
partnership authority to execute, deliver, and perform this Agreement and each
other agreement, instrument, or document executed or to be executed by Seller in
connection with the transactions contemplated hereby to which it is a party and
to consummate the transactions contemplated hereby and thereby. The execution,
delivery, and performance by Seller of this Agreement and each other agreement,
-9-
<PAGE>
instrument, or document executed or to be executed by Seller in connection with
the transactions contemplated hereby to which it is a party, and the
consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by all necessary partnership action of Seller.
SECTION 4.3. VALID AND BINDING AGREEMENT. This Agreement has been duly
executed and delivered by Seller and constitutes, and each other agreement,
instrument, or document executed or to be executed by Seller in connection with
the transactions contemplated hereby to which it is a party has been, or when
executed will be, duly executed and delivered by Seller and constitutes, or when
executed and delivered will constitute, a valid and legally binding obligation
of Seller, enforceable against it in accordance with their respective terms,
except that such enforceability may be limited by (a) applicable bankruptcy,
insolvency, reorganization, moratorium, and similar laws affecting creditors'
rights generally and (b) equitable principles which may limit the availability
of certain equitable remedies (such as specific performance) in certain
instances.
SECTION 4.4. NON-CONTRAVENTION. Other than requirements (if any) that
there be obtained consents to assignment (or waivers of preferential rights to
purchase) from third parties, as disclosed in EXHIBIT 4.4, and except for
approvals required to be obtained from governmental entities who are lessors
under leases forming a part of the Oil and Gas Properties (or who administer
such leases on behalf of such lessors) which are customarily obtained
post-closing, neither the execution, delivery, and performance by Seller of this
Agreement and each other agreement, instrument, or document executed or to be
executed by Seller in connection with the transactions contemplated hereby to
which it is a party nor the consummation by it of the transactions contemplated
hereby and thereby do and will (a) conflict with or result in a violation of any
provision of the partnership agreement or other governing instruments of Seller,
(b) conflict with or result in a violation of any provision of, or constitute
(with or without the giving of notice or the passage of time or both) a default
under, or give rise (with or without the giving of notice or the passage of time
or both) to any right of termination, cancellation, or acceleration under, any
bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other
instrument or obligation to which Seller is a party or by which Seller or any of
its properties may be bound, (c) result in the creation or imposition of any
lien or other encumbrance upon the properties of Seller, or (d) violate any
applicable law, rule or regulation binding upon Seller.
SECTION 4.5. APPROVALS. Other than requirements (if any) that there be
obtained consents to assignment (or waivers of preferential rights to purchase)
from third parties, as disclosed in EXHIBIT 4.4, and except for approvals
required to be obtained from governmental entities who are lessors under leases
forming a part of the Oil and Gas Properties (or who administer such leases on
behalf of such lessors) which are customarily obtained post-closing, no consent,
approval, order, or authorization of, or declaration, filing, or registration
with, any court or governmental agency or of any third party is required to be
obtained or made by Seller in connection with the execution, delivery, or
performance by Seller of this Agreement and each other agreement, instrument, or
document executed or to be executed by Seller in connection with the
transactions
-10-
<PAGE>
contemplated hereby to which it is a party or the consummation by it of the
transactions contemplated hereby and thereby.
SECTION 4.6. PENDING LITIGATION. Except as otherwise set forth in
EXHIBIT 4.6, there are no pending suits, actions, or other proceedings in which
Seller is a party which affect the Properties in any material respect, or
affecting the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby or that would, if determined adversely to
Seller, (a) result in the impairment or loss of Seller's title to the
Properties, (b) hinder or impede the operation of all or any portion of any
Property or (c) restrain, prohibit or impose damage on Buyer or Seller with
respect to the transactions contemplated hereby.
SECTION 4.7. NO AFE ITEMS OR WELL ABANDONMENTS, NO P&A LIABILITIES.
(a) Seller has incurred no expenses, and has made no commitments to make
expenditures, in connection with (and no other obligations or liabilities
have been incurred which would adversely affect) the ownership or operation
of the Properties after the Effective Date (as defined below), other than
routine expenses incurred in the normal operation of the producing wells
located on Properties which do not in the aggregate exceed U.S. $100,000, (b)
Seller has not abandoned any wells included on the Properties (or removed any
material items of equipment which would be included in the Properties, except
those replaced by items of equal suitability and value) since the Effective
Date, (c) no proposals are currently outstanding (whether made by Seller or
by any other party) to deepen, plug back, rework or abandon any wells
included located on the Properties, to conduct other operations with respect
to the Properties for which consent is required under the applicable
operating agreement, or to conduct any other operations with respect to the
Subject Properties other than routine operation of the producing wells
located on the Subject Properties, and (d) there are no dry holes, or
otherwise inactive wells, located on the Properties, other than wells that
have been properly plugged and abandoned.
SECTION 4.8. PRODUCTION MARKETING. The Properties are not subject to
any contractual or other arrangements for the sale, processing or transportation
of production, or otherwise relating to the marketing of production, other than
contracts or other arrangements which either (a) will terminate in 90 days or
less, or are subject to cancellation on not more than 90 days' notice, in each
case without penalty or other detriment, or (b) are disclosed on EXHIBIT 4.8.
Except as disclosed on EXHIBIT 4.8, there exist no calls or other similar rights
or options to purchase production from the Properties.
SECTION 4.9. COMPLIANCE WITH APPLICABLE LAWS.
(a) The ownership and operation of those Properties operated by Seller
and, to Seller's knowledge, the ownership and operation of Properties not
operated by Seller, has been in conformity in all material respects with all
Applicable Non-Environmental Laws, except for such noncompliance with such
Applicable Non-Environmental Laws which, individually or in the aggregate would
not have a material adverse effect on the ownership or operation of the
Properties.
-11-
<PAGE>
(b) (i) To Seller's knowledge, there are no underground storage tanks
on the Properties; (ii) Seller has not entered into, nor to Seller's knowledge,
has any predecessor to Seller entered into, or is subject to, any consent
orders, decrees, or judgments in existence at this time based on any
Environmental Laws that relate to the future use of any of the Properties or
that require any material change in the present condition of any of the
Properties; (iii) there are no actions, suits, claims, or proceedings seeking
money damages, injunctive relief, remedial action or remedy, pending or, to
Seller's knowledge, threatened against Seller or the Properties arising from its
ownership or operation of the Properties and relating to the violation of, or
non-compliance with, any Environmental Laws. Notwithstanding SUBSECTION (a) or
anything else herein to the contrary, the representation and warranty contained
in this SUBSECTION (b) shall be the sole and exclusive representation and
warranty of Seller hereunder with respect to Environmental Laws.
SECTION 4.10. TAX PARTNERSHIPS. None of the Properties is subject to a
tax partnership, including, without limitation, none of such properties are
subject to any operating agreement or other arrangement under which the parties
thereto have not made an effective election pursuant to Section 761 of the
Internal Revenue Code of 1986 (herein called the "INTERNAL REVENUE CODE"), and
the Treasury Regulations promulgated thereunder, to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue
Code.
SECTION 4.11. PERMITS. Seller has all material governmental licenses
and permits necessary or appropriate to own and operate the Properties as
presently being owned and operated, and such licenses and permits are in full
force and effect (and are transferrable to Seller, or are subject to being
routinely replaced by a license or permit issued to Buyer as a successor owner
of the Properties), and Seller has not received written notice of any material
violations in respect of any such licenses or permits.
SECTION 4.12. CONDITION OF ASSETS. The Properties have been maintained
in a state of repair so as to be reasonably adequate for normal operations;
provided, however, and without limiting the last sentence of SECTION 4.9 or
SECTION 4.17, the representation and warranty contained in this SECTION 4.12 is
not, nor shall it be construed to be, a representation and warranty with respect
to Environmental Laws.
SECTION 4.13. INVESTMENT INTENT. Seller is acquiring the Note for its
own account for investment and not with a view to, or for sale or other
disposition in connection with, any distribution of all or any part thereof or
of any Shares issuable upon conversion of the Note, except (i) in an offering
covered by a registration statement filed with the Securities and Exchange
Commission under the Securities Act covering the Note or the Shares, (ii)
pursuant to an applicable exemption under the Securities Act, or (iii) in
compliance with applicable Canadian securities laws.
SECTION 4.14. INVESTMENT EXPERIENCE. Seller acknowledges that it is
able to fend for itself, can bear the economic risk of its investment in the
Note and any Shares issuable upon
-12-
<PAGE>
issuable upon conversion of the Note. Seller represents that it has not been
organized for the purpose of acquiring the Note to be acquired by it
hereunder and any Shares issuable upon conversion of the Note. Seller
represents that it is an "accredited investor" as such term is defined in
Regulation D promulgated pursuant to the Securities Act.
SECTION 4.15. RESTRICTED SECURITIES. Seller understands that the
Note and any Shares issuable upon conversion of the Note will not have been
registered pursuant to the Securities Act or any applicable state securities
laws of the United States, that such Note and the Shares issuable upon
conversion of the Note will be characterized as "restricted securities" under
U.S. federal securities laws, and that under such laws and applicable
regulations such Note and the Shares issuable upon conversion of the Note
cannot be sold or otherwise disposed of in the United States without
registration under the Securities Act or an exemption therefrom. Seller also
understands that the Note and any Shares issuable upon conversion of the Note
will be issued pursuant to exemptions from the prospectus and registration
requirements of Canadian securities laws and will be subject to restrictions
on resale including a 12-month hold period during which such securities
cannot be sold except in limited circumstances, and if Seller is a "control
person," as defined under Canadian securities laws, additional onerous resale
restrictions will apply to Seller.
SECTION 4.16. LEGEND. It is agreed and understood by Seller that the
Note and the certificates representing the Shares issuable upon conversion of
the Note shall each conspicuously set forth on the face or back thereof, in
addition to any legends required by applicable law or other agreement, a legend
in substantially the following form:
[THIS NOTE HAS] [THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE] NOT
BEEN REGISTERED PURSUANT TO THE U.S. SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS OF THE UNITED STATES. SUCH [NOTE]
[SHARES] MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES
UNLESS [IT] [THEY] ARE FIRST REGISTERED PURSUANT TO THAT ACT AND
APPLICABLE STATE SECURITIES LAWS OR UNLESS THE CORPORATION RECEIVES A
WRITTEN OPINION OF COUNSEL, WHICH OPINION AND COUNSEL ARE SATISFACTORY
TO THE CORPORATION, TO THE EFFECT THAT SUCH REGISTRATION IS NOT
REQUIRED IN THE UNITED STATES. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A HOLD PERIOD AND MAY NOT BE TRADED IN
BRITISH COLUMBIA UNTIL JANUARY 23, 1999, EXCEPT AS PERMITTED BY THE
SECURITIES ACT (BRITISH COLUMBIA) AND THE REGULATIONS AND RULES MADE
THEREUNDER.
SECTION 4.17. FULL DISCLOSURE. To the best knowledge of Seller (after
due inquiry), no certificate, statement or other information delivered herewith
or heretofore by Seller to Buyer in connection with the negotiation of this
Agreement or in connection with any transaction contemplated hereby contains any
untrue statement of a material fact or omits to state any material fact known to
Seller (other than industry-wide risks normally associated with the type of
business
-13-
<PAGE>
contemplated hereby contains any untrue statement of a material fact or omits
to state any material fact known to Seller (other than industry-wide risks
normally associated with the type of business conducted by Seller) necessary
to make the statements contained herein or therein not misleading as of the
date made or deemed made. There is no fact known to Seller (other than
industry-wide risks normally associated with the type of business conducted
by Seller) that has not been disclosed to Buyer which could materially
adversely affect the Properties.
SECTION 4.18. DISCLAIMER OF WARRANTIES. Other than those expressly set
out in this ARTICLE IV, Seller hereby expressly disclaims any and all
representations or warranties with respect to the Properties or the transaction
contemplated hereby, and Buyer agrees that the Properties are being sold by
Seller "where is" and "as is". Specifically as a part of (but not in limitation
of) the foregoing, Buyer acknowledges that Seller has not made, and Seller
hereby expressly disclaims, any representation or warranty (express, implied,
under common law, by statute or otherwise) (a) except to the limited extent set
forth in SECTION 4.12, as to the condition of the Properties (INCLUDING WITHOUT
LIMITATION, SELLER DISCLAIMS ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY TO MODELS OR SAMPLES OF
MATERIALS), (b) except as set forth in SECTION 4.9(b), as to the compliance by
Seller with Environmental Laws, (c) as to the status of title to the Properties,
or (d) as to the extent of oil, gas and/or other mineral reserves, the
recoverability of or the cost of recovering any of such reserves, the value of
reserves, prices (or anticipated prices) at which production has been or will be
sold and the ability to sell oil or gas production from the Properties.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
SECTION 5.1. ORGANIZATION AND EXISTENCE. Buyer is a corporation duly
organized, legally existing and in good standing under the laws of the
jurisdiction of its formation and is qualified to do business in the State of
Texas.
SECTION 5.2. POWER AND AUTHORITY. Except for the Preferred Share
Approval, Buyer has full corporate power and corporate authority to execute,
deliver, and perform this Agreement and each other agreement, instrument, or
document executed or to be executed by Buyer in connection with the transactions
contemplated hereby to which it is a party and to consummate the transactions
contemplated hereby and thereby. Except for the Preferred Share Approval, the
execution, delivery, and performance by Buyer of this Agreement and each other
agreement, instrument, or document executed or to be executed by Buyer in
connection with the transactions contemplated hereby to which it is a party, and
the consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by all necessary corporate action of Buyer.
-14-
<PAGE>
SECTION 5.3. VALID AND BINDING AGREEMENT. This Agreement has been duly
executed and delivered by Buyer and constitutes, and each other agreement,
instrument, or document executed or to be executed by Buyer in connection with
the transactions contemplated hereby to which it is a party has been, or when
executed will be, duly executed and delivered by Buyer and constitutes, or when
executed and delivered will constitute, a valid and legally binding obligation
of Buyer, enforceable against it in accordance with their respective terms,
except that such enforceability may be limited by (a) applicable bankruptcy,
insolvency, reorganization, moratorium, and similar laws affecting creditors'
rights generally and (b) equitable principles which may limit the availability
of certain equitable remedies (such as specific performance) in certain
instances.
SECTION 5.4. NON-CONTRAVENTION. The execution, delivery, and
performance by Buyer of this Agreement and each other agreement, instrument, or
document executed or to be executed by Buyer in connection with the transactions
contemplated hereby to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby do not and will not (a) conflict
with or result in a violation of any provision of the charter or bylaws or other
governing instruments of Buyer (subject, however, to receipt of the Preferred
Share Approval), (b) conflict with or result in a violation of any provision of,
or constitute (with or without the giving of notice or the passage of time or
both) a default under, or give rise (with or without the giving of notice or the
passage of time or both) to any right of termination, cancellation, or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
contract, agreement, or other instrument or obligation to which Buyer is a party
or by which Buyer or any of its properties may be bound, (c) result in the
creation or imposition of any lien or other encumbrance upon the properties of
Buyer, or (d) violate any applicable law, rule or regulation binding upon Buyer.
SECTION 5.5. APPROVALS. No consent, approval, order, or authorization
of, or declaration, filing, or registration with, any court or governmental
agency or of any third party is required to be obtained or made by Buyer in
connection with the execution, delivery, or performance by Buyer of this
Agreement and each other agreement, instrument, or document executed or to be
executed by Buyer in connection with the transactions contemplated hereby to
which it is a party or the consummation by it of the transactions contemplated
hereby and thereby, other than compliance with any applicable requirements of
the Securities Act and any applicable state securities laws.
SECTION 5.6. PENDING LITIGATION. There are no pending suits, actions,
or other proceedings in which Buyer is a party which affect the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby. Except as disclosed in the Initial Financial Statements, (i) there are
no actions, suits or legal, equitable, arbitrative or administrative proceedings
pending, or to the knowledge of Buyer, threatened, against Buyer or any
Subsidiary thereof, and (ii) there are no outstanding judgments, injunctions,
writs, rulings orders by any tribunal against Buyer's or any Subsidiary's
stockholders, partners, directors or officers which could cause a Material
Adverse Change.
-15-
<PAGE>
SECTION 5.7. KNOWLEDGEABLE PURCHASER. Buyer is a knowledgeable
purchaser, owner and operator of oil and gas properties, has the ability to
evaluate (and in fact has evaluated) the Properties for purchase, and is
acquiring the Properties for its own account and not with the intent to make a
distribution within the meaning of the Securities Act of 1933 (and the rules and
regulations pertaining thereto) or a distribution thereof in violation of any
other applicable securities laws.
SECTION 5.8. CAPITAL STOCK. The total authorized capital stock of Buyer
consists of an unlimited number of common shares, without par value, of which
(as of January 14, 1998) 30,162,985 have been validly issued and are
outstanding, fully paid and non-assessable. Except as set forth in EXHIBIT 5.8
and as provided in ARTICLE XIII, there are no outstanding warrants, options, or
other rights to subscribe for or purchase any shares of capital stock of Buyer.
SECTION 5.9. AUTHORIZATION OF THE NOTE. The Note has been duly
authorized by all necessary corporate action and, when issued and delivered in
accordance with this Agreement, will constitute the legal, valid and binding
obligation of Buyer enforceable in accordance with its terms (provided, however,
that the Note cannot be converted into Preferred Shares without receipt of the
Preferred Share Approval).
SECTION 5.10. RESERVATION OF SHARES. The (a) Common Shares issuable
upon conversion of the Note have been duly reserved for issuance upon conversion
thereof, (b) the Preferred Shares issuable upon conversion of the Note, upon
receipt of the Preferred Share Approval, will have been duly reserved for
issuance upon conversion thereof, and, when issued upon conversion, will be
validly issued, fully paid and non-assessable. The issuance of the Shares by
Buyer upon conversion of the Note is not subject to any preemptive or similar
rights.
SECTION 5.11. INITIAL FINANCIAL STATEMENTS. Buyer has heretofore
delivered to Seller true, correct and complete copies of the Initial Financial
Statements. The Initial Financial Statements fairly present Buyer's Consolidated
financial position at the respective dates thereof and the Consolidated results
of Buyer's operations and Buyer's Consolidated cash flows for the respective
periods thereof. Since the date of the annual Initial Financial Statements no
Material Adverse Change has occurred. All Initial Financial Statements were
prepared in accordance with GAAP. Neither Buyer nor any Subsidiary thereof has
any outstanding liabilities of any kind (including contingent obligations, tax
assessments, and unusual forward or long-term commitments) which is, in the
aggregate, material to Buyer or such Subsidiary or material with respect to
Buyer's Consolidated financial condition and not shown in the Initial Financial
Statements.
SECTION 5.12. FULL DISCLOSURE. To the best knowledge of Buyer (after
due inquiry), no certificate, statement or other information delivered herewith
or heretofore by Buyer to Seller in connection with the negotiation of this
Agreement or in connection with any transaction contemplated hereby contains any
untrue statement of a material fact or omits to state any material fact known to
Buyer (other than industry-wide risks normally associated with the types of
businesses conducted by Buyer and its Subsidiaries) necessary to make the
statements contained
-16-
<PAGE>
herein or therein not misleading as of the date made or deemed made. There is no
fact known to Buyer that has not been disclosed to Seller in writing which could
cause a Material Adverse Change.
SECTION 5.13. LABOR DISPUTES AND ACTS OF GOD. Neither the business nor
the properties of Buyer or any Subsidiary thereof has been affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought, storm,
hail, earthquake, embargo, act of God or of the public enemy or other casualty
(whether or not covered by insurance), which could cause a Material Adverse
Change.
SECTION 5.14. ERISA PLANS AND LIABILITIES. All currently existing ERISA
Plans are listed in EXHIBIT 5.14. Except as disclosed in the Initial Financial
Statements or in EXHIBIT 5.14, no Termination Event has occurred with respect to
any ERISA Plan and all ERISA Affiliates are in compliance with ERISA in all
material respects. No ERISA Affiliate is required to contribute to, or has any
other absolute or contingent liability in respect of, any "multiemployer plan"
as defined in Section 4001 of ERISA. Except as set forth in EXHIBIT 5.14: (i) no
"accumulated funding deficiency" (as defined in Section 412(a) of the Internal
Revenue Code of 1986, as amended) exists with respect to any ERISA Plan, whether
or not waived by the Secretary of the Treasury or his delegate, and (ii) the
current value of each ERISA Plan's benefits does not exceed the current value of
such ERISA Plan's assets available for the payment of such benefits by more than
$500,000.
SECTION 5.15. ENVIRONMENTAL AND OTHER LAWS. Except as set forth in
EXHIBIT 5.15, (a) to the best of Buyer's knowledge (after due inquiry), Buyer
and its Subsidiaries are conducting their businesses in material compliance with
all applicable laws, including Environmental Laws, and have and are in material
compliance with all licenses and permits required under any such laws; (b) none
of the operations or properties of Buyer or any of its Subsidiaries is the
subject of federal, state or local investigation evaluating whether any material
remedial action is needed to respond to a release of any Hazardous Materials
into the environment or to the improper storage or disposal (including storage
or disposal at offsite locations) of any Hazardous Materials; (c) neither Buyer
nor any Subsidiary thereof has filed any notice under any Law indicating that it
is responsible for the improper release into the environment, or the improper
storage or disposal, of any material amount of any Hazardous Materials or that
any Hazardous Materials have been improperly released, or are improperly stored
or disposed of, upon any property of Buyer or any Subsidiary thereof; (d) to the
best of Buyer's knowledge, neither Buyer nor any Subsidiary thereof has
transported or arranged for the transportation of any Hazardous Material to any
location which is (i) listed on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, listed for possible inclusion on such National Priorities List by the
Environmental Protection Agency in its Comprehensive Environmental Response,
Compensation and Liability Information System List, or listed on any similar
state list or (ii) the subject of federal, state or local enforcement actions or
other investigations which may lead to material claims against Buyer or any
Subsidiary thereof for clean-up costs, remedial work, damages to natural
resources or for personal injury claims
-17-
<PAGE>
(whether under Environmental Laws or otherwise); and (e) neither Buyer nor any
Subsidiary thereof otherwise has any known material contingent liability under
any Environmental Laws or in connection with the release into the environment,
or the storage or disposal, of any Hazardous Materials.
SECTION 5.16. NAMES AND PLACES OF BUSINESS. Neither Buyer nor any
Subsidiary thereof has, during the preceding five years, had, been known by, or
used any other trade or fictitious name, except as disclosed in EXHIBIT 5.16.
Except as otherwise indicated in EXHIBIT 5.16, the chief executive office and
principal place of business of Buyer and each Subsidiary thereof are (and for
the preceding five years have been) located at the address of Buyer set out in
ARTICLE XVI. Except as indicated in EXHIBIT 5.16, neither Buyer nor any
Subsidiary thereof has any other office or place of business.
SECTION 5.17. BUYER'S SUBSIDIARIES. Buyer does not presently have any
Subsidiary or own any stock in any other corporation or association except those
listed in EXHIBIT 5.17. Neither Buyer nor any Subsidiary thereof is a member of
any general or limited partnership, joint venture or association of any type
whatsoever except those listed in EXHIBIT 5.17 and associations, joint ventures
or other relationships (a) which are established pursuant to a standard form
operating agreement or similar agreement or which are partnerships for purposes
of federal income taxation only, (b) which are not corporations or partnerships
(or subject to the Revised Uniform Partnership Act) under applicable state Law,
and (c) whose businesses are limited to the exploration, development and
operation of oil, gas or mineral properties and interests owned directly by the
parties in such associations, joint ventures or relationships. Buyer owns,
directly or indirectly, the equity interest in each of its Subsidiaries which is
indicated in EXHIBIT 5.17.
SECTION 5.18. TITLE TO PROPERTIES; LICENSES. To the best of Buyer's
knowledge (after due inquiry), Buyer and each of it Subsidiaries has good and
defensible title to all of its material properties and assets, free and clear of
all Liens other than Permitted Liens and of all impediments to the use of such
properties and assets in such Person's business, except that no representation
or warranty is made with respect to any oil, gas or mineral property or interest
to which no proved oil or gas reserves are properly attributed. Buyer and each
of its Subsidiaries possesses all licenses, permits, franchises, patents,
copyrights, trademarks and trade names, and other intellectual property (or
otherwise possesses the right to use such intellectual property without
violation of the rights of any other Person) which are necessary to carry out
its business as presently conducted and as presently proposed to be conducted
hereafter, and neither Buyer nor any Subsidiary thereof is in violation in any
material respect of the terms under which it possesses such intellectual
property or the right to use such intellectual property.
SECTION 5.19. GOVERNMENT REGULATION. Neither Buyer nor any of its
Subsidiaries is subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act, the Investment Company Act of 1940 (as any
of the preceding acts have been amended) or any other Law which regulates the
incurring by such Person of Indebtedness, including laws
-18-
<PAGE>
relating to common contract carriers or the sale of electricity, gas, steam,
water or other public utility services.
SECTION 5.20. OFFICERS, DIRECTORS AND SHAREHOLDERS. Except as disclosed
in EXHIBIT 5.20, the officers and directors of Buyer are those persons disclosed
in the definitive proxy statement prepared by Buyer and filed with the
appropriate Canadian securities authorities in connection with Buyer's most
recent annual meeting, copies of which proxy statement have been previously
furnished in connection with the negotiation hereof.
ARTICLE VI
COVENANT RE ACCESS
From the date hereof until the Post-Closing Examination Point, Seller
will give Buyer, and its attorneys and other representatives, access at all
reasonable times to the Properties and to any contract files, lease or other
title files, production files, well files and other files of Seller pertaining
to the ownership and/or operation of the Properties, and Seller will use its
reasonable best efforts to arrange for Buyer, and its attorneys and other
representatives, to have access to any such files in the office of Seller.
Seller shall not be obligated to provide Buyer with access to any records or
data which Seller cannot provide to Buyer without, in its opinion, breaching
confidentiality agreements with other parties. Buyer recognizes and agrees that
all materials made available to it (whether pursuant to this Section or
otherwise) in connection with the transactions contemplated hereby are made
available to it as an accommodation and without representation or warranty of
any kind as to the accuracy and completeness of such materials.
ARTICLE VII
DUE DILIGENCE EXAMINATION
SECTION 7.1. INSPECTION AND ASSERTION OF DEFECTS.
(a) Buyer may, to the extent it deems appropriate, conduct, at its sole
cost, such title examination or investigation as it may choose to conduct with
respect to the Properties. Should, as a result of such examination and
investigation or otherwise, matters come to Buyer's attention which would
constitute "Defects" (as below defined), and should there be one or more of such
Defects which Buyer determines it is unwilling to waive, Buyer shall notify
Seller in writing of such Defects (in this SECTION 7.1, a "DEFECT NOTICE") as
soon as they are identified by Buyer, but in no event later than April 1, 1998
(the "POST-CLOSING EXAMINATION POINT"). Such Defects of which Buyer so provides
notice are herein called "ASSERTED DEFECTS." All Defects, other than an
Indemnified Item, with respect to which Buyer fails to so give Seller notice
will be deemed waived for all purposes. Each Defect Notice shall specify in
reasonable detail the matter which, in Buyer's opinion, constitutes a Defect.
-19-
<PAGE>
(b) The term "DEFECT" as used in this Section shall mean the following:
(i) Seller's ownership of the Properties on or prior to the
Closing Date is such that, with respect to a well listed on EXHIBIT
7.1(b)(i) hereto, it (A) entitles Seller to receive a percentage share
of the oil, gas and other hydrocarbons produced from, or allocated to,
such well which is less than the percentage share set forth on EXHIBIT
7.1(b)(i) in connection with such well in the column headed "NRI" or
(B) causes Seller to be obligated to bear a percentage share of the
cost of operation of such well greater than the percentage share set
forth on EXHIBIT 7.1(b)(i) in connection with such well in the column
headed "WI" (unless the share of production from such well to which
Seller is entitled is proportionately larger than the "NRI" shown for
such well on EXHIBIT 7.1(b)(i)); or
(ii) Seller's ownership of an Oil and Gas Property on or prior
to the Closing Date is subject to a lien other than a Permitted
Encumbrance.
(iii) Seller's ownership of an Oil and Gas Property on or
prior to the Closing Date is subject to a preferential right to
purchase such property or a requirement that consent to assignment of
such property be obtained, unless a waiver of such right has been
obtained with respect to the transaction contemplated hereby or, in the
case of a preferential right to purchase, an appropriate tender of the
applicable interest has been made to the party holding such right and
the period of time required for such party to exercise such right has
expired without such party exercising such right; or
(iv) Seller's ownership of an Oil and Gas Property on or prior
to the Closing Date is subject to an imperfection in title which, if
asserted, would cause a Defect, as defined in CLAUSE (i) above, to
exist, and such imperfection in title is not such as would normally be
waived by Persons engaged in the oil and gas business who are
purchasing producing properties; or
(v) With respect to any well listed on EXHIBIT 7.1(b)(v),
Seller and its predecessors in title to the Properties have as of the
Closing Date collectively taken more gas from such well than the
ownership of the Properties would entitle it them to receive (an
"overproduced position").
(vi) With respect to the Properties as of the Closing Date:
(A) Seller is in violation of, and there exists a current unsatisfied
obligation to perform any cleanup, removal, containment or other
remediation pursuant to, Environmental Laws; (B) there are proceedings
pending relating (whether on-site or off-site) to any of the
Properties under any Environmental Law by any federal, state,
provincial or local environmental agency or third party; (C) there are
written demands, notices or claims pending or threatened relating to
any of the Properties under any Environmental Law, including any
written notices, demand letters or site-specific requests for
information from any federal, state, provincial, or local
environmental agency relating to any liabilities under or
-20-
<PAGE>
violations of Environmental Laws; or (D) Seller is in breach of its
representation and warranty set forth in SECTION 4.9(b).
(c) Buyer waives and releases all claims against Seller, its partners
and its and such partners' parent or subsidiary companies or other affiliates,
and its and their respective shareholders, members, owners, directors, officers,
managers, employees and agents, for injury to, or death of, Persons or for
damage to property arising in any way from the conduct of the investigations and
examinations contemplated by this Section (or the exercise of Buyer's rights of
access under ARTICLE VI) or the conduct of its employees, agents or contractors
in connection with such investigations and examinations (or the exercise of such
rights of access). Buyer shall indemnify Seller, its partners and its and such
partners' parent and subsidiary companies and other affiliates, and its and
their respective shareholders, members, owners, directors, officers, managers,
employees and agents from and against any and all claims, actions, liabilities,
losses, damages, costs or expenses (including court costs and attorney fees)
whatsoever arising out of the exercise of such rights of investigation and
examination (or exercise of such rights of access).
SECTION 7.2. CERTAIN PRICE ADJUSTMENTS.
(a) In the event that, as a part of the due diligence review provided
for in SECTION 7.1 above, Asserted Defects are presented to Seller and Seller is
unable (or unwilling) to cure such Asserted Defects to the reasonable
satisfaction of Buyer prior to September 1, 1998, then Buyer and Seller shall,
with respect to each Oil and Gas Property affected by one or more Defects,
attempt to agree upon an appropriate adjustment to the Base Purchase Price to
account for such Defects. Notwithstanding anything herein to the contrary, Buyer
and Seller shall elect to specify as an appropriate adjustment to the Base
Purchase Price (A) for a Defect of the type which is specified in SECTION
7.1(b)(i) or SECTION 7.1(b)(iv), and which relates to the NRI specified on
EXHIBIT 7.1(b)(i), an amount equal to X multiplied by Y, where "X" is the amount
specified on EXHIBIT 7.1(b)(i) for the Oil and Gas Property to which such Defect
relates, and where "Y" is the proportionate reduction in NRI (e.g., the amount
by which the share of production to which Seller is actually entitled is less
than the NRI specified for such Oil and Gas Property on EXHIBIT 7.1(b)(i),
divided by such NRI specified on EXHIBIT 7.1(b)(i)), (B) for a Defect of the
type specified in SECTION 7.1(b)(ii), the amount required to discharge such
lien, or (C) for a Defect of the type specified in SECTION 7.1(b)(v), the amount
represented by the loss of volumes required to discharge such overproduced
position, which amounts shall be the discounted present value of the volumes
required to discharge such obligation, determined by using a 10% discount rate
and assuming the same would be discharged as promptly as possible (under the
terms of applicable agreements) after the Closing Date assuming production
occurs at the same rate as projected in projections of production furnished by
Buyer as (and represented by Buyer to be) its projections used in making its
decision to purchase (and valuing such production using prices for production
utilized in such projections).
(b) Should Seller determine (or should Buyer, in the course of its due
diligence review contemplated by SECTION 7.1, determine) that (i) the ownership
of the Properties by Seller entitles
-21-
<PAGE>
Seller to a share of the production from a well listed on EXHIBIT 7.1(b)(i)
greater than the share shown for such well under the column headed "NRI" on
EXHIBIT 7.1(b)(i), or (ii) with respect to any well listed in EXHIBIT 7.1(b)(v)
Seller and its predecessors in title have taken less gas than their ownership in
such Oil and Gas Property would entitle them to take, or is in an overproduced
position less than that shown on EXHIBIT 7.1(b)(v), then Seller may propose an
upward adjustment to the Base Purchase Price to account for such fact, in which
case such adjustment shall be handled in the same manner as provided above with
respect to adjustments for Asserted Defects.
(c) Any reduction to the Base Purchase Price under this SECTION 7.2
(in this SUBSECTION (c) called the "REDUCTION AMOUNT") shall be effected in
the following manner:
(i) If the Note is still outstanding at the time of the
reduction, the outstanding principal amount of the Note shall be
reduced on a dollar-for-dollar basis in an amount equal to the
Reduction Amount (provided, that in connection therewith (A) first,
the Preferred Portion of the Purchase Price shall be deemed reduced
on a dollar-for-dollar basis; and (B) second, to the extent the
Reduction Amount has not been fully offset pursuant to the
immediately preceding CLAUSE (a), the Common Portion of the Purchase
Price shall be deemed reduced on a dollar-for-dollar basis).
(ii) If the Note has been converted at the time of the
reduction, the number of Seller's Common Shares and Preferred Shares
received hereunder shall be reduced as follows: (A) first, the number
of Preferred Shares shall be reduced on a share-for-share basis in an
amount derived by dividing the Remaining Amount by $1.00; and (B)
second, to the extent the Reduction Amount has not been fully offset
pursuant to the immediately preceding CLAUSE (a) (the amount of the
Reduction Amount not offset being called the "REMAINING AMOUNT") the
number of Common Shares shall be reduced on a share-for-share basis by
the number of shares equal to the lesser of (1) the number of shares
derived by dividing the Remaining Amount by the Average Closing Price
and (2) the number of Common Shares into which the Note was converted
hereunder.
(d) Notwithstanding SUBSECTION (c) above, Seller shall have the right
to transfer and assign to Buyer additional oil and gas properties located in the
same general area as the Oil and Gas Properties (in this Section, "SUBSTITUTE
PROPERTIES"), which transfer and assignment would be in lieu of, or in
conjunction with, an adjustment to the Base Purchase Price under this Section.
If substitute properties are transferred and assigned to Buyer under this
SUBSECTION (d), the Reduction Amount shall be offset by the PV-10 Value (as
defined below) of the substitute properties. Any transfer and assignment by
Seller under this SUBSECTION (d) shall, however, be subject to the Buyer having
(A) concurred in good faith with the PV-10 Value of the substitute properties
and (B) made a good faith determination that (1) Buyer will receive good and
defensible title to the substitute properties, (2) there are no material
environmental or similar liabilities associated with the substitute properties
and (3) there are no other matters or items that a reasonable and prudent
purchaser of oil and gas properties would consider as materially adversely
affecting the value of, or proposed operations on, the substitute properties;
such transfer and
-22-
<PAGE>
assignment by Seller shall also be further subject to receipt by Buyer of the
concurrence of its lender under the Senior Credit Facility as to the PV-10
Value of the substitute properties and lender's approval of the substitute
properties as acceptable additional collateral for the Senior Credit
Facility. As used in this SUBSECTION (d), the term "PV-10 VALUE" shall mean,
when used with respect to any substitute properties, the pre-income tax value
of projected net revenues (utilizing a 10% discount factor) from Proved
Reserves (as defined in the definition for Oil and Gas Reserves promulgated
by the Society of Petroleum Engineers, or any generally recognized successor)
attributable to such substitute properties as set forth in an Approved
Reserve Report. As used in this SUBSECTION (d), the term "APPROVED RESERVE
REPORT" shall mean a reserve report prepared in accordance with customary and
generally accepted standards and practices for petroleum engineers, and shall
be based on prices, costs and other assumptions as shall be designated by
Seller and approved by Buyer (which approval shall not be unreasonably
withheld. The petroleum engineer or engineers that prepare an Approved
Reserve Report shall be designated by Seller and approved by Buyer (which
approval shall not be unreasonably withheld).
SECTION 7.3. WAIVER. Without limiting SECTION 7.1 and
notwithstanding anything else herein to the contrary, all Defects (except for
a Defect which is an Indemnified Item) not raised or asserted by Buyer within
the requisite time periods specified in SECTION 7.1 shall be waived by Buyer
for all purposes, and Buyer shall have no right to seek an adjustment to the
Purchase Price, make a claim against Seller or seek indemnification from
Seller with respect thereto (except as otherwise provided (a) in ARTICLE XI,
with respect to claims arising under Environmental Laws, and (b) ARTICLE XII,
with respect to an Indemnified Item). It is not the intent of this SECTION
7.3, however, to waive Buyer's right to enforce the other terms and
conditions of this Agreement with respect to matters other than Defects,
including Seller's representations, warranties, covenants, agreements and
indemnifications insofar as they relate to matters other than Defects.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES; TERMINATION
RIGHTS
SECTION 8.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The
obligations of Buyer under this Agreement are subject to each of the following
conditions being met:
(a) Each and every representation of Seller under this Agreement shall
be true and accurate in all material respects as of the date when made and shall
be deemed to have been made again at and as of the time of Closing and shall at
and as of such time of Closing be true and accurate in all respects except as to
changes specifically contemplated by this Agreement or consented to by Buyer.
(b) Seller shall have performed and complied in all material respects
with (or compliance therewith shall have been waived by Buyer) each and every
covenant, agreement and condition required by this Agreement to be performed or
complied with by Seller prior to or at the Closing.
-23-
<PAGE>
(c) No suit, action or other proceedings shall, on the date of Closing,
be pending or threatened before any court or governmental agency seeking to
restrain, prohibit, or obtain damages or other relief in connection with the
consummation of the transactions contemplated by this Agreement.
If any such condition on the obligations of Seller under this Agreement is
not met as of the Closing Date, or in the event the Closing does not occur on
or before the Closing Date, and (in either case) Buyer is not in breach of
its obligations hereunder in the absence of Seller also being in breach of its
obligations hereunder, this Agreement may, at the option of Buyer, be
terminated, in which case the parties shall have no further obligations to
one another hereunder (other than the obligations under SECTIONS 6.1 and
7.1(c) and ARTICLE XVII which will survive such termination).
SECTION 8.2. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The
obligations of Seller under this Agreement are subject to the each of the
following conditions being met:
(a) Each and every representation of Buyer under this Agreement
shall be true and accurate in all material respects as of the date when made
and shall be deemed to have been made again at and as of the time of Closing
and shall at and as of such time of Closing be true and accurate in all
respects except as to changes specifically contemplated by this Agreement or
consented to by Seller.
(b) Buyer shall have performed and complied in all material respects
with (or compliance therewith shall have been waived by Seller) each and
every covenant, agreement and condition required by this Agreement to be
performed or complied with by Buyer prior to or at the Closing.
(c) No suit, action or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental agency
seeking to restrain, prohibit, or obtain damages or other relief in
connection with the consummation of the transactions contemplated by this
Agreement.
(d) Seller shall have received an opinion of counsel or counsels
reasonably acceptable to Seller dated the Closing Date covering the matters
described in EXHIBIT 8.2(d) and in a form reasonably acceptable to Seller.
(e) The letter of intent dated as of November 17, 1997, by and among
Buyer, Calibre Energy, L.L.C., Slattery Trust, Starbucks Trust, Todd Grabois,
Robert Novak and Prentis B. Tomlinson, Jr., shall be in full force and
effect, and no party thereunder shall have withdrawn or threatened to
withdraw from participation in the transactions contemplated thereby.
If any such condition on the obligations of Seller under this Agreement is not
met as of the Closing Date, or in the event the Closing does not occur on or
before the Closing Date, and (in
-24-
<PAGE>
either case) Seller is not in breach of its obligations hereunder in the
absence of Buyer also being in breach of its obligations hereunder, this
Agreement may, at the option of Seller, be terminated, in which case the
parties shall have no further obligations to one another hereunder (other
than the obligations under SECTIONS 6.1 and 7.1(c) and ARTICLE XVII which
will survive such termination).
ARTICLE IX
CLOSING OF TRANSACTION
SECTION 9.1. THE CLOSING. The closing (herein called the "CLOSING")
of the transaction contemplated hereby shall take place in the offices of
Thompson & Knight, P.C., at 1700 Texas Commerce Tower, 600 Travis Street,
Houston, Texas, at 10:00 a.m. Central Standard Time, on the date hereof (such
date and time being herein called the "CLOSING DATE").
SECTION 9.2. SELLER'S CLOSING OBLIGATIONS. At the Closing, Seller
shall:
(a) execute, acknowledge and deliver to Buyer Assignments
of the Properties (the "ASSIGNMENTS"), in the form attached hereto
as EXHIBIT 9.2(a), being effective as to runs of oil and deliveries
of gas as of 12:01 o'clock a.m., Central Daylight Time on December
1, 1997 (the "EFFECTIVE DATE");
(b) to the extent requested by Buyer, execute and deliver
to Buyer (i) letters in lieu of transfer orders (or similar
documentation), in form acceptable to both parties;
(c) to the extent requested by Buyer, execute and deliver
an affidavit or other certification (as permitted by such code) that
Seller is not a "foreign Person" within the meaning of Section 1445
(or similar provisions) of the Internal Revenue Code of 1986 as
amended (I.E., Seller is not a non-resident alien, foreign
corporation, foreign partnership, foreign trust or foreign estate as
those terms are defined in such code and regulations promulgated
thereunder); and
(d) execute and deliver that certain Registration Rights
Agreement substantially in the form of the document attached hereto
as EXHIBIT 9.2(d).
SECTION 9.3. BUYER'S CLOSING OBLIGATIONS. At the Closing, Buyer shall:
(a) deliver to the Seller, a convertible promissory note
substantially in the form attached hereto as EXHIBIT 9.3(a) in the
principal amount equal to the Base Purchase Price, as adjusted in
ARTICLE X (the "NOTE");
-25-
<PAGE>
(b) (i) furnish to Seller such evidence (including, without
limitation, evidence of satisfaction of all applicable bonding
requirements) as Seller may require that Buyer is qualified with the
applicable authorities to succeed Seller as the owner and, where
applicable, operator of the Properties, (ii) with respect to
properties operated by Seller where Buyer is to succeed Seller as
operator, execute and deliver to Seller appropriate evidence
reflecting change of operator as required by applicable authorities,
and (iii) execute and deliver to Seller such forms as Seller may
reasonably request for filing with the applicable authorities to
reflect Buyer's assumption of plugging and abandonment liabilities
with respect to the wells located on the Properties or on units in
which the Properties participate; and
(c) execute and deliver that certain Registration Rights
Agreement substantially in the form of the document attached hereto
as EXHIBIT 9.2(d).
SECTION 9.4. DELIVERY OF FILES. Within 30 days after the Closing,
Seller shall deliver to Buyer the files and other materials referenced in
SUBSECTION (e) of ARTICLE II. Notwithstanding the foregoing, to the extent
such files or other materials include items which Seller cannot provide to
Buyer without, in the opinion of Seller, breaching confidentiality agreements
with other parties, Seller shall have no obligation to furnish such items.
Seller may retain copies of all or any parts of the files or other materials
so furnished, and all costs of copying such files shall be borne by Seller.
So long as such files or other materials so delivered by Seller to Buyer are
maintained by Buyer, Buyer shall permit Seller and its representatives to
have access to the same; for a period of three years after Closing Buyer
shall advise Seller before it destroys any such files or other materials (and
will, if requested by Seller, deliver to Seller any files or other materials
it intends to destroy).
ARTICLE X
CERTAIN ACCOUNTING ADJUSTMENTS.
SECTION 10.1. ADJUSTMENTS. Appropriate adjustments shall be made
between Buyer and Seller so that (a) all expenses (including, without
limitation, all drilling costs, all capital expenditures, and all overhead
charges under applicable operating agreements, and all other overhead charges
actually charged by third parties) which are incurred in the operation of the
Properties after the Effective Date will be borne by Buyer, and all proceeds
(net of applicable production, severance, and similar taxes) from sale of
oil, gas and/or other minerals produced from the Oil and Gas Properties after
the Effective Date will be received by Buyer, and (b) all expenses which are
incurred in the operation of the Properties before the Effective Date will be
borne by Seller and all proceeds (net of applicable production, severance,
and similar taxes) from the sale of oil, gas and/or other minerals produced
therefrom before the Effective Date will be received by Seller. It is agreed
that, in making such adjustments: (i) oil which was produced from the Oil and
Gas Properties and which was, on the Effective Date, stored in tanks located
on the Oil and Gas Properties (or located elsewhere but used to store oil
produced from the Oil and Gas Properties prior to delivery to oil purchasers)
and above pipeline connections shall be deemed
-26-
<PAGE>
to have been produced before the Effective Date (it is recognized that such
tanks were not gauged on the Effective Date for the purposes of this
Agreement and that determination of the volume of such oil in storage will be
based on the best available data, which may include estimates), and (ii) ad
valorem taxes assessed with respect to a period which the Effective Date
splits shall be prorated based on the number of days in such period which
fall on each side of the Effective Date (with the day on which the Effective
Date falls being counted in the period after the Effective Date), and (iii)
no consideration shall be given to the local, state or federal income tax
liabilities of any party.
SECTION 10.2. CLOSING AND POST-CLOSING ACCOUNTING SETTLEMENTS.
(a) At or before Closing, the parties shall determine, based upon
the best information reasonably available to them, the amount of the
adjustments provided for in SECTION 10.1. If the amount of adjustments so
determined which would result in a credit to Buyer exceed the amount of
adjustments so determined which would result in a credit to Seller, Buyer
shall receive a credit, for the amount of such excess, against the Preferred
Portion of the Purchase Price, and, if the converse is true, the Preferred
Portion of the Purchase Price shall be increased by the amount of such
excess. If no adjustment of the type contemplated under this SUBSECTION (a)
is made at or before Closing and Seller should thereafter receive any net
proceeds attributable to oil or gas produced after the Effective Date, Seller
shall promptly remit such net proceeds to Buyer.
(b) On or before 90 days after Closing, Buyer and Seller shall
review any additional information which may then be available pertaining to
the adjustments provided for in SECTION 10.1, shall determine if any
additional adjustments (whether the same be made to account for expenses or
revenues not considered in making the adjustments made at Closing, or to
correct errors made in such adjustments) should be made beyond those made at
Closing, and shall make any such adjustments in the manner provided in
SUBSECTION (a) above. Following such additional adjustments, no further
adjustments shall be made under this ARTICLE X.
ARTICLE XI
ASSUMPTION AND INDEMNIFICATION
Seller agrees, as of the date of Closing (and, upon the execution
and delivery of the Assignments by Seller, Seller shall be deemed to have
agreed), to indemnify, defend and hold Buyer and its shareholders, directors,
officers, employees and agents harmless from and against any and all claims,
actions, liabilities, losses, damages, costs or expenses (including court
costs and attorneys' fees) of any kind or character arising out of or
otherwise relating to the ownership and/or operation of the Properties before
the Effective Date; provided, however, that the Seller's indemnification
obligation under this ARTICLE XI with respect to claims arising under
Environmental Laws shall extend only to conditions as they exist on the
Properties as of the Effective Date and to events giving rise to such
conditions which occurred prior to the Effective Date and shall terminate and
expire on the second anniversary date of this Agreement, except as
-27-
<PAGE>
to any such claim made hereunder prior to such date. Buyer agrees, as of the
date of Closing (and, upon the execution and delivery of the Assignments by
Seller, Buyer shall be deemed to have agreed), (a) to assume, and to timely
pay and perform, all duties, obligations and liabilities relating to the
ownership and/or operation of the Properties after the Effective Date
(including, without limitation, those arising under the contracts and
agreements described in ARTICLE II(c) and those discussed in SECTION 18.4),
and (b) to indemnify, defend and hold Seller, its partners and its and such
partners' parent and subsidiary companies and other affiliates, and its and
their respective shareholders, members, owners, directors, officers,
managers, employees and agents harmless from and against any and all claims,
actions, liabilities, losses, damages, costs or expenses (including court
costs and attorneys' fees) of any kind or character arising out of or
otherwise relating to the ownership and/or operation of the Properties after
the Effective Date. In connection with (but not in limitation of) the
foregoing, it is specifically understood and agreed that matters arising out
of or otherwise relating to the ownership and/or operation of the Properties
after the Effective Date shall include all obligations to properly plug and
abandon, or replug and re-abandon, wells located on the Properties and to
restore the surface. The assumption by Buyer of Seller's duties, obligations
and liabilities of a given contract or agreement or provision thereof as
described above shall be subject, however, to (and shall not be a limitation
on) the right of Buyer to assert under SECTION 7.1 that such contract or
agreement is not a Permitted Encumbrance and to the provisions of SECTION 7.2
regarding an adjustment of the Base Purchase Price in respect of a Defect
therefor.
ARTICLE XII
SELLER'S SPECIAL POST-CLOSING INDEMNIFICATION
SECTION 12.1. INDEMNIFICATION FOR CERTAIN LAWSUITS. Subject to
SECTION 12.3 and the other terms and provisions hereof, Seller agrees, as of
the date of Closing (and, upon the execution and delivery of the Assignments
by Seller, Seller shall be deemed to have agreed), to indemnify, defend and
hold Buyer and its shareholders, directors, officers, employees and agents
harmless from and against any and all claims, actions, liabilities, losses,
damages, costs or expenses (including reasonable court costs and attorneys'
fees) of any kind or character arising out of or otherwise relating to the
suits, actions or proceedings set forth in EXHIBIT 4.6.
SECTION 12.2. INDEMNIFICATION FOR CERTAIN TITLE RELATED ITEMS.
Subject to SECTION 12.3 and the other terms and provisions hereof, Seller
agrees, as of the date of Closing (and, upon the execution and delivery of
the Assignments by Seller, Seller shall be deemed to have agreed), to
indemnify, defend and hold Buyer and its shareholders, directors, officers,
employees and agents harmless from and against any and all claims, actions,
liabilities, losses, damages, costs or expenses (including reasonable court
costs and attorneys' fees) of any kind or character arising out of or
otherwise relating to the following:
(a) claims and demands affecting or relating to the interest of
Seller in and to the Lake Cherokee Gas Unit, as described in the Declaration
of Unitization dated December 7, 1983,
-28-
<PAGE>
recorded in Volume 1511, page 1 of the Deed Records of Gregg County, Texas,
to the extent and only to the extent that such claims and demands arise by,
through or under Goldking Properties Co., a partnership, or any other
Goldking entity other than Goldking Oil and Gas Corp.; and
(b) any Defect of the type described in SECTION 7.1(b)(i) or SECTION
7.1(b)(iv) with respect to that portion of the Property described in item 1
following the heading "Gregg and Rusk Counties, Texas" on EXHIBIT II attached
hereto.
SECTION 12.3. CERTAIN PROVISIONS. Notwithstanding SECTION 12.1 or
SECTION 12.2 or anything else herein to the contrary:
(a) In connection with any indemnification under SECTION 12.1, in
no event shall the amount of Seller's indemnification exceed the sum of the
amounts set forth in EXHIBIT 7.1(b)(i) attributable to the Oil and Gas
Properties affected by the suit, action or proceeding for which such
indemnification is given.
(b) In connection with any indemnification under SECTION 12.2:
(i) Buyer and Seller shall attempt to agree upon the
amount of the indemnification;
(ii) If Buyer and Seller are unable to agree upon the
amount of the indemnification, and the Defect with respect to a
given Oil and Gas Property relates to the NRI specified on EXHIBIT
7.1(b)(i) for such Oil and Gas Property, then the amount of the
indemnification shall equal X multiplied by Y, where "X" is the
amount specified on EXHIBIT 7.1(b)(i) for such Oil and Gas Property,
and where "Y" is the proportionate reduction in NRI (e.g., the
amount by which the share of production to which Seller is actually
entitled is less than the NRI specified for such Oil and Gas
Property on EXHIBIT 7.1(b)(i), divided by such NRI specified on
EXHIBIT 7.1(b)(i)); and
(iii) Notwithstanding SUBPARAGRAPHS (i) and (ii) above, in
no event shall the amount of Seller's indemnification with respect
to a given Oil and Gas Property exceed the amount specified on
EXHIBIT 7.1(b)(i) for such Oil and Gas Property.
(c) Any indemnification under this ARTICLE XII shall be effected in
the following manner:
(i) If the Note is still outstanding at the time of the
indemnification, the outstanding principal amount of the Note shall
be reduced on a dollar-for-dollar basis by the amount of the
indemnification obligation (provided, that in connection therewith
(A) first, the Preferred Portion of the Purchase Price shall be
deemed reduced on a dollar-for-dollar basis; and (B) second, to the
extent the indemnification obligation has not been fully
-29-
<PAGE>
offset pursuant to the immediately preceding CLAUSE (A), the Common
Portion of the Purchase Price shall be deemed reduced on a
dollar-for-dollar basis).
(ii) If the Note has been converted at the time of the
indemnification obligation, the number of Seller's Common Shares and
Preferred Shares received hereunder shall be reduced as follows: (A)
first, the number of Preferred Shares shall be reduced on a
share-for-share basis in amount derived by dividing the amount of
the indemnification obligation by $1.00 and (B) second, to the
extent the indemnification obligation has not been fully offset
pursuant to the immediately preceding CLAUSE (A) (the amount of the
indemnification obligation not offset being called the "REMAINING
PORTION"), the number of Common Shares shall be reduced on a
share-for-share basis by the number of shares equal to the lesser of
(1) the number of shares derived by dividing the Remaining Amount by
the Average Closing Price and (2) the number of Common Shares into
which the Note was converted hereunder.
(d) Notwithstanding SUBSECTION (c) above, Seller shall have the
right to transfer and assign to Buyer additional oil and gas properties
located in the same general area as the Oil and Gas Properties (in this
Section, "SUBSTITUTE PROPERTIES"), which transfer and assignment would be in
lieu of, or in conjunction with, an adjustment under SUBSECTION (c) above. If
substitute properties are transferred and assigned to Buyer under this
SUBSECTION (d), the amount of the indemnification shall be offset by the
PV-10 Value (as defined below) of the substitute properties. Any transfer and
assignment by Seller under this SUBSECTION (d) shall, however, be subject to
the Buyer having (A) concurred in good faith with the PV-10 Value of the
substitute properties and (B) made a good faith determination that (1) Buyer
will receive good and defensible title to the substitute properties, (2)
there are no material environmental or similar liabilities associated with
the substitute properties and (3) there are no other matters or items that a
reasonable and prudent purchaser of oil and gas properties would consider as
materially adversely affecting the value of, or proposed operations on, the
substitute properties; such transfer and assignment by Seller shall also be
further subject to receipt by Buyer of the concurrence of its lender under
the Senior Credit Facility as to the PV-10 Value of the substitute properties
and lender's approval of the substitute properties as acceptable additional
collateral for the Senior Credit Facility. As used in this SUBSECTION (d),
the term "PV-10 VALUE" shall mean, when used with respect to any substitute
properties, the pre-income tax value of projected net revenues (utilizing a
10% discount factor) from Proved Reserves (as defined in the definition for
Oil and Gas Reserves promulgated by the Society of Petroleum Engineers, or
any generally recognized successor) attributable to such substitute
properties as set forth in an Approved Reserve Report. As used in this
SUBSECTION (d), the term "APPROVED RESERVE REPORT" shall mean a reserve
report prepared in accordance with customary and generally accepted standards
and practices for petroleum engineers, and shall be based on prices, costs
and other assumptions as shall be designated by Seller and approved by Buyer
(which approval shall not be unreasonably withheld. The petroleum engineer or
engineers that prepare an Approved Reserve Report shall be designated by
Seller and approved by Buyer (which approval shall not be unreasonably
withheld).
-30-
<PAGE>
(e) In connection with any indemnification under this ARTICLE XII,
the amount of such indemnification insofar as it pertains to a given Oil and
Gas Property, shall be reduced by the amount of the net cash flow received by
Buyer from such Oil and Gas Property from the Effective Date until the date
the indemnification is effected hereunder.
(f) Seller shall retain full and complete control of the defense of
any of the suits, actions or proceeding listed in EXHIBIT 4.6. However,
amounts expended by Seller to date or hereafter in connection with the
defense of a suit, action or proceeding listed in EXHIBIT 4.6 (including
reasonable attorneys' fees and expenses and amounts paid in settlement of
such suit, action or proceeding or arising from a judgment against Seller (or
an affiliate thereof) in respect of such suit, action or proceeding, shall
not be applied against, and shall not be deemed to offset, the maximum amount
of any indemnification owed by Seller to Buyer under this ARTICLE XII in
respect of such suit, action or proceeding.
(g) Seller's indemnification obligation under SECTION 12.2 shall
expire and terminate on the second anniversary date of this Agreement, except
as to any claim for indemnification under such Section made by Buyer prior to
such date. Further, Buyer agrees not to assert any claim for indemnification
under SECTION 12.2 prior to September 1, 1998.
(h) Any claim by Buyer for indemnification under this ARTICLE XII
must be given in writing to Seller and shall specify in reasonable detail the
grounds for indemnification and the amount of indemnification sought.
ARTICLE XIII
CONVERSION OF NOTE
SECTION 13.1. SHARES ISSUABLE UPON CONVERSION. Upon receipt by Buyer
of the Vancouver Exchange Acceptance and the Preferred Share Approval, the
Note shall automatically be converted into a combination of Common Shares and
Preferred Shares determined as set forth below.
(i) The number of Common Shares to be issued upon conversion
of the Note shall be equal to the Common Portion of the Purchase Price
divided by the Average Closing Price.
(ii) The number of Preferred Shares to be issued upon
conversion of the Note shall be equal to the Preferred Portion of the
Purchase Price divided by $1.00.
In connection with the foregoing, it is specifically agreed by the parties
that upon conversion of the Note (A) any accrued but unpaid interest on the
Note existing on the date of conversion (in this Section, "ACCRUED INTEREST")
shall be due and payable by Buyer on the first Quarterly
-31-
<PAGE>
Payment Date (as such term is used in EXHIBIT 2.1--PREFERRED SHARES) and (B)
if, on the first Quarterly Payment Date, Buyer has the right to elect to make
a Payment in Kind (as such term is used in EXHIBIT 2.1--PREFERRED SHARES),
Buyer may also include the accrued interest as a part of the Payment in Kind.
SECTION 13.2. DELIVERY OF NOTE; ISSUANCE OF SHARES. Upon the
conversion of the Note into Shares as provided in SECTION 13.1, Seller shall
surrender the Note, duly endorsed to Buyer, or in blank and accompanied by
proper instruments of transfer to Buyer, at its address set forth herein.
Promptly thereafter (and in any event no later five days after receipt by
Buyer of the Note), Buyer shall issue and deliver to Seller certificates for
the number of full Common Shares and full Preferred Shares to which Seller
shall be entitled. Buyer shall not be required to issue fractional shares of
Common Shares upon conversion of the Note. As to any final fraction of a
Common Share which Seller would otherwise be entitled to receive upon
conversion of the Note, Buyer shall pay a cash adjustment in respect of such
final fraction in an amount equal to the same fraction of the Average Closing
Price.
ARTICLE XIV
CERTAIN POST-CLOSING AFFIRMATIVE COVENANTS OF BUYER
To induce Seller to enter into this Agreement and receive the Note
and the Shares issuable upon conversion of the Note, Buyer covenants and
agrees that until Seller no longer holds the Note (except upon conversion of
the Note) or Seller owns less than 25% of the Preferred Shares issuable upon
conversion of the Note:
SECTION 14.1. BOOKS, FINANCIAL STATEMENTS AND REPORTS. Buyer will
maintain and will cause its Subsidiaries to maintain a standard system of
accounting, will maintain its Fiscal Year, and will furnish the following
statements and reports to Seller at Buyer's expense:
(a) As soon as available, and in any event within one
hundred forty (140) days after the end of each Fiscal Year, complete
Consolidated (and, upon the request of Seller, consolidating)
financial statements of Buyer together with all notes thereto,
prepared in reasonable detail in accordance with GAAP, together with
an unqualified opinion, based on an audit using generally accepted
auditing standards, by Dyke and Howard, Chartered Accountants, or
other independent certified public accountants selected by Buyer and
reasonably acceptable to Seller, stating that such Consolidated
financial statements have been so prepared. These financial
statements shall contain a Consolidated balance sheet as of the end
of such Fiscal Year and Consolidated statements of earnings, of cash
flows, and of changes in owners' equity for such Fiscal Year, each
setting forth in comparative form the corresponding figures for the
preceding Fiscal Year.
-32-
<PAGE>
(b) As soon as available, and in any event within
forty-five (45) days after the end of each Fiscal Quarter, Buyer's
Consolidated (and, upon the request of Seller, consolidating)
balance sheet as of the end of such Fiscal Quarter and Consolidated
statements of Buyer's earnings and cash flows for the period from
the beginning of the then current Fiscal Year to the end of such
Fiscal Quarter, all in reasonable detail and prepared in accordance
with GAAP, subject to changes resulting from normal year-end
adjustments.
(c) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by
Buyer or any of its Subsidiaries to its stockholders and all
registration statements, periodic reports and other statements and
schedules filed by Buyer or any Subsidiary thereof with any
securities exchange, any Canadian securities authority or any
similar governmental authority.
(d) By March 31 of each year, a reserve report, effective
as of December 31 of the prior year, and in the form required to be
delivered under the Fund III Credit Agreement.
(e) As soon as available, and in any event within ninety
(90) days after the end of each Fiscal Year, a business and
financial plan for Buyer (in form reasonably satisfactory to
Seller), prepared by a senior financial officer thereof, setting
forth for the first year thereof, quarterly financial projections
and budgets for Buyer, and thereafter yearly financial projections
and budgets.
SECTION 14.2. OTHER INFORMATION AND INSPECTIONS. Buyer will furnish
to Seller any information reasonably available to Buyer and which can be
obtained by it without undue effort or expense which Seller may from time to
time request in writing concerning any covenant, provision or condition
contained in this ARTICLE XIV or ARTICLE XV or any matter in connection with
Buyer's businesses and operations. Buyer will permit representatives
appointed by Seller (including independent accountants, auditors, agents,
attorneys, appraisers and any other Persons), with reasonable notice, to
visit and inspect during normal business hours any of Buyer's or any
Subsidiary's property, including its books of account, other books and
records, and any facilities or other business assets, and to make extra
copies therefrom and photocopies and photographs thereof, and to write down
and record any information such representatives obtain (provided, that the
number of such visits and inspections shall not exceed one per calendar
year), and Buyer shall permit Seller or its representatives to investigate
and verify the accuracy of the information furnished to Seller in connection
with this Agreement and to discuss all such matters with its officers.
SECTION 14.3. NOTICE OF MATERIAL EVENTS AND CHANGE OF ADDRESS. Buyer
will promptly notify Seller in writing, stating that such notice is being
given pursuant to this Agreement, of:
-33-
<PAGE>
(a) the occurrence of any Material Adverse Change after
the Effective Date,
(b) the occurrence of any material breach by Buyer of any
of its covenants and agreements contained in ARTICLES XIV and XV,
(c) the acceleration of the maturity of any indebtedness
owed by Buyer or any Subsidiary thereof or of any default by Buyer
or any Subsidiary under any indenture, mortgage, agreement, contract
or other instrument to which any of them is a party or by which any
of them or any of their properties is bound, if such acceleration or
default could cause a Material Adverse Change,
(d) the occurrence of any Termination Event,
(e) any claim of $100,000 or more, any notice of potential
liability under any Environmental Laws which might exceed such
amount, or any other material adverse claim asserted against Buyer
or any Subsidiary or with respect to any of their properties, and
(f) the filing of any suit or proceeding against Buyer or
any Subsidiary in which an adverse decision could cause a Material
Adverse Change.
Upon the occurrence of any of the foregoing Buyer will take all necessary or
appropriate steps to remedy promptly any such Material Adverse Change,
Default, acceleration, default or Termination Event, to protect against any
such adverse claim, to defend any such suit or proceeding, and to resolve all
controversies on account of any of the foregoing. Buyer will also notify
Seller in writing at least twenty business days prior to the date that Buyer
changes its name or the location of its chief executive office or principal
place of business.
SECTION 14.4. MAINTENANCE OF PROPERTIES. Buyer and each Subsidiary
thereof will maintain, preserve, protect, and keep, and shall cause to be
maintained, preserved, protected and kept, all property used or useful in the
conduct of its business in condition reasonably adequate for normal
operations and in compliance with all applicable laws, and will from time to
time make all repairs, renewals and replacements needed to enable the
business and operations carried on in connection therewith to be promptly and
advantageously conducted at all times.
SECTION 14.5. MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. Buyer and
each Subsidiary thereof will maintain and preserve its existence and its
rights and franchises in full force and effect and will qualify to do
business in all states or jurisdictions where required by applicable law,
except where the failure so to qualify will not cause a Material Adverse
Change.
-34-
<PAGE>
SECTION 14.6. PAYMENT OF TAXES. Buyer and each of its Subsidiaries
will (a) timely file all required tax returns and (b) timely pay all taxes,
assessments, and other governmental charges or levies imposed upon it or upon
its income, profits or property. Buyer and any Subsidiary may, however, delay
paying or discharging any of the foregoing so long as it is in good faith
contesting the validity thereof by appropriate proceedings and has set aside
on its books adequate reserves therefor.
SECTION 14.7. INSURANCE. Buyer and each Subsidiary thereof will keep
or cause to be kept insured by financially sound and reputable insurers its
property in such amounts and against such risks as are reasonably customary
for Persons engaged in the same or similar business of owning or operating
similar properties.
SECTION 14.8. COMPLIANCE WITH AGREEMENTS AND LAW. Buyer and each
Subsidiary thereof will perform all material obligations it is required to
perform under the terms of each indenture, mortgage, deed of trust, security
agreement, lease, franchise, agreement, contract or other instrument or
obligation to which it is a party or by which it or any of its properties is
bound. Buyer and each Subsidiary thereof will conduct its business and
affairs in compliance with all laws applicable thereto.
ARTICLE XV
CERTAIN POST-CLOSING NEGATIVE COVENANTS OF BUYER
To induce Seller to enter into this Agreement and receive the Note
and the Shares issuable upon conversion of the Note, Buyer covenants and
agrees that until Seller no longer holds the Note (except upon conversion of
the Note) or less than 25% of the Preferred Shares issuable upon conversion
of the Note:
SECTION 15.1. INDEBTEDNESS. Neither Buyer nor any Subsidiary thereof
will in any manner owe or be liable for Indebtedness except:
(a) Indebtedness under the Senior Credit Facility;
(b) Indebtedness under the Fund III Credit Agreement;
(c) purchase money Indebtedness and Indebtedness under leases of
Buyer or any Subsidiary thereof as lessee which are capitalized in accordance
with GAAP, provided such purchase money Indebtedness and Indebtedness under
capital leases required to be paid in any Fiscal Year do not in the aggregate
exceed $100,000;
(d) Indebtedness which is non-recourse to Buyer and such Subsidiary
and which is subordinated to the Indebtedness under the Fund III Credit
Agreement on terms and conditions satisfactory to Seller in its sole and
absolute discretion;
-35-
<PAGE>
(e) Indebtedness arising from endorsing negotiable instruments for
collection in the ordinary course of business;
(f) Indebtedness constituting deposits to secured the performance of
bids, trade contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds and performance bonds and other
obligations of a like nature that are incurred in the ordinary course of
business;
(g) Indebtedness constituting indemnities under agreements entered
into by Buyer or any Subsidiary thereof arising in the ordinary course of
business.
SECTION 15.2. LIMITATION ON LIENS. Neither Buyer nor any Subsidiary
thereof will create, assume or permit to exist any lien upon any of the
properties or assets which it now owns or hereafter acquires, except:
(a) liens which secure the Indebtedness permitted under SECTION
15.1; and
(b) statutory liens for taxes, statutory mechanics' and
materialmen's liens incurred in the ordinary course of business, and other
similar liens incurred in the ordinary course of business, provided such
liens do not secure Indebtedness and secure only Liabilities which are not
delinquent or which are being contested as provided in SECTION 14.6.
SECTION 15.3. LIMITATIONS ON INVESTMENTS AND NEW BUSINESSES. Neither
Buyer nor any Subsidiary will engage directly or indirectly in any business
other than the oil and gas exploration and development business.
SECTION 15.4. TRANSACTIONS WITH AFFILIATES. Neither Buyer nor any
Subsidiary thereof will engage in any material transaction with any of its
Affiliates on terms which are less favorable to it than those which would
have been obtainable at the time in arm's-length dealing with Persons other
than such Affiliates.
SECTION 15.5. LIMITATION ON DIVIDENDS AND REDEMPTIONS. Neither Buyer
nor any of its Subsidiaries will declare or pay dividends on, or make any
other distribution in respect of, any class of its capital stock or any
partnership or other interest in it, nor will Buyer or any Subsidiary
directly or indirectly make any capital contribution to or purchase, redeem,
acquire or retire any shares of the capital stock of or partnership interests
in Buyer or any Subsidiary, or cause or permit any reduction or retirement of
the capital stock of Buyer or any Subsidiary, except as otherwise expressly
provided in this Section. Such dividends, distributions, contributions,
purchases, redemptions, acquisitions, retirements or reductions may be made
by Buyer (a) without limitation to Buyer; (ii) to Subsidiaries of Buyer, to
the extent permitted under SECTION 15.5; and (iii) as required under the
terms of the Preferred Shares. Buyer or any Subsidiary thereof may declare
and pay to any Person dividends payable only in its common stock, so long as
Buyer's interest in any of its Subsidiaries is not thereby reduced.
-36-
<PAGE>
SECTION 15.6. CERTAIN CONTRACTS; AMENDMENTS; MULTIEMPLOYER ERISA
PLANS. Neither Buyer nor any Subsidiary thereof will, directly or indirectly,
enter into, create, or otherwise allow to exist any contract or other
consensual restriction on the ability of any Subsidiary of Buyer to: (a) pay
dividends or make other distributions to Buyer, (b) to redeem equity
interests held in it by Buyer, (c) to repay loans and other indebtedness
owing by it to Buyer, or (d) to transfer any of its assets to Buyer. No ERISA
Affiliate will incur any obligation to contribute to any "multiemployer plan"
as defined in Section 4001 of ERISA.
SECTION 15.7. COVERAGE RATIO. The Coverage Ratio will never be less
than 1.4 to 1. As used in this Section, the term "COVERAGE RATIO" shall mean
Tangible Assets of Buyer divided by Long Term Debt of Buyer. As used in this
Section, (a) the term "TANGIBLE ASSETS" shall mean the sum of (i) the present
value (utilizing a 10% discount rate) of the estimated proved reserves, (ii)
cash, (iii) securities and (iv) net book value of unproved properties and
equipment as if Buyer were following the full cost method of property
accounting beginning January 1, 1997, and (b) the term "LONG TERM DEBT" shall
mean long-term debt as the same is defined in Buyer's audited financial
statements. For purposes hereof, the Coverage Ratio will be calculated no
later than April 15 of each year as of December 31 of the previous year using
Buyer's audited fiscal year-end audited financial statements and year end
estimates of proved reserves by Buyer's independent engineers.
ARTICLE XVI
NOTICES
All notices and other communications required under this Agreement
shall (unless otherwise specifically provided herein) be in writing and be
delivered personally, by recognized commercial courier or delivery service
(which provides a receipt), by telecopier (with receipt acknowledged), or by
registered or certified mail (postage prepaid), at the following addresses:
IF TO SELLER: Lasco Energy Partners, L.P.
c/o Riverhill Energy Corporation
1716 Briarcrest Drive
Suite 400
Bryan, Texas 77802
Attention: Gary Trotter
Fax No.: 409-846-0848
-37-
<PAGE>
WITH A COPY TO:
EnCap Investments, L.C.
1100 Louisiana, Suite 3150
Houston, Texas 77002
Attention: Robert L. Zorich
Fax No.: 713-659-6130
IF TO BUYER: Benz Energy Ltd.
1000 Louisiana, Suite 3950
Houston, Texas 77002
Attention: Robert S. Herlin
Fax No.: 713-739-8402
and shall be considered delivered on the date of receipt. Either Buyer, on
the one hand, or Seller, on the other hand, may specify as its proper address
any other post office address within the continental limits of the United
States by giving notice to the other, in the manner provided in this Article,
at least ten (10) days prior to the effective date of such change of address.
ARTICLE XVII
COMMISSIONS
Seller agrees to indemnify and hold harmless Buyer from and against
any and all claims, obligations, actions, liabilities, losses, damages, costs
or expenses (including court costs and attorneys fees) of any kind or
character arising out of or resulting from any agreement, arrangement or
understanding alleged to have been made by, or on behalf of, Seller with any
broker or finder in connection with this Agreement or the transactions
contemplated hereby. Buyer agrees to indemnify and hold harmless Seller from
and against any and all claims, obligations, actions, liabilities, losses,
damages, costs or expenses (including court costs and attorneys fees) of any
kind or character arising out of or resulting from any agreement, arrangement
or understanding alleged to have been made by, or on behalf of, Buyer with
any broker or finder in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE XVIII
MISCELLANEOUS MATTERS
SECTION 18.1. SURVIVAL OF PROVISIONS. All representations and
warranties made herein by Buyer and Seller shall be continuing and shall be
true and correct on and as of the date of
-38-
<PAGE>
Closing with the same force and effect as if made at that time; further,
except as hereinafter provided, all of such representations and warranties
shall survive the Closing and the delivery of the Assignments.
Notwithstanding anything else herein to the contrary, the representations and
warranties contained in the following Sections shall not survive past the
Post-Closing Examination Point: SECTIONS 4.4 through 4.12 and SECTION 4.17.
The provisions of, and the obligations of the parties under, ARTICLE VII,
ARTICLE IX (to the extent the same are, by mutual agreement, not performed at
Closing), and ARTICLES X through XVIII inclusive shall survive the Closing
and the delivery of the Assignments.
SECTION 18.2. FURTHER ASSURANCES. From time to time after the
Closing, at the request of any party hereto and without further
consideration, Seller, on the one hand, and Buyer, on the other hand, shall
execute and deliver to the requesting party such instruments and documents
and take such other action (but without incurring any material financial
obligation) as such requesting party may reasonably request in order to
consummate more fully and effectively the transactions contemplated hereby.
SECTION 18.3. BINDING EFFECT; SUCCESSORS AND ASSIGNS. The Agreement
shall be binding on the parties hereto and their respective successors and
permitted assigns. No party hereto shall have the right to assign its rights
under this Agreement without the prior written consent of the other party
first having been obtained.
SECTION 18.4. IMBALANCES. On the date of Closing (and, upon the
delivery to Buyer of the Assignments), Buyer shall succeed to the position of
Seller with respect to all gas imbalances. As a result of such succession
Buyer shall (i) be entitled to receive any and all benefits, including
payments of proceeds of production in excess of amounts which it would
otherwise be entitled to produce and receive by virtue of ownership of the
Oil and Gas Properties, which Seller would have been entitled to receive by
virtue of such positions and (ii) shall be obligated to suffer any detriments
(whether the same be in the form of obligations to deliver production which
would have otherwise been attributable to its ownership of the Oil and Gas
Properties without receiving full payment therefor, or be in the form of the
obligation to make payment in cash) which Seller would have been obligated to
suffer by virtue of such positions.
SECTION 18.5. EXPENSES; SALES TAXES; FILINGS AND RECORDING FEES.
(a) Buyer, on the one hand, and Seller, on the other hand, shall
bear and pay all expenses incurred by them or it in connection with the
transaction contemplated by this Agreement, except as otherwise provided in
SECTION 7.4.
(b) Notwithstanding anything to the contrary herein, since the
transaction contemplated hereby is an isolated transaction, no sales tax will
be collected from Buyer. If, however, this transaction is later deemed to be
other than an occasional sale, Buyer agrees to be solely responsible, and
shall indemnify and hold Seller (and their respective partners, and
-39-
<PAGE>
each of their and each such partners' parent and subsidiary companies and
other affiliates, and shareholders, managers, owners, directors, officers,
employees, consultants, and agents, respectively) harmless, from any and all
sales or transfer taxes or fees (including related penalty, interest or legal
costs) due by virtue of this transaction on the Properties transferred
pursuant hereto and Buyer shall remit such sales or transfer taxes at that
time. Seller and Buyer agree to cooperate with each other in demonstrating
that the requirements for an occasional or isolated sale or any other sales
tax exemption have been met.
(c) Buyer shall be solely responsible for all filings and recordings
of assignments and other documents related to the Properties and for all fees
connected therewith, and Buyer shall furnish Seller with pertinent recording
data. Seller shall not be responsible for any loss to Buyer because of
Buyer's failure to file or record documents correctly or promptly.
SECTION 18.6. ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to subject matter hereof and
supersedes all prior agreements, understandings, negotiations, and
discussions among the parties with respect to such subject matter. Time is of
the essence in this Agreement.
SECTION 18.7. PUBLIC STATEMENTS. Seller, on the one hand, and Buyer,
on the other hand, shall consult with each other with regard to all publicity
and other releases at or prior to Closing concerning this Agreement and the
transactions contemplated hereby and, except as required by applicable law or
the applicable rules or regulations of any governmental body or stock
exchange, neither Seller, on the one hand, nor Buyer, on the other hand,
shall issue any publicity or other release without the prior consent of the
other.
SECTION 18.8. INJUNCTIVE RELIEF. The parties hereto acknowledge and
agree that irreparable damage would occur in the event any of the provisions
of this Agreement were not performed in accordance with their specific terms
or were otherwise breached. It is accordingly agreed that the parties shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement, and shall be entitled to enforce specifically
the provisions of this Agreement, in any court of the United States or any
state thereof having jurisdiction, in addition to any other remedy to which
the parties may be entitled under this Agreement or at law or in equity.
SECTION 18.9. DECEPTIVE TRADE PRACTICES. To the extent applicable to
the transaction contemplated hereby or any portion thereof, BUYER CAN AND
DOES EXPRESSLY WAIVE THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE
PRACTICES-CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., TEXAS BUSINESS &
COMMERCE CODE, OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED, AND ALL OTHER
CONSUMER PROTECTION LAWS OF THE STATE OF TEXAS, OR ANY OTHER STATE,
APPLICABLE TO THIS TRANSACTION THAT MAY BE WAIVED BY THE PARTIES. IN
CONNECTION WITH SUCH WAIVER, BUYER HEREBY REPRESENTS TO SELLER THAT IT (a) IS
IN THE BUSINESS OF SEEKING OR ACQUIRING BY PURCHASE OR LEASE, GOODS OR
SERVICES FOR COMMERCIAL OR BUSINESS USE, (b) HAS KNOWLEDGE AND EXPERIENCE IN
FINANCIAL AND BUSINESS MATTERS THAT ENABLES IT TO EVALUATE THE
-40-
<PAGE>
MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED HEREBY, (c) IS NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION AND (d) HAS ASSETS OF $5,000,000
OR MORE ACCORDING TO ITS MOST RECENT FINANCIAL STATEMENTS.
SECTION 18.10. AMENDMENTS. This Agreement may be amended, modified,
supplemented, restated or discharged (and provisions hereof may be waived)
only by an instrument in writing signed by the parties hereto.
SECTION 18.11. ADDITIONAL REPRESENTATIONS, COVENANTS AND AGREEMENTS
OF BUYER REGARDING VANCOUVER EXCHANGE ACCEPTANCE AND PREFERRED SHARE
APPROVAL. Buyer hereby represents and warrants to Seller that Buyer has
received Vancouver Exchange Acceptance. Buyer has informed Seller that as of
the date hereof Buyer only has the requisite corporate authority under its
charter documents to issue the Common Shares contemplated hereby upon
conversion of the Note, but not the Preferred Shares. Buyer represents and
warrants to Seller that the only actions necessary for Buyer in connection
with obtaining the approval of the issuance of Preferred Shares to Seller
upon conversion of the Note are (1) to amend the charter documents of Buyer
to authorize the Preferred Shares (which will require approval of both the
board of directors and shareholders of the Company) and (2) to authorize the
issuance of the Preferred Shares upon conversion of the Note (which will
require the approval of the board of directors of Buyer). The actions
described in the immediately preceding sentence are herein called the
"PREFERRED SHARE APPROVAL". Buyer covenants and agrees with Seller that the
Preferred Share Approval, as it relates to the actual terms and conditions of
the Preferred Shares, will be consistent with the terms, rights and
preferences set forth in EXHIBIT 2.1--PREFERRED SHARES and in a form
reasonably acceptable to Seller, and that Buyer will use its best efforts to
obtain the Preferred Share Approval as promptly as possible and, in any
event, no later than February 20, 1998. Buyer further represents and warrants
to Seller that it has no reason to believe that the Preferred Share Approval
will not be obtained by February 20, 1998. After receipt of the Preferred
Share Approval and the Vancouver Exchange Acceptance and upon request of
Seller, Buyer agrees to provide an opinion of legal counsel, which opinion
and legal counsel shall be reasonably acceptable to Seller, substantially to
the effect that the Preferred Share Approval and the Vancouver Exchange
Acceptance have been obtained and that the Common Shares and the Preferred
Shares have been duly authorized and issued and are fully paid and
nonassessable and covering such other matters relating to the authorization
and issuance of such shares as Seller may reasonably request.
SECTION 18.12. ADDITIONAL COVENANT AND AGREEMENT OF SELLER REGARDING
EXISTING AND NET WORTH. Seller covenants and agrees with Buyer (a) to
maintain its existence (and not liquidate and terminate) during the two-year
period commencing on the date hereof and (b) that during the aforementioned
two-year period, it will either (1) retain and not transfer the Note or the
Common Shares and Preferred Shares issuable upon conversion of the Note or
(2) if it sells or otherwise transfers the Note (except upon conversion
thereof) or the Common Shares and Preferred Shares upon conversion of the
Note (or a portion thereof) it will maintain
-41-
<PAGE>
a net worth of not less than $2,500,000 (which net worth shall be computed
based on the fair market value of the assets of Seller).
SECTION 18.13. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.
SECTION 18.14. COUNTERPARTS. This Agreement may be executed in
counterparts, all of which are identical and all of which constitute one and
the same instrument. It shall not be necessary for Buyer and Seller to sign
the same counterpart.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-42-
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the parties hereto
on the date set forth above.
"SELLER":
LASCO ENERGY PARTNERS, L.P.
By: RIVERHILL ENERGY
CORPORATION, General Partner
By: /s/ Gary L. Trotter
-------------------------------------------
Gary R. Trotter, President
"BUYER":
BENZ ENERGY LTD.
By:
-------------------------------------------
Prentis B. Thomlison, Jr., Chairman
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the parties hereto
on the date set forth above.
"SELLER":
LASCO ENERGY PARTNERS, L.P.
By: RIVERHILL ENERGY
CORPORATION, General Partner
By:
-------------------------------------------
Gary R. Trotter, President
"BUYER":
BENZ ENERGY LTD.
By: /s/ Ernest J. LaFlure
-------------------------------------------
Ernest J. LaFlure, President
-43-
<PAGE>
DECEMBER 1998 AGREEMENT IN RESPECT OF
PURCHASE AND SALE AGREEMENT
THIS DECEMBER 1998 AGREEMENT IN RESPECT OF PURCHASE AND SALE
AGREEMENT (this "AGREEMENT") is made and entered into as of December 16,
1998, by and between Lasco Energy Partners, L.P., a Texas limited partnership
("Seller"), Texstar Petroleum, Inc., a Texas corporation, and Benz Energy
Ltd., a corporation existing under the laws of the Yukon Territory, Canada
(collectively, "Buyer").
RECITALS:
A. Reference is herein made to that certain Purchase and Sale
Agreement dated January 23, 1998, by and between Seller and Benz Energy
Ltd.(the "PURCHASE AGREEMENT"). Terms not otherwise defined herein shall have
the respective meanings assigned to them in the Purchase Agreement, except
that any reference herein to the "CLOSING" or the "CLOSING DATE" shall have
the meaning assigned to it herein and not in the Purchase Agreement.
B. Under the Purchase Agreement, Seller conveyed certain oil, gas
and other mineral leases and related assets to Buyer in consideration of the
issuance by Buyer to Seller of Common Shares and Preferred Shares, subject to
certain adjustments as provided in Article VII thereof.
C. The parties hereto deem it in their mutual best interests (i) for
Buyer to reconvey to Seller certain of the Properties as specified more
particularly herein, (ii) for Seller to reconvey to Buyer certain Preferred
Shares as specified more particularly herein and (iii) for Buyer and Seller
to make certain agreements with respect to their rights, duties and
obligations regarding the Properties and under the Purchase Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants and agreements contained herein and in the Purchase
Agreement, the parties hereto do hereby agree as follows:
1. PROPERTIES AND SHARES TO BE CONVEYED. Subject to the terms and
conditions contained herein:
(a) Buyer agrees to convey, transfer and assign to Seller, the
properties and other assets described more particularly in that certain
Conveyance substantially in the form of the instrument attached hereto as
EXHIBIT 1(a) in all material respects (the "CONVEYANCE") and
(b) Seller agrees to convey, transfer and assign to Buyer 2,511,860
Preferred Shares.
2. AGREEMENT IN RESPECT OF TRANSACTIONS.
-1-
<PAGE>
(a) Buyer and Seller agree that upon consummation of the
transactions contemplated hereby:
(i) Seller and all Affiliated Persons shall have no further
duty, obligation or liability to Buyer under Section 7.2 or Article XII
of the Purchase Agreement; provided, that Seller's obligations under
Section 12.1 of the Purchase Agreement shall remain in full force and
effect except as to the matters referenced as items 1 and 3 in Exhibit
4.6 to the Purchase Agreement (which shall remain in full force and
effect until the second anniversary date of the Purchase Agreement).
(ii) Seller and all Affiliated Persons shall have no further
liability to Buyer for any breach or alleged breach by Seller of any
representation and warranty or covenant or agreement made by Seller to
Buyer in the Purchase Agreement.
As used in this SECTION 2, the term "AFFILIATED PERSON" shall mean any
partner of Seller, any officer, director, shareholder, member, manager or
other owner or governing person of such partner, and any employee, agent or
other representative of Seller, such partner, and any officer, director,
shareholder, member, manager or other owner or other governing person of such
partner.
(b) Notwithstanding the foregoing or anything else herein or in the
Purchase Agreement to the contrary, nothing in this Agreement is intended to
modify, amend or otherwise limit the covenants, agreements and obligations of
Buyer under the Purchase Agreement, including Buyer's obligations (i) to make
its required payments with respect to the Preferred Shares and (ii) under
Articles XIV and XV of the Purchase Agreement.
(c) The parties agree that upon consummation of the transactions
contemplated hereby, Buyer shall be deemed to have fulfilled its obligations
to pay the dividends due and owing on the Preferred Shares for the fiscal
third quarter of 1998.
3. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and
warrants to Buyer as follows:
(a) Seller is a limited partnership duly formed and validly existing
under the laws of the State of Texas.
(b) Seller has full partnership power and partnership authority to
execute, deliver, and perform this Agreement and each other agreement,
instrument, or document executed or to be executed by Seller in connection
with the transactions contemplated hereby to which it is a party and to
consummate the transactions contemplated hereby and thereby. The execution,
delivery, and performance by Seller of this Agreement and each other
agreement, instrument, or document executed or to be executed by Seller in
connection with the transactions contemplated hereby to which it is a party,
and the consummation by it of the transactions contemplated hereby and
thereby, have been duly authorized by all necessary partnership action of
Seller.
-2-
<PAGE>
(c) This Agreement has been duly executed and delivered by Seller
and constitutes, and each other agreement, instrument, or document executed
or to be executed by Seller in connection with the transactions contemplated
hereby to which it is a party has been, or when executed will be, duly
executed and delivered by Seller and constitutes, or when executed and
delivered will constitute, a valid and legally binding obligation of Seller,
enforceable against it in accordance with their respective terms, except that
such enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting creditors' rights
generally and (ii) equitable principles which may limit the availability of
certain equitable remedies (such as specific performance) in certain
instances.
(d) Neither the execution, delivery, and performance by Seller of
this Agreement and each other agreement, instrument, or document executed or
to be executed by Seller in connection with the transactions contemplated
hereby to which it is a party nor the consummation by it of the transactions
contemplated hereby and thereby do and will (i) conflict with or result in a
violation of any provision of the partnership agreement or other governing
instruments of Seller, (ii) conflict with or result in a violation of any
provision of, or constitute (with or without the giving of notice or the
passage of time or both) a default under, or give rise (with or without the
giving of notice or the passage of time or both) to any right of termination,
cancellation, or acceleration under, any bond, debenture, note, mortgage,
indenture, lease, contract, agreement, or other instrument or obligation to
which Seller is a party or by which Seller or any of its properties may be
bound, (iii) result in the creation or imposition of any lien or other
encumbrance upon the properties of Seller, or (iv) violate any applicable
law, rule or regulation binding upon Seller.
(e) No consent, approval, order, or authorization of, or
declaration, filing, or registration with, any court or governmental agency
or of any third party is required to be obtained or made by Seller in
connection with the execution, delivery, or performance by Seller of this
Agreement and each other agreement, instrument, or document executed or to be
executed by Seller in connection with the transactions contemplated hereby to
which it is a party or the consummation by it of the transactions
contemplated hereby and thereby.
(f) There are no pending suits, actions, or other proceedings in
which Seller is a party which affect the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
4. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby represents
and warrants to Seller as follows:
(a) Each of the parties comprising Buyer is a corporation duly
organized, legally existing and in good standing under the laws of the
jurisdiction of its formation. Each of the parties comprising Buyer is duly
qualified or licensed to do business as a foreign corporation in each
jurisdiction in which the conduct of its business requires such qualification
or licensing, except jurisdictions in which the failure to be so qualified or
licensed would not, individually or in the aggregate, result in a Material
Adverse Change.
-3-
<PAGE>
(b) Each of the parties comprising Buyer has full corporate power
and corporate authority to execute, deliver, and perform this Agreement and
each other agreement, instrument, or document executed or to be executed by
it in connection with the transactions contemplated hereby to which it is a
party and to consummate the transactions contemplated hereby and thereby. The
execution, delivery, and performance by each of the parties comprising Buyer
of this Agreement and each other agreement, instrument, or document executed
or to be executed by it in connection with the transactions contemplated
hereby to which it is a party, and the consummation by it of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action of such party.
(c) This Agreement has been duly executed and delivered by each of
the parties comprising Buyer and constitutes, and each other agreement,
instrument, or document executed or to be executed by it in connection with
the transactions contemplated hereby to which it is a party has been, or when
executed will be, duly executed and delivered by it and constitutes, or when
executed and delivered will constitute, a valid and legally binding
obligation of such party, enforceable against it in accordance with their
respective terms, except that such enforceability may be limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, and similar
laws affecting creditors' rights generally and (ii) equitable principles
which may limit the availability of certain equitable remedies (such as
specific performance) in certain instances.
(d) The execution, delivery, and performance by each of the parties
comprising Buyer of this Agreement and each other agreement, instrument, or
document executed or to be executed by it in connection with the transactions
contemplated hereby to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or result in a violation of any provision of the charter or bylaws or
other governing instruments of such party, (ii) conflict with or result in a
violation of any provision of, or constitute (with or without the giving of
notice or the passage of time or both) a default under, or give rise (with or
without the giving of notice or the passage of time or both) to any right of
termination, cancellation, or acceleration under, any bond, debenture, note,
mortgage, indenture, lease, contract, agreement, or other instrument or
obligation to which it is a party or by which it or any of its properties may
be bound, (iii) result in the creation or imposition of any lien or other
encumbrance upon the properties of such party, or (iv) violate any applicable
law, rule or regulation binding upon such party.
(e) No consent, approval, order, or authorization of, or
declaration, filing, or registration with, any court or governmental agency
or of any third party is required to be obtained or made by either of the
parties comprising Buyer in connection with the execution, delivery, or
performance by Buyer of this Agreement and each other agreement, instrument,
or document executed or to be executed by it in connection with the
transactions contemplated hereby to which it is a party or the consummation
by it of the transactions contemplated hereby and thereby, other than
compliance with any applicable requirements of the Securities Act and any
applicable state securities laws or the approval (if any) of the Vancouver
Stock Exchange.
-4-
<PAGE>
(f) There are no pending suits, actions, or other proceedings in
which either of the parties comprising Buyer is a party which affect the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
5. CERTAIN COVENANTS AND AGREEMENT OF BUYER. Buyer covenants
and agrees with Seller as follows:
(a) It will use its reasonable best efforts to obtain all consents,
approvals, orders, authorizations, and waivers of, and to effect all
declarations, filings and registrations with, all third parties (including
governmental entities) that are necessary, required or deemed by Buyer to be
desirable to enable Buyer to consummate the transactions contemplated hereby.
(b) Without limiting SUBSECTION (a) above, Buyer agrees to use its
reasonable best efforts (i) to obtain the written consent from Bank One,
Texas, N.A. (the "BANK"), to the transactions contemplated hereby, to the
extent required under that certain Letter Loan Agreement between the Bank and
Calibre Energy, LLC, a Texas limited liability company; and (ii) to cause the
Bank to execute and deliver a partial release of lien in form and content
reasonably satisfactory to Seller (the "PARTIAL RELEASE").
6. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES.
(a) The obligations of Buyer under this Agreement are subject to
each of the following conditions being met:
(i) Each and every representation of Seller under this Agreement
shall be true and accurate in all material respects as of the date
when made and shall be deemed to have been made again at and as of the
time of Closing and shall at and as of such time of Closing be true
and accurate in all respects except as to changes specifically
contemplated by this Agreement or consented to by Buyer.
(ii) Seller shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by
Buyer) each and every covenant, agreement and condition required by
this Agreement to be performed or complied with by Seller prior to or
at the Closing.
(iii) No suit, action or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental
agency seeking to restrain, prohibit, or obtain damages or other
relief in connection with the consummation of the transactions
contemplated by this Agreement.
If any such condition on the obligations of Buyer under this Agreement is not
met as of the Closing Date, or in the event the Closing does not occur on or
before the Closing Date, and (in either case) Buyer is not in breach of its
obligations hereunder, this Agreement may, at the option of Buyer, be
terminated, in which case the parties shall have no further obligations to one
another
-5-
<PAGE>
hereunder (other than the obligations under SECTIONS 9(a) and 9(e) which will
survive such termination).
(b) The obligations of Seller under this Agreement are subject to each
of the following conditions being met:
(i) Each and every representation of Buyer under this Agreement
shall be true and accurate in all material respects as of the date
when made and shall be deemed to have been made again at and as of
the time of Closing and shall at and as of such time of Closing be
true and accurate in all respects except as to changes specifically
contemplated by this Agreement or consented to by Seller.
(ii) Buyer shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by
Seller) each and every covenant, agreement and condition required by
this Agreement to be performed or complied with by Buyer prior to or
at the Closing.
(iii) No suit, action or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental
agency seeking to restrain, prohibit, or obtain damages or other
relief in connection with the consummation of the transactions
contemplated by this Agreement.
(iv) The Bank shall have executed and delivered the Partial
Release.
(v) Seller shall have received an opinion or opinions of
counsel, which counsel shall be reasonably satisfactory to Seller and
which opinion(s) shall be reasonably satisfactory to Seller and
covering the matters referenced in Exhibit 8.2(d) of the Purchase
Agreement and such other matters as Seller shall request.
(vii) No casualty loss shall have occurred with respect to any
of the Properties.
If any such condition on the obligations of Seller under this Agreement is not
met as of the Closing Date, or in the event the Closing does not occur on or
before the Closing Date, and (in either case) Seller is not in breach of its
obligations hereunder, this Agreement may, at the option of Seller,be
terminated, in which case the parties shall have no further obligations to
one another hereunder (other than the obligations under SECTIONS 9(a) and 9(e)
which will survive such termination).
7. THE CLOSING.
(a) The closing (herein called the "CLOSING") of the transactions
contemplated hereby shall take place in the offices of Thompson & Knight, at
1700 Chase Tower, 600 Travis Street, Houston, Texas, at 10:00 a.m. Central
Standard Time, at a time and place mutually agreed upon by the parties hereto,
but no later than December 21, 1998 (such date and time being herein called the
"CLOSING DATE").
-6-
<PAGE>
(b) At the Closing, Buyer shall:
(i) execute, acknowledge and deliver the Conveyance, effective
as to runs of oil and deliveries of gas as of 7:00 o'clock a.m.,
Central Standard Time on November 1, 1998 (the "EFFECTIVE DATE");
(ii) execute and deliver to Seller agreement(s) in a form
approved by Buyer and Seller granting Seller and Kabco Oil & Gas
Corp.and their respective assigns the right to use Buyer's existing
pipeline and related facilities located on the Malcolm Young Lease,
Rusk County, Texas;
(iii) deliver a copy of the resolutions adopted by the board of
Directors of Buyer authorizing Buyer to execute and deliver this
Agreement and all related documents and instruments and to perform its
obligations hereunder and thereunder, which copy shall be certified by
the secretary of assistant secretary of Buyer; and
(iv) issue and deliver to Seller replacement certificates
evidencing ownership of 9,488,140 Preferred Shares.
(c) At the Closing, Seller shall:
(i) deliver the certificate or certificates representing the
Preferred Shares to be conveyed and assigned under SECTION 1(b) duly
endorsed in blank for transfer or accompanied by a stock power duly
executed in blank; and
(ii) deliver a copy of the consent adopted by the requisite
partners of Seller authorizing Seller to execute and deliver this
Agreement and all related documents and instruments and to perform its
obligations hereunder and thereunder, which copy shall be certified by
the managing general partner of Seller.
(d) No later than 10 days after the Closing, Buyer shall deliver to
Seller such of buyer's contract files, lease and other title files, production
files, well files and other material files pertaining to the ownership and/or
operation of the oil and gas properties and related assets being conveyed under
the Conveyance as Seller may request.
8. REFERENCES, TITLES AND CONSTRUCTION.
(a) All references in this Agreement to articles, sections,
subsections and other subdivisions refer to corresponding articles, sections,
subsections and other subdivisions of this Agreement unless expressly provided
otherwise.
(b) Titles appearing at the beginning of any of such subdivisions
are for convenience only and shall not constitute part of such subdivisions
and shall be disregarded in construing the language contained in such
subdivisions.
-7-
<PAGE>
(c) The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly
so limited.
(d) Words in the singular form shall be construed to include the
plural and VICE VERSA, unless the context otherwise requires. Pronouns in
masculine, feminine and neuter genders shall be construed to include any
other gender.
(e) Unless the context otherwise requires or unless otherwise
provided herein, the terms defined in this Agreement which refer to a
particular agreement, instrument or document also refer to and include all
renewals, extensions, modifications, amendments or restatements of such
agreement, instrument or document, provided that nothing contained in this
subsection shall be construed to authorize such renewal, extension,
modification, amendment or restatement.
(f) Examples shall not be construed to limit, expressly or by
implication, the matter they illustrate.
(g) The word "or" is not intended to be exclusive and the word
"includes" and its derivatives means "includes, but is not limited to" and
corresponding derivative expressions.
(h) No consideration shall be given to the fact or presumption that
one party had a greater or lesser hand in drafting this Agreement.
(i) All references herein to "$" or "dollars" shall refer to U.S.
Dollars.
(j) EXHIBIT 1(a) is attached hereto. Such Exhibit is incorporated
herein by reference for all purposes and references to this Agreement shall
also include such Exhibit unless the context in which used shall otherwise
require.
9. MISCELLANEOUS.
(a) Seller agrees to indemnify and hold harmless Buyer from and
against any and all claims, obligations, actions, liabilities, losses,
damages, costs or expenses (including court costs and attorneys fees) of any
kind or character arising out of or resulting from any agreement, arrangement
or understanding alleged to have been made by, or on behalf of, Seller with
any broker or finder in connection with this Agreement or the transaction
contemplated hereby. Buyer agrees to indemnify and hold harmless Seller from
and against any and all claims, obligations, actions, liabilities, losses,
damages, costs or expenses (including court costs and attorneys fees) of any
kind or character arising out of or resulting from any agreement, arrangement
or understanding alleged to have been made by, or on behalf of, Buyer with
any broker or finder in connection with this Agreement or the transaction
contemplated hereby.
(b) All representations and warranties made herein by Buyer and
Seller shall be continuing and shall be true and correct on and as of the
date of Closing with the same force and
-8-
<PAGE>
effect as if made at that time and all of such representations and warranties
shall survive the Closing and the delivery of the Conveyance.
(c) After the Closing, Buyer shall execute and deliver, and shall
otherwise cause to be executed and delivered, from time to time, such further
instruments, notices, division orders, transfer orders and other documents,
and do such other and further acts and things, as may be reasonably necessary
to more fully and effectively grant, convey and assign the Properties being
conveyed to Seller under the Assignment.
(d) The Agreement shall be binding on the parties hereto and their
respective successors and permitted assigns. Neither party shall have the
right to assign its rights under this Agreement, without the prior written
consent of the other party first having been obtained.
(e) Each party shall bear and pay all expenses incurred by it in
connection with the transaction contemplated by this Agreement.
(f) This Agreement and the Purchase Agreement contains the entire
understanding of the parties hereto with respect to subject matter hereof and
supersedes all prior agreements, understandings, negotiations, and discussions
among the parties with respect to such subject matter. Time is of the essence
in this Agreement.
(g) Seller and Buyer shall consult with each other with regard to
all publicity and other releases at or prior to Closing concerning this
Agreement and the transactions contemplated hereby and, except as required by
applicable law or the applicable rules or regulations of any governmental body
or stock exchange, neither party shall issue any publicity or other release
without the prior consent of the other party.
(h) The parties hereto acknowledge and agree that irreparable damage
would occur in the event any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of the provisions of this Agreement, and
shall be entitled to enforce specifically the provisions of this Agreement,
in any court of the United States or any state thereof having jurisdiction,
in addition to any other remedy to which the parties may be entitled under
this Agreement or at law or in equity.
(i) This Agreement may be amended, modified, supplemented, restated
or discharged (and provisions hereof may be waived) only by an instrument in
writing signed by the party against whom enforcement of the amendment,
modification, supplement, restatement or discharge (or waiver) is sought.
(j) All notices and other communications required under this Agreement
shall (unless otherwise specifically provided herein) be in writing and be
delivered personally, by recognized commercial courier or delivery service
(which provides a receipt), by telecopier (with receipt acknowledged), or by
registered or certified mail (postage prepaid), at the respective addresses
-9-
<PAGE>
for Buyer and Seller set forth in the Purchase Agreement, and shall be
considered delivered on the date of receipt. Either Buyer or Seller may specify
as its proper address any other post office address within the continental
limits of the United States by giving notice to the other party, in the manner
provided in this Article, at least ten (10) days prior to the effective date of
such change of address.
(k) This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas.
(l) This Agreement may be executed in counterparts, all of which are
identical and all of which constitute one and the same instrument. It shall not
be necessary for Buyer and Seller to sign the same counterpart.
(m) Seller agrees to assume Buyer's liability (as described below)
with respect to the Kabco Revenue Payments (as defined below), subject to the
following:
(i) As between Seller and Buyer, it is specifically agreed that
(A) Seller's liability with respect to the Kabco Revenue Payments
extends only to oil and gas revenues received by it during the period
commencing August 1, 1997, and ending November 30, 1997, attributable
to the SOH No. 1 (as defined below), and (B) Buyer's liability with
respect to the Kabco Revenue Payments extends only to oil and gas
revenues received by it during the period commencing December 1, 1997
and ending on the date hereof, attributable to the SOH No. 1.
(ii) Buyer shall have first provided Seller with a full and
complete accounting reasonably satisfactory to Seller of the
production, revenues, taxes and lease operating expenses (including
COPAS overhead charges) relating to the SOH No.1 for the period
commencing December 1, 1997 and ending on the date hereof.
(iii) Seller's liability under this subsection shall not exceed
$23,000 (it being agreed that if Buyer's liability with respect to
the Kabco Revenue Payments is in excess of $23,000, Buyer shall be
fully responsible for such excess).
(iv) By virtue of Seller's assumption of Buyer's liability with
respect to the Kabco Revenue Payments, Seller and Buyer agree that,
for purposes of Section 7.1(b)(i) of the Purchase Agreement and
elsewhere therein, Seller shall have been deemed to have delivered,
and Buyer shall be deemed to have received, $280,000 of PW10 value
shown in the "Amount" column in Exhibit 7.1(b)(i) of the Purchase
Agreement with respect to PUD NE/4 31-21-5.
(v) As used in this subsection and elsewhere herein, the
following terms shall have the respective meanings assigned to them
below:
-10-
<PAGE>
"KABCO REVENUE PAYMENTS" shall mean the payments owed to
Kabco Oil & Gas Co. pursuant to a Notice of Final Judgment issued by
the Fourth Judicial District, Rusk County, Texas, and dated
November 5, 1998, in respect of Kabco Oil and Gas Co. vs. Lasco Oil
& Gas Co.
"SOH NO. 1" shall mean the South Oak Hill Unit No. 1.
(n) In connection with the SOH No. 1, Buyer agrees to execute promptly
upon request of Seller a form P-4 and such other documents or instruments as
shall be necessary to effect the transfer of the operatorship with respect to
such well from Texstar Petroleum, Inc. to Kabco Oil & Gas Co. (or affiliate).
(o) In connection with the Lake Cherokee Unit, the parties acknowledge
and agree that Seller has paid certain capital costs attributable to the
interest of Nuevo Energy Company (or related entity) ("NUEVO") and that Seller
has not been repaid or reimbursed for the amount of such payments. It is agreed
that any payments made by Nuevo as reimbursement or repayment of the capital
costs referenced in the preceding sentence shall be and remain the property of
Seller, and that if Buyer should receive any such payments it shall immediately
tender them to Seller. Buyer agrees to provide reasonable assistance to Seller
in connection with Seller's efforts to collect repayment or reimbursement of
the above amounts, including (if requested by Seller) placing Nuevo's right to
receive revenues in suspense.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-11-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date set forth above.
BENZ ENERGY LTD.
By: /s/ Robert S. Herlin
---------------------
Name: /s/ Robert S. Herlin
---------------------
Title: /s/ SVP
---------------------
TEXSTAR PETROLEUM, INC.
By: /s/ Robert S. Herlin
---------------------
Name: /s/ Robert S. Herlin
---------------------
Title: /s/ SVP
---------------------
LASCO ENERGY PARTNERS, L.P.
By: RIVERHILL ENERGY CORPORATION,
General Partner
By: /s/ Gary L. Trotter
-------------------
Gary L. Trotter
President
<PAGE>
Exhibit 10.31
PURCHASE AND SALE AGREEMENT AMONG
SLATTERY TRUST, STARBUCKS TRUST, TODD GRABOIS,
ROBERT NOVAK, PRENTIS B. TOMLINSON, JR.,
CALIBRE OIL & GAS, INC., CALIBRE ENERGY, L.L.C.
AND
BENZ ENERGY LTD.
April 22, 1998
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
SECTION TITLE PAGE
- ------- ----- ----
<S> <C> <C>
RECITALS.........................................................2
1. INTERPRETATION...................................................3
2. SALE AND PURCHASE BETWEEN CALIBRE LLC AND THE PURCHASE...........7
5. REPRESENTATIONS AND WARRANTIES..................................10
6. COVENANTS.......................................................22
7. CLOSING.........................................................28
8. TERMINATION.....................................................31
9. GENERAL PROVISIONS..............................................32
10. COUNTERPARTS....................................................34
</TABLE>
<PAGE>
PURCHASE AND SALE AGREEMENT
PURCHASE AND SALE AGREEMENT dated for reference this 22nd day of
April, 1998.
AMONG:
SLATTERY TRUST, of P.O. Box 61268, Houston, Texas 77208-1268
("Slattery")
OF THE FIRST PART
AND: STARBUCKS TRUST, of P.O. Box 61268, Houston, Texas 77208-1268
("Starbucks")
OF THE SECOND PART
AND: TODD GRAB01S, of 8919 Ashridge Park, Spring, Texas 77379
("Grabois")
OF THE THIRD PART
AND: ROBERT NOVAK, of 6326 Willgus Trail, Lane, Texas 77066
("Novak")
OF THE FOURTH PART
AND: PRENTIS B. TOMLINSON. JR, of 1000 Louisiana, Suite 1500,
Houston, Texas 77002
("Tomlinson")
OF THE FIFTH PART
1
<PAGE>
AND: CALIBRE OIL & GAS, INC. of 1000 Louisiana, Suite 1500,
Houston, Texas 77002
("Calibre Inc.")
OF THE SIXTH PART
AND: CALIBRE ENERGY L.L.C. of 1000 Louisiana, Suite 1500,
Houston, Texas 77002
("Calibre LLC")
OF THE SEVENTH PART
AND: BENZ ENERGY LTD. of 1305 - 1090 West Georgia Street,
Vancouver, British Columbia, V6E 3V7
(the "Purchaser")
OF THE EIGHTH PART
WHEREAS:
A. Calibre LLC owns 1000 common shares in the capital of Calibre Inc.
(the "CI Shares"), being 100% of the issued and outstanding shares in the
capital of Calibre Inc.
B. Calibre Inc. owns the oil and gas interests and properties described
in the attached Schedule "A" (the "Calibre Properties") and has the
liabilities described in the attached Schedule "D" (the "Calibre
Liabilities");
C . Slattery, Starbucks, Grabois and Novak (the "Members") own, among
other assets, the oil and gas interests and properties described in Schedule
"B" hereof (the "Member Properties");
D. Tomlinson owns, among other assets, the oil and gas interests and
properties described in Schedule "C" hereof (the "Tomlinson Properties");
E. Calibre LLC, the Members, Tomlinson and the Purchaser entered into a
letter of understanding dated November 17, 1997 (the "Letter of
Understanding") which set forth the terms and conditions under which:
(1) the Purchaser agreed to purchase from Calibre LLC and Calibre
LLC agreed to sell to the Purchaser all of the CI Shares;
2
<PAGE>
(2) the Purchaser agreed to purchase from the Members and the
Members agreed to sell to the Purchaser the Member Properties;
and
(3) the Purchaser agreed to purchase from Tomlinson and Tomlinson
agreed to sell to the Purchaser the Tomlinson Properties.
E. In accordance with the terms of the Letter of Understanding, Calibre
LLC, the Members, Tomlinson and the Purchaser have prepared this Agreement as
the definitive agreement to supersede and replace the Letter of Understanding
concerning the transactions contemplated by the Letter of Understanding.
NOW THEREFORE THIS AGREEMENT WITNESSES that for and in consideration of the
sum of TEN ($10.00) DOLLARS now paid by the Purchaser to each of Calibre LLC,
the Members and Tomlinson and of the premises, covenants and agreements
herein set forth, the parties hereto covenant and agree each with the other
as follows:
1. INTERPRETATION
1.1 DEFINITIONS. For the purposes of this Agreement and the recitals and
any schedules hereto, unless the context otherwise requires, the following
words and phrases will have the meanings hereinafter ascribed to them:
(a) "AGREEMENT" means this Agreement including the recitals and
schedules hereto, as amended and supplemented;
(b) "APPROVALS" means any and all approvals, orders, consents,
filings, licences and permits required by any applicable law,
rule, regulation, order, decree or statute of any Governmental
Authority including all court, securities, regulatory,
shareholder and stock exchange approvals;
(c) "BUSINESS DAY" means any day on which commercial banking
institutions in Vancouver, British Columbia are open for the
transaction of business other than Saturday, Sunday or any day
which is a legal holiday in Vancouver, British Columbia;
(d) "CALIBRE INC." means Calibre Oil & Gas, Inc., a body corporate
subsisting under the laws of Texas;
(e) "CALIBRE FINANCIAL STATEMENTS" means the unaudited financial
statements of Calibre Inc. for the period ended March 31, 1998
attached hereto as Schedule "G";
(f) "CALIBRE LIABILITIES" means all of the liabilities of Calibre
Inc. which are described in Schedule "D" hereto;
3
<PAGE>
(g) "CALIBRE LLC" means Calibre Energy L.L.C., a limited liability
company subsisting under the laws of Texas;
(h) "CALIBRE PERMITTED ENCUMBRANCES" means any liens, encumbrances,
charges, claims or rights of third parties summarized in Schedule
"F" hereto;
(i) "CALIBRE PROPERTIES" means the oil and gas interests and
properties described in Schedule "A";
(j) "CI SHARES" means 1000 common shares in the capital of Calibre
Inc., being all of the issued and outstanding shares in the
capital of Calibre Inc.;
(k) "CLOSING" has the meaning set out in Section 7.1 hereof, and
"time of Closing" means the time that Closing occurs;
(l) "CLOSING DATE" means the date which is five days following the
date of receipt of all required Approvals, or such other date as
the parties may agree but no later than May 15,1998;
(m) "COMPANY ACT" means COMPANY ACT, R.S.B.C. 1979, c.59, as amended;
(n) "CONSTATING DOCUMENTS" means the Memorandum, the Articles, the
Articles of Incorporation, the Articles of Arrangement, the
Articles of Continuance or the Articles of Amalgamation pursuant
to which a corporation is incorporated, arranged, continued or
amalgamated, as the case may be, together with any amendments
thereto, the by-laws of such corporation, any special rights and
restrictions associated with any class of shares and any
shareholders' agreement which has been executed by such
corporation and which governs in whole or in part such
corporation's affairs;
(o) "EFFECTIVE TIME" means 7:00 a.m., local time of the location of
the Member Properties and the Tomlinson Properties on November
14, 1997 (the "Effective Time");
(p) "EXCHANGE" means the Vancouver Stock Exchange;
(q) "GOVERNMENTAL AUTHORITY" means any federal, provincial, state,
municipal, county parish, local or regional governmental or
quasi-governmental authority, domestic or foreign, and bureau,
board, administrative or other agency or regulatory body or
instrumentality thereof;
(r) "KNOWLEDGE" means the actual, conscious awareness of a party and
not any form of constructive, vicarious or imputed knowledge.
When used with reference to a corporation, "knowledge" means the
character of knowledge defined in the preceding
4
<PAGE>
sentence of any of such corporation's directors and executive
officers, and when used with respect to a trust means the same
character of knowledge of the trustees of the trust;
(s) "MEMBER PERMITTED ENCUMBRANCES" means any liens, encumbrances,
charges, claims or rights of third parties summarized in Schedule
"J" hereto;
(t) "MEMBER PROPERTIES" means the oil and gas interests and
properties described in Schedule "B" hereof;
(u) "NOTICE" means any citation, directive, order, claim, judgment,
letter or other communication, written or oral, actual or
threatened, from any Person;
(v) "PERSON" means and includes an individual, a partnership, a
corporation, a joint venture, a trust, an unincorporated
association or other entity or government or any agency or
political subdivision thereof;
(w) "PROPERTIES" means the Calibre LLC Properties, the Members
Properties and the Tomlinson Properties;
(x) "PURCHASER" means Benz Energy Ltd., a body corporate subsisting
under the laws of the Yukon;
(y) "PURCHASER FINANCIAL STATEMENTS" means the annual audited
financial statements of the Purchaser for the period ending
August 31, 1997 together with the unaudited financial statements
of the Purchaser for the period ending December 31, 1997 attached
hereto as Schedule "H";
(z) "PURCHASER'S LIABILITIES" means all of the liabilities of Benz
which are described in Schedule "H" hereto;
(aa) "PURCHASER'S SHARES" means 1,927,426 common shares without par
value in the capital of the Purchaser at a deemed price of $2.80
per share;
(bb) "SELLER" means individually or collectively as called for in the
context of the usage of the term Calibre LLC, the Members or
Tomlinson.
(cc) "TAXES" means all income, franchise, business, property, sales,
use, value added, withholding, excise, alternate minimum capital
and other taxes required to be reported upon or paid to any
domestic or foreign jurisdiction and all interest and penalties
thereon;
5
<PAGE>
(dd) "TEXSTAR" means Texstar Petroleum, Inc., a wholly owned
subsidiary corporation of the Purchaser, subsisting under the
laws of Texas;
(ee) "TEXSTAR PROMISSORY NOTES" means the promissory notes to be
issued by Texstar pursuant to subsections 3.2(a)(ii), (b)(ii),
(c)(ii) and 4.2(11) hereof;
(ff) "TOMLINSON PERMITTED ENCUMBRANCES" means any liens, encumbrances,
charges, claims or rights of third parties summarized in Schedule
"K" hereto;
(gg) "TOMLINSON PROPERTIES" means the oil and gas interests and
properties described in Schedule "C" hereof;
(hh) "U.S. GOVERNMENTAL AUTHORITY" means any federal, state, county,
parish, or local governmental or quasi-governmental authority of
or within the United States of America, and any bureau, board,
administrative or other agency or regulatory body or
instrumentality thereof; and
(ii) "U.S. LAWS" means laws and regulations of any U.S. Governmental
Authority.
1.2 SCHEDULES. The following Schedules are attached hereto and form a part
hereof:
<TABLE>
<CAPTION>
SCHEDULE SUBJECT
<S> <C>
"A" Calibre Properties
"B" Member Properties
"C" Tomlinson Properties
"D" Calibre Liabilities
"F" Calibre Permitted Encumbrances
"G" Calibre Financial Statements
"H" Purchaser Financial Statements
"J" Member Permitted Encumbrances
"K" Tomlinson Permitted Encumbrances
"N" Options, Warrants and Other Convertible Securities
</TABLE>
6
<PAGE>
2. SALE AND PURCHASE BETWEEN CALIBRE LLC AND THE PURCHASER
2.1 SALE AND PURCHASE OF CI SHARES. Upon and subject to the terms and
conditions set forth in this Agreement, Calibre LLC hereby agrees to sell,
assign and transfer to the Purchaser, and the Purchaser hereby agrees to
purchase from Calibre LLC, on the Closing Date, the CI Shares free and clear
of all liens, charges and encumbrances of any kind whatsoever. The sale and
purchase of the CI Shares shall occur on the Closing Date but shall be
effective as of the Effective Date.
2.2 PURCHASE PRICE FOR THE CI SHARES. The purchase price for the CI Shares
shall be CDN$5,396,793 (US$3,820,713) (the "CI Purchase Price"), payable by
the issuance by the Purchaser to Calibre LLC of the Purchaser's Shares. The
sale and purchase of the CI Shares shall occur on the Closing Date but shall
be effective as of the Effective Date.
2.3 RESALE RESTRICTIONS. Calibre LLC hereby acknowledges and accepts that
the Purchaser's Shares to be issued under the terms of this Agreement may be
subject to certain resale restrictions imposed under such applicable
securities; laws and the rules of regulatory bodies having jurisdiction and
Calibre LLC agrees to comply with such requirements and restrictions.
3. SALE AND PURCHASE BETWEEN THE MEMBERS AND THE PURCHASER
3.1 SALE AND PURCHASE OF THE MEMBER PROPERTIES. Upon and subject to the
terms and conditions set forth in this Agreement, the Members hereby agree to
sell, assign and transfer to the Purchaser, and the Purchaser hereby agrees
to purchase from the Members, the Member Properties. The sale and purchase of
the Member Properties shall occur on the Closing Date but shall be effective
as of the Effective Date.
3.2 PURCHASE PRICE FOR THE MEMBER PROPERTIES. The purchase price for the
Member Properties shall be US$339,150 (CDN$478,201), subject to the
adjustments provided for herein (the "MP Purchase Price") payable by the
issuance and delivery to:
(a) Starbucks of (1) a certified check, bank draft or wire transfer
in the amount of US$26,100 (CDN$36,866); and (ii) a promissory
note issued by Texstar Petroleum, Inc. ("Texstar") to Starbucks
in the original principal amount of US$200,000 (CDN$282,501);
(b) Grabois of: (i) a certified check, bank draft or wire transfer
in the amount of US$9,135 (CDN$12,903); and (ii) a promissory
note issued by Texstar to Grabois in the original principal
amount of US$70,000 (CDN$98,875); and
(c) Novak of: (i) a certified check, bank draft or wire transfer in
the amount of US$3,915 (CDN$5,529); and (ii) a promissory note
issued by Texstar to Grabois in the original principal amount of
US$30,000 (CDN$42,375).
7
<PAGE>
All amounts to be delivered under subsections 3.2(a)(i), (b)(i) and (c)(ii) are
to be delivered in cash in escrow pursuant to section 7.6 hereof, on the date of
execution of this Agreement. The Texstar Promissory Note to be delivered under
subsections 3.2(a)(ii), (b)(ii) and (c)(ii) are to be delivered at Closing. Each
of the Texstar Promissory Notes issued under subsections 3.2(a)(ii), (b)(ii) and
(c)(ii) shall: (i) bear interest at the per annum rate of 10%, (ii) be payable
in two installments, with 50% of the original principal amount being due on
April 1, 1998, and the remaining principal balance being due September 1, 1998,
and (iii) be guaranteed by the Purchaser.
3.3 ALLOCATION. The MP Purchase Price shall be allocated to the Member
Properties in accordance with the schedule set forth in Exhibit C of Schedule
"B". Each of the Members and the Purchaser covenant and agree that the values
allocated to various portions of the Member Properties which are set forth on
Exhibit C to Schedule "B", shall be binding on the Members.
3.4 OWNERSHIP PRIOR TO EFFECTIVE TIME. Except as set forth in section 3.6, the
Members shall be entitled to all of the rights and incidents of ownership
generated from or attributable to the Member Properties prior to the Effective
Time, including the right to all Oil and Gas (as defined in Schedule "B")
produced from or attributable to the Member Properties prior to the Effective
Time. The Members shall bear and be responsible for the duties, liabilities,
costs, expenses and obligations of ownership attributable to the Member
Properties prior to the Effective Time, except as may be otherwise provided
herein.
3.5 OWNERSHIP AFTER EFFECTIVE TIME. Except as set forth in section 3.6, the
Purchaser shall be entitled to all of the rights and incidents of ownership
generated from or attributable to the Member Properties after the Effective
Time, including the right to all Oil and Gas thereafter produced from or
attributable to the Member Properties after the Effective Time. The Purchaser
shall assume, bear and be responsible for the duties, liabilities, costs,
expenses and obligations of ownership attributable to the Member Properties from
and after the Effective Time, including but not limited to compliance with
applicable environmental laws and plugging and abandonment of all MP Wells (as
defined in Schedule "B") in accordance with applicable laws and regulations,
except as may be otherwise provided herein.
3.6 For purposes of calculating the adjustments to the Purchase Price, the
Members shall be credited with proceeds of production attributable to the Member
Properties through January 3 1, 1998 and shall be debited with costs and
expenses (except for capital costs) of operating the Member Properties through
January 31, 1998.
4. SALE AND PURCHASE BETWEEN TOMLINSON AND THE PURCHASER
4.1 SALE AND PURCHASE OF THE TOMLINSON PROPERTIES. Upon and subject to the
terms and conditions set forth in this Agreement, Tomlinson hereby agrees to
sell, assign and transfer to the Purchaser, and the Purchaser hereby agrees to
purchase from Tomlinson, on the Closing Date, the Tomlinson Properties.
8
<PAGE>
4.2 PURCHASE PRICE FOR THE TOMLINSON PROPERTIES. The purchase price for the
Tomlinson Properties shall be US$1,921,850 (CDN$2,714,630), subject to the
adjustments provided for herein (the "TP Purchase Price"), payable by the
issuance and delivery to Tomlinson of: (i) a certified check, bank draft or wire
transfer in the amount of US$221,850 (CDN$313,365); and (ii) a promissory note
issued by Texstar to Tomlinson in the original principal amount of US$1,700,000
(CDN$2,401,265). The amount to be delivered under this sections 4.2(i) is to be
delivered in escrow pursuant to section 7.6 hereof, on the date of execution of
this Agreement. The Texstar Promissory Notes to be delivered under this section
4.2(ii) is to be delivered at Closing. The promissory notes issued under section
4.2(ii), shall: (i) bear interest at the per annum rate of 10%, (ii) be payable
in two installments, with 50% of the original principal amount being due on
April 1, 1998, and the remaining principal balance being due September 1, 1998,
and (iii) be guaranteed by the Purchaser.
4.3 ALLOCATION. The TP Purchase Price shall be allocated to the Tomlinson
Properties in accordance with the schedule set forth in Exhibit C of Schedule
"C". Each of Tomlinson and the Purchaser covenant and agree that the values
allocated to various portions of the Tomlinson Properties which are set forth on
Exhibit C to Schedule "C" shall be binding on Tomlinson.
4.4 OWNERSHIP PRIOR TO EFFECTIVE TIME. Except as set forth in section 4.6,
Tomlinson shall be entitled to all of the rights and incidents of ownership
generated from or attributable to the Tomlinson Properties prior to the Closing
Date, including the right to all Oil and Gas (as defined in Schedule "C")
produced from or attributable to the Tomlinson Properties prior to the Closing
Date. Tomlinson shall bear and be responsible for the duties, liabilities,
costs, expenses and obligations of ownership attributable to the Tomlinson
Properties prior to the Effective Time, except as may be otherwise provided
herein.
4.5 OWNERSHIP AFTER EFFECTIVE TIME. Except as set forth in section 4.6, the
Purchaser shall be entitled to all of the rights and incidents of ownership
generated from or attributable to the Tomlinson Properties after the Closing
Date, including the right to all Oil and Gas thereafter produced from or
attributable to the Tomlinson Properties after the Closing Date. The Purchaser
shall assume, bear and be responsible for the duties, liabilities, costs,
expenses and obligations of ownership attributable to the Tomlinson Properties
from and after the Closing Date, including but not limited to compliance with
applicable environmental laws and plugging and abandonment of all Wells in
accordance with applicable laws and regulations, except as may be otherwise
provided herein.
4.6 For purposes of calculating the Purchase Price, Tomlinson shall be
credited with proceeds of production attributable to the Tomlinson Properties
through January 31, 1998 and shall be debited with costs and expenses (except
for capital costs) of operating the Tomlinson Properties through January 31,
1998.
9
<PAGE>
5. REPRESENTATIONS AND WARRANTIES
5.1 GENERAL REPRESENTATIONS AND WARRANTIES OF CALIBRE LLC, THE MEMBERS
AND TOMLINSON. Each of Calibre LLC, the Members and Tomlinson severally (and
not jointly and severally) represents and warrants to the Purchaser, as
representations and warranties that are true at the date hereof or as of
Closing, and acknowledges that the Purchaser is relying on each of the
following representations and warranties in entering into this Agreement that:
(a) CAPACITY - it has all requisite power and capacity to execute and
deliver this Agreement, to carry out the transactions to which it
is a party and to duly observe and perform all of its covenants
set out herein;
(b) AUTHORITY - the execution and delivery of this Agreement has been
duly and validly authorized by all necessary action on its part
and this Agreement constitutes a legal, valid and binding
obligation of it enforceable against it in accordance with its
terms subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other similar laws of general applicability
relating to or affecting creditors' rights and to the
availability of equitable remedies;
(c) ARPROVALS AND FILINGS - to its Knowledge, no exemption or
Approval of any court or Governmental Authority or any third
party is required to be obtained by it with respect to the
execution and delivery of this Agreement by it or the
consummation by it of the transactions contemplated hereby,
except applicable securities legislation, Exchange approval and
shareholder approval of Calibre LLC;
(d) NO DEFAULT/APPROVALS - provided that it has completed all the
necessary filings in subsection 5.1(c), neither the execution
and delivery of this Agreement nor the due observance and
performance by it of its obligations contemplated herein shall:
(i) result in a breach or violation by the it of any of the
terms, conditions or provisions of any law, judgment,
order, injunction, decree or ruling to which it is subject;
or
(ii) except for rights held by EnCap Energy Capital Fund III,
L.P. ("EnCap") and Bank One, Texas N.A. ("Bank One")
pursuant to existing credit facilities, give any other
Person any right of termination, cancellation, acceleration
in respect of, or constitute a material breach of or
material default under, any material agreement, instrument
or commitment to which it is a party or by which the
Calibre Properties, the Member Properties or the Tomlinson
Properties, as the case may be, are bound or affected which
termination, cancellation, acceleration or breach, if any,
would likely materially and adversely affect Calibre Inc.
or any portion of the
10
<PAGE>
Calibre Properties, the Member Properties or the Tomlinson
Properties, as the case may be.
5.2 SPECIFIC REPRESENTATIONS AND WARRANTIES OF CALIBRE LLC. Calibre LLC
represents and warrants to the Purchaser, as representations and warranties that
are true at the date hereof or as of Closing, and acknowledges that the
Purchaser is relying on each of the following representations and warranties in
entering into this Agreement that:
(a) CALIBRE PROPERTIES--
(i) the Calibre Properties are fully and accurately described
in Schedule "A" hereto except for Bank One and EnCap
liens and encumbrances described in Exhibit A to Schedule
"D";
(ii) to the best of Calibre LLC's Knowledge, Calibre Inc. is
the owner (both beneficially and of record insofar as
such Calibre Properties are required to be recorded in
public real property records) of the Calibre Properties
described in Schedule "A", free of any liens, charges,
claims, encumbrances, with the exception of Calibre
Permitted Encumbrances which in the aggregate would not
materially and adversely affect the value or future
operation of the Calibre Properties;
(iii) to the best of Calibre LLC's Knowledge, no third party
has any options to purchase, or any preferential rights
to acquire or develop any of the Calibre Properties and
except as may constitute a Calibre Permitted Encumbrance;
(iv) except for Bank One and EnCap liens and encumbrances, the
Calibre Properties have been validly transferred by
Calibre LLC to Calibre Inc. and are free and clear of all
liens, charges and encumbrances except the Calibre
Permitted Encumbrances and no interest in all or any of
the Calibre Properties have been transferred or otherwise
disposed of by Calibre Inc.;
(v) all applicable requirements and procedures established by
applicable U.S. Laws with regard to the grant or
acquisition of the Calibre Properties have been fulfilled
except for such matters of non-compliance, if any, as
would not affect materially and adversely Calibre Inc. or
any portion of the Calibre Properties;
(vi) neither Calibre LLC nor Calibre Inc. is in breach or
default of any laws or agreement under which Calibre Inc.
has acquired the Calibre Properties except for such
breaches or defaults, if any, as would not affect
materially and adversely Calibre Inc. or any portion of
the Calibre Properties;
11
<PAGE>
(vii) Calibre LLC and Calibre Inc. are in material compliance
with all permits, licenses, contracts and agreements
relating to the Calibre Properties. Calibre LLC and
Calibre Inc. are in material compliance with all laws,
rules, regulations and orders of federal, state or local
entities which have jurisdiction over Calibre LLC,
Calibre Inc. or the Calibre Properties, except for
noncompliance with such laws, rules and regulations
which, individually or in the aggregate, do not and will
not affect materially and adversely Calibre Inc. or any
portion of the Calibre Properties; and
(viii) to the best of Calibre LLC's Knowledge, there is no suit,
action, claim, investigation or inquiry pending or
threatened arising out of or with respect to the
ownership, operation or environmental condition of the
Calibre Properties.
(b) STATUS AND CAPACITY OF CALIBRE INC,-- Calibre Inc. is a
corporation duly incorporated and validly in existence in
accordance with the laws of the State of Texas, and Calibre Inc.:
(i) is in good standing and up-to-date with all its corporate
filings required under the laws of its incorporating
jurisdiction;
(ii) has the corporate power and capacity to carry on the
business now carried on by it and to own, lease or
acquire the assets or interests in assets now owned or
leased by it including the Calibre Properties;
(iii) is duly qualified to carry on business in each
jurisdiction in which the conduct of its business or the
ownership or leasing of its properties and assets makes
such qualification necessary except in jurisdictions
where the failure to be so qualified would not likely
affect materially and adversely Calibre Inc. or any
portion of the Calibre Properties;
(iv) is not in default of any requirement under any applicable
U.S. Laws or other laws to which it is subject except for
such defaults, if any, as would not likely affect
materially and adversely Calibre Inc. or any portion of
the Calibre Properties; and
(v) has no subsidiaries and has no participation in any
company, limited partnership or sole proprietorship;
12
<PAGE>
(c) ORGANIZATION OF CALIBRE INC.--
(i) Calibre Inc. has an authorized capital of 1000 shares
with a par value of US$.01 per share of which 1000 shares
are issued and outstanding;
(ii) all of the CI Shares are legally and beneficially owned by
Calibre LLC;
(iii) the CI Shares are all validly issued and outstanding as
fully paid and nonassessable shares and are free and
clear of all liens, charges and encumbrances and are
shares with a right to vote;
(iv) no Person has any right, present or future, contingent or
absolute, to require Calibre Inc. to issue any share in
its capital and, in particular, there are no outstanding
securities of Calibre Inc. which are convertible into
shares in the capital of Calibre Inc. and there are no
outstanding options on or rights to subscribe for any of
the unissued shares in the capital of Calibre Inc., or
any agreements, options or understandings capable of
becoming options or agreements to purchase the CI Shares;
(v) effective upon the Closing Date no Person other than
Calibre LLC or its nominee will have any right of any
Kind or nature to vote the CI Shares or to appoint the
officers or directors of Calibre Inc.; and
(vi) on the Closing Date, the CI Shares shall be validly
issued and fully paid, and shall be shares with the right
to vote. On the Closing Date, Calibre LLC shall have the
complete and absolute right to sell, to transfer and to
cede legal and beneficial title to the Cl Shares, without
the existence of preferential rights or acquisition
options created by the Constating Documents or other
agreements of Calibre Inc. and Calibre Inc. has no debt
other than as described in Schedule "D" and will not
have any indebtedness for borrowed money, whether
principal or interest other than as described in Exhibit
A to Schedule "D";
(d) FINANCIAL STATUS OF CALIBRE INC.--
(i) the Calibre Financial Statements and all the financial
records of Calibre Inc. are true, correct and complete in
all material respects, have been prepared in accordance
with generally accepted accounting principles in the
United States applied on a consistent basis throughout
the periods involved, fairly represent the financial
condition of Calibre Inc. as of the dates set forth in
the balance sheets included therein and the results of
operation of Calibre Inc. for the respective periods
covered thereby;
13
<PAGE>
(ii) there are no outstanding debts between Calibre Inc. and
Calibre LLC or between Calibre Inc. and the officers or
directors of Calibre Inc. or the officers and directors
of Calibre LLC or the relatives or associates of the
aforementioned persons and no direct or indirect
contractual connection is in existence between them,
including absolute or contingent liabilities, save and
except as may arise in the ordinary course of business
out of employment relationships between Calibre Inc. and
such persons and except as described in Schedule "D";
(iii) there are no material liabilities of Calibre Inc. that
are not disclosed in the most recent balance sheet
included in the Calibre Financial Statements except those
incurred in the ordinary course of business since the
date of the Calibre Financial Statements and except as
described in Schedule "D";
(iv) since the date of the Calibre Financial Statements, there
has been no:
A. material change in the financial condition of Calibre
Inc. or its assets, liabilities or business;
B. indebtedness for borrowed money incurred by Calibre
Inc. that is not reflected in the Calibre Financial
Statements or on Schedule "D" hereto;
C. termination, revision or significant renegotiation of
any material contract with third parties; or
D. event or condition that may have influenced in an
adverse and significant manner the financial
condition or business of Calibre Inc., individually
or collectively, with the exception of all the events
derived from the execution of this Agreement;
(e) ACQUISITION OF THE PURCHASER'S SHARES--
(i) it has such Knowledge and experience in financial and
business matters as to be capable of evaluating the
merits and risks of an investment in the Purchaser's
Shares and it is able to bear the economic risk of loss
of its entire investment;
(ii) it has had access to such additional information, if any,
concerning the Purchaser as it has considered
necessary in connection with an investment in the
Purchaser's Shares;
14
<PAGE>
(iii) it is acquiring the Purchaser's Shares for its own account,
for investment purposes only and not with a view to any
resale, distribution or other disposition of the
Purchaser's Shares in violation of the United States or
other applicable securities laws;
(iv) it understands that the Purchaser's Shares have not been
and will not be registered under the United States
Securities Act of 1933, as amended (the "Securities Act")
or the securities laws of any state of the United States
and that the sale contemplated hereby is being made in
reliance of an exemption from such registration
requirements;
(v) it acknowledges that it has dealt directly with the
Purchaser rather than through the facilities of a security
exchange, investment bankers, or by any other means of
public distribution; and
(vi) it acknowledges that it has a significant amount of prior
business experience in the oil and gas industry in which
the Purchaser will operate.
(f) RESALE OF THE PURCHASER'S SHARES -
(i) it agrees that if it decides to offer, sell or otherwise
transfer any of the Purchaser's Shares, it will not offer,
sell or otherwise transfer any of such Shares directly or
indirectly, unless:
A. the sale is to the Purchaser;
B. the sale is made outside the United States in a
transaction meeting the requirements of Rule 904 of
Regulation S under the Securities Act and in compliance
with applicable local laws and regulations;
C. the sale is made pursuant to an exemption from the
registration requirements under applicable securities
laws including, without limiting the generality of the
forgoing, the Securities Act provided by Rules 144 and
145 thereunder and in accordance with any applicable
state securities or "Blue Sky" laws; or
D. the Purchaser's Shares are sold in a transaction that
does not require an exemption from applicable
securities laws or registration under the Securities
Act or any applicable state or laws and regulations
governing the offer and sale of securities, and it has
prior to such sale furnished to the Purchaser an
opinion of counsel reasonably satisfactory to the
Purchaser;
15
<PAGE>
(g) LEGENDING OF CERTIFICATES - it acknowledges that the certificates
representing the Purchaser's Shares will bear a legend in
accordance with applicable securities laws, including a legend
stating that such shares have not been registered under the
Securities Act or the securities laws of any state of the United
States and may not be offered for sale or sold unless registered
under the Securities Act and the securities laws of all
applicable states of the United States or an exemption from such
registration requirements is available; and
(h) CONSENT TO NOTATION - it consents to the Purchaser making a
notation on its records of giving instructions to any transfer
agent of the Purchaser in order to implement the restrictions on
transfer set forth and described herein.
5.3 SPECIFIC REPRESENTATIONS AND WARRANTIES OF CALIBRE LLC AND THE MEMBERS
CONCERNING MEMBERS PROPERTIES. Each of Calibre LLC and each of the Members
represents and warrants to the Purchaser, as representations and warranties
that are true at the date hereof or as of Closing, and acknowledges that the
Purchaser is relying on each of the following representations and warranties
in entering into this Agreement that:
(a) MEMBER PROPERTIES -
(i) the Member Properties are fully and accurately described in
Schedule "B" hereto;
(ii) to the best of Calibre LLC's and the Members Knowledge, the
Members are the owners (both beneficially and of record
insofar as such Member Properties are required to be
recorded in public real property records) of the Member
Properties described in Schedule "B" free of any liens,
charges, claims, encumbrances, with the exception of the
Member Permitted Encumbrances, which in the aggregate
would materially and adversely affect the value or future
operation of the Member Properties;
(iii) no third party has any options to purchase, or any
preferential rights to acquire or develop any of the Member
Properties for which notices have not been sent to such
third parties, and except as may constitute a Member
Permitted Encumbrance;
(iv) the Member Properties have been validly transferred by
Calibre LLC to the Members and are free and clear of all
liens, charges and encumbrances except the Member Permitted
Encumbrances and no interest in all or any of the Member
Properties have been transferred or otherwise disposed of
by the Members;
16
<PAGE>
(v) all applicable requirements and procedures established by
applicable U.S. Laws with regard to the grant or
acquisition of the Member Properties have been fulfilled
except for such matters of non-compliance, if any, as would
not likely affect materially and adversely any portion of
the Member Properties;
(vi) none of the Members nor Calibre LLC is in breach or default
of any laws or agreement under which it has acquired the
Member Properties except for such breaches or defaults, if
any, as would not likely affect materially and adversely
any portion of the Member Properties;
(vii) the Members and Calibre LLC are in material compliance with
all permits, licenses, contracts and agreements relating to
Member Properties. The Members and Calibre LLC are in
material compliance with all laws, rules, regulations and
orders of federal, state or local entities which have
jurisdiction over the Members, Calibre LLC or the Member
Properties, except for noncompliance with such laws, rules
and regulations which, individually or in the aggregate, do
not and will not affect materially and adversely any
portion of the Member Properties; and
(viii) to the best of Calibre LLC's and the Members Knowledge,
there is no suit, action, claim, investigation or inquiry
pending or threatened arising out of or with respect to the
ownership, operation or environmental condition of any of
the Member Properties.
5.4 SPECIFIC REPRESENTATIONS AND WARRANTIES OF CALIBRE LLC AND TOMLINSON
CONCERNING TOMLINSON PROPERTIES. Each of Calibre LLC and Tomlinson represents
and warrants to the Purchaser, as representations and warranties that are true
at the date hereof or as of Closing, and acknowledges that the Purchaser is
relying on each of the following representations and warranties in entering into
this Agreement that:
(a) TOMLINSON PROPERTIES - each of Calibre LLC and Tomlinson
represents and warrants, in respect of the Tomlinson Properties
that:
(i) the Tomlinson Properties are fully and accurately described
in Schedule "C" hereto;
(ii) to the best of Calibre LLC's and Tomlinson's Knowledge,
Tomlinson is the owner (both beneficially and of record
insofar as such Tomlinson Properties are required to be
recorded in public real property records) of the Tomlinson
Properties described in Schedule "C" free of any liens,
charges, claims, encumbrances, with the exception of the
Tomlinson Permitted Encumbrances which in the aggregate
would materially and adversely affect the value or future
operations of the Tomlinson Properties;
17
<PAGE>
(iii) no third party has any options to purchase, or any
preferential rights to acquire or develop any of the
Tomlinson Properties for which notices have not been sent
to such third parties, and except as may constitute a
Tomlinson Permitted Encumbrance;
(iv) the Tomlinson Properties have been validly transferred by
Calibre LLC to Tomlinson and are free and clear of all
liens, charges and encumbrances except the Tomlinson
Permitted Encumbrances and no interest in all or any of the
Tomlinson Properties have been transferred or otherwise
disposed of by Tomlinson;
(v) all applicable requirements and procedures established by
applicable U.S. Laws with regard to the grant or
acquisition of the Tomlinson Properties have been fulfilled
except for such matters of non-compliance, if any, as would
not likely affect materially and adversely any portion of
the Tomlinson Properties;
(vi) neither Tomlinson nor Calibre LLC is in breach or default
of any laws or agreement under which it has acquired the
Tomlinson Properties except for such breaches or defaults,
if any, as would not likely affect materially and adversely
any portion of the Tomlinson Properties;
(vii) Tomlinson and Calibre LLC are in material compliance with
all permits, licenses, contracts and agreements relating to
the Tomlinson Properties. Tomlinson and Calibre LLC are in
material compliance with all laws, rules, regulations and
orders of federal, state or local entities which have
jurisdiction over Tomlinson, Calibre LLC or the Tomlinson
Properties, except for noncompliance with such laws, rules
and regulations which, individually or in the aggregate, do
not and will not affect materially and adversely any
portion of any of the Tomlinson Properties; and
(viii) to the best of Calibre LLC's and Tomlinson's Knowledge,
there is no suit, action, claim, investigation or inquiry
pending or threatened against Calibre LLC or Calibre Inc.
or arising out of or with respect to the ownership,
operation or environmental condition of the Tomlinson
Properties.
5.5 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents
and warrants to Calibre LLC, the Members and Tomlinson, as representations and
warranties that are true at the date hereof, and acknowledges that Calibre LLC,
the Members and Tomlinson are relying on each of the following representations
and warranties in entering this Agreement that:
18
<PAGE>
(a) CAPACITY - the Purchaser has all requisite corporate power and
capacity to execute and deliver this Agreement, to carry out the
transactions to which it is a party and to duly observe and
perform all its covenants set out herein;
(b) AUTHORITY - the execution and delivery of this Agreement have
been duly and validly authorized by all necessary action on the
part of the Purchaser and this Agreement constitutes a legal,
valid and binding obligation of the Purchaser enforceable
against it in accordance with its terms subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other
similar laws of general applicability relating to or affecting
creditors' rights and to the availability of equitable remedies;
(c) APPROVALS AND FILINGS - no exemption or Approval of any court or
Governmental Authority or any third party is required to be
obtained by the Purchaser with respect to the execution and
delivery of this Agreement by the Purchaser or the consummation
by the Purchaser of the transactions contemplated hereby,
except, to the Purchaser's Knowledge, as follows:
(i) acceptance for filing by the Exchange of final
documentation with respect to the transactions
contemplated hereby;
(ii) the Purchaser filing a report on Form 20 with the British
Columbia Securities Commission pursuant to the
provisions of applicable securities legislation; and
(iii) the Purchaser filing a press release and a report on
Form 27 with the British Columbia Securities Commission
pursuant to the provisions of applicable securities
legislation;
(d) NO DEFAULT/APPROVALS - provided that the Purchaser has obtained
the Approvals in subsection 5.5(c), neither the execution and
delivery of this Agreement nor the due observance and
performance by the Purchaser of its obligations contemplated
herein shall:
(i) result in a breach or violation by the Purchaser of any
of the terms, conditions or provisions of any law,
Judgment, order, injunction, decree, ruling to which the
Purchaser is subject; or
(ii) give any other Person any right of termination,
cancellation, acceleration in respect of, or constitute
a material breach of or material default under, any
material agreement, instrument or commitment to which
the Purchaser is a party or by which its properties or
assets are bound or affected which termination,
cancellation, acceleration or breach, if any, would
likely affect materially and adversely the Purchaser or
its properties or assets;
19
<PAGE>
(e) STATUS AND CAPACITY - the Purchaser is a corporation duly
organized, validly existing and is in good standing in the
jurisdiction of its incorporation,
(i) is in good standing and up-to-date with all its corporate
filings required under the laws of its incorporating
jurisdiction;
(ii) has the corporate power and capacity to carry on the
business now carried on by it and to own, lease or
acquire the assets or interests in assets now owned or
leased by it;
(iii) is duly qualified to carry on business in each
jurisdiction in which the conduct of its business or the
ownership or leasing of its properties and assets makes
such qualification necessary except in jurisdictions
where the failure to be so qualified would not likely
affect materially and adversely the Purchaser or its
properties or assets;
(iv) is not in default of any requirement under any
applicable laws to which it is subject except for such
defaults, if any, as would not likely affect materially
and adversely the Purchaser or its properties or assets;
(v) is in material compliance with all permits, licenses,
contracts and agreements relating to its properties. The
Purchaser is in material compliance with all laws,
rules, regulations and orders of federal, state or local
entities which have jurisdiction over the Purchaser or
its properties, including but not limited to all
environmental regulations and laws, except for
noncompliance with such laws, rules and regulations
which, individually or in the aggregate, do not and will
not affect materially and adversely any portion of its
properties;
(f) ORGANIZATION OF THE PURCHASER -
(i) the authorized capital of the Purchaser consist of an
unlimited number of common shares, of which 32,508,357
are validly issued and outstanding as fully paid and
non-assessable shares as at the date of this Agreement;
(ii) on the Closing Date, the Purchaser's Shares, after
issuance, will be validly issued as fully paid and
non-assessable shares free and clear of all liens
charges and encumbrances, and shall be shares with the
right to vote;
(iii) no Person has any right, present or future, contingent
or absolute, to require the Purchaser to issue any share
in its capital and, in particular, there are no
outstanding securities of the Purchaser which are
convertible into shares in the capital of the Purchaser
and there are no outstanding options on or rights
20
<PAGE>
to subscribe for any of the unissued shares in the
capital of the Purchaser except as otherwise described
in Schedule "N" hereto (which shall be as of March 31,
1998); and
(iv) effective upon the Closing Date no Person other than
Calibre LLC or its nominees will have any right of any
kind or nature to vote the Purchaser's Shares;
(g) FINANCIAL STATUS OF THE PURCHASER -
(i) the Purchaser's Financial Statements and all the
financial records of the Purchaser are true, correct and
complete in all material respects, have been prepared in
accordance with generally accepted accounting principles
in Canada applied on a consistent basis throughout the
periods involved, fairly represent the financial
condition of the Purchaser as of the dates set forth in
the balance sheets included therein and the results of
operation of the Purchaser for the respective periods
covered thereby;
(ii) there are no outstanding debts between the Purchaser and
the officers or directors of the Purchaser or the
relatives or associates of the aforementioned persons
and no direct or indirect contractual connection is in
existence between them, including absolute or contingent
liabilities, save and except as may arise in the ordinary
course of business out of employment relationships
between the Purchaser and such persons or except as
described in Schedule "N";
(iii) since the date of the Purchaser's Financial Statements,
there has been no:
A. material change in the financial condition of the
Purchaser or its assets, liabilities or business;
B. indebtedness for borrowed money incurred by the
Purchaser that is not reflected in the Purchaser's
Financial Statements or on Schedule "H" hereto;
C. termination, revision or significant renegotiation
of any material contract with third parties; or
D. event or condition that may have influenced in an
adverse and significant manner the financial
condition or business of the Purchaser,
individually or collectively, with the exception
of all the events derived from the execution of
this Agreement; and
21
<PAGE>
(h) LITIGATION. To the best of the Purchaser's knowledge, there is
no suit, action, claim, investigation or inquiry pending or
threatened against the Purchaser or arising out of or with
respect to the ownership, operation or environmental condition
of its properties.
5.6 RELIANCE. Prior to executing this Agreement, Purchaser has been
afforded an opportunity to examine the Properties and such materials as it
has requested to be provided to it by Calibre LLC, the Members and Tomlinson,
to discuss with representatives of Calibre LLC, the Members and Tomlinson
such materials and the nature and operation of the Properties and to
investigate the condition, including the subsurface condition, of the
Properties and the condition of the personal property. In entering into this
Agreement, Purchaser has relied solely on the express representations and
covenants of Calibre LLC, the Members and Tomlinson in this Agreement, its
independent investigation of, and judgment with respect to, the personal
property and the Properties and the advice of its own legal, tax, economic,
environmental, engineering, geological and geophysical advisors and not on
any written or oral comments or statements of any representatives of, or
consultants or advisors engaged directly or indirectly by, Calibre LLC, the
Members and Tomlinson or any advisor to Calibre LLC, the Members and
Tomlinson.
5.7 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties and covenants made by any party to this Agreement
herein or pursuant hereto, including any statements contained in any
certificate or other instrument delivered by or on behalf of any party
pursuant to this Agreement, and shall not survive the completion of the
transactions contemplated hereunder.
6. COVENANTS
6.1 GENERAL COVENANTS OF CALIBRE LLC, THE MEMBERS AND TOMLINSON. Each of
Calibre LLC, each Member and Tomlinson severally covenants and agrees with
the Purchaser as follows:
(a) to provide all necessary information regarding itself, Calibre
Inc., the Calibre Properties, the Member Properties or the
Tomlinson Properties, as the case may be, to the Exchange as may
be required to obtain the approval of the Exchange for the
transactions contemplated herein;
(b) until the Closing Date, none of Calibre LLC, Calibre Inc., the
Members or Tomlinson, will perform any act or enter into any
transaction or negotiation which interferes or is inconsistent
with the completion of the transactions contemplated herein or
would render inaccurate in any material way any of the
representations and warranties set forth in sections 5.1
through 5.4, as the case may be, as if such representations and
warranties were made at a date subsequent to such act,
transaction or negotiation unless such transaction or
negotiation is entered into with the consent of the Purchaser;
22
<PAGE>
(c) until the Closing Date, to promptly discuss with the Purchaser
any significant developments in or with respect to Calibre LLC,
Calibre Inc., the Calibre Properties the Member Properties or
the Tomlinson Properties, and to provide to the Purchaser all
such information about Calibre LLC, Calibre Inc., the Calibre
Properties, the Member Properties and the Tomlinson Properties,
as the case may be, as the Purchaser may reasonably request on a
timely and regular basis, and to afford, or cause to be
afforded, to the Purchaser and to their accountants, counsel,
financial advisors and other representatives, full access during
normal business hours to Calibre LLC's and Calibre Inc.'s
management, properties, books, contracts, commitments and
records in its possession or to which it has access and to allow
the Purchaser and such representatives to perform a diligent and
complete examination of Calibre LLC, Calibre Inc., the Calibre
Properties, the Member Properties and the Tomlinson Properties
during such period, to furnish at the request of the Purchaser
a copy of all filings with any regulatory - authority, and all
other information concerning Calibre LLC, Calibre Inc., the
Calibre Properties, the Member Properties and the Tomlinson
Properties as the Purchaser may reasonably request;
(d) forthwith after execution and delivery of this Agreement, to
take such steps and proceedings in good faith as may be
reasonably required to obtain all consents, Approvals, waivers
(including preferential rights) and agreements of all other
parties and Governmental Authorities which are required for the
Purchaser to complete the transactions contemplated herein;
(e) each of Calibre LLC, the Members and Tomlinson, as the case may
be, will in good faith make reasonable efforts to cause all the
conditions precedent on its part to be performed, as set out in
sections 7.3 and 7.4, to be complied with on or before the
Closing Date;
(f) as soon as reasonably possible after any of Calibre LLC, the
Members or Tomlinson, as the case may be, has determined that a
state of facts exists which results in or will result in the
non-fulfilment of any of the material conditions precedent set
forth in sections 7.3 or 7.4, Calibre LLC, the Members and/or
Tomlinson, as the case may be, will notify the Purchaser of such
state of facts; and
(g) provided the conditions set forth in sections 7.3 and 7.4 have
been satisfied or waived by the Closing Date, Calibre LLC, the
Members and Tomlinson will execute and deliver all such
documents and certificates required to carry out the
transactions contemplated herein to which it is a party.
23
<PAGE>
6.2 ADDITIONAL COVENANTS OF CALIBRE LLC CONCERNING MAINTENANCE OF THE
CALIBRE PROPERTIES. From the date of this Agreement until Closing, Calibre
LLC agrees and covenants to cause Calibre Inc. to:
(a) administer and operate the Calibre Properties in good and
workmanlike manner, and conduct its business and operations in a
prudent manner, and in substantially the same manner as prior to
the date of this Agreement;
(b) not introduce any new methods of management, operation or
accounting with respect to any of the Calibre Properties;
(c) maintain and keep the Calibre Properties in good condition and
working order; preserve the Calibre Properties in full force and
effect; and fulfil all contractual or other covenants,
obligations and conditions imposed upon Calibre Inc. with
respect to the Calibre Properties, including, but not limited,
to payment of royalties, delay rentals, shut-in gas royalties
and any and all other required payments;
(d) operate or cause to be operated the CI Wells (as defined in
Schedule "A") in accordance with generally accepted oil field
practices and standards;
(e) not enter into agreements to drill new wells or to rework, plug
back, deepen, plug or abandon any existing well or wells on the
CI Leases (as defined in Schedule "A"), nor commence any
drilling, reworking or completing or other operations or make or
authorize any expenditures (except for emergency operations and
operations required under presently existing contractual
obligations) without giving notice to and consulting with the
Purchaser; provided that such notice to and consultation with
the Purchaser shall not be required with respect to any single
expenditure that does not exceed Fifty Thousand Dollars
($50,000.00) or aggregate expenditures that do not exceed One
Hundred Thousand Dollars ($100,000.00) (in either case, net to
Calibre Inc.'s working interest);
(f) not voluntarily relinquish its position as operator to anyone
other than the Purchaser with respect to any of the Calibre
Properties or abandon any of the Calibre Properties;
(g) not, without the prior written consent of the Purchaser, (i)
enter into any agreement or arrangement transferring, selling or
encumbering any of the Calibre Properties; (ii) grant any
preferential or other right to purchase or agree to require the
consent of any party to the transfer and assignment of the
Calibre Properties to the Purchaser; (iii) enter into any new
sales contracts or supply contracts; or (iv) incur or agree to
incur any material contractual obligation or liability (absolute
or contingent) with respect to the Calibre Properties except as
otherwise provided herein; and
24
<PAGE>
(h) promptly provide the Purchaser with written notice of (i) any
claims, demands, suits or actions made against Calibre Inc.
which materially affect the Calibre Properties; or (ii) any
proposal from a third party to engage in any material
transaction (e.g. a farmout) with respect to the Calibre
Properties.
6.3 ADDITIONAL COVENANTS OF THE MEMBERS CONCERNING MAINTENANCE OF THE
MEMBER PROPERTIES. From the date of this Agreement until Closing, each of the
Members covenants and agrees to:
(a) administer and operate the Member Properties in good and
workmanlike manner, and conduct its business and operations in a
prudent manner, and in substantially the same manner as prior to
the date of this Agreement;
(b) not introduce any new methods of management, operation or
accounting with respect to any or all of the Member Properties;
(c) maintain and keep the Member Properties in good condition and
working order; preserve the Member Properties in full force and
effect; and fulfil all contractual or other covenants, obligations
and conditions imposed upon the Members with respect to the
Member Properties, including, but not limited, to payment of
royalties, delay rentals, shut-in gas royalties and any and
all other required payments;
(d) operate or cause to be operated the MP Wells (as defined in
Schedule "B") in accordance with generally accepted oil field
practices and standards;
(e) not enter into agreements to drill new wells or to rework, plug
back, deepen, plug or abandon any existing well or wells on the
MP Leases (as defined in Schedule "B"), nor commence any
drilling, reworking or completing or other operations or make or
authorize any expenditures (except for emergency operations and
operations required under presently existing contractual
obligations) without giving notice to and consulting with the
Purchaser; provided that such notice to and consultation with
prior written consent of the Purchaser shall not be required
with respect to any single expenditure that does not exceed
Fifty Thousand Dollars ($50,000.00) or aggregate expenditures
that do not exceed One Hundred Thousand Dollars ($100,000.00)
(in either case, net to the Members' working interest), and
provided further that the terms of this paragraph shall not
apply to any expenditures of the Members which will not be
charged to the Purchaser.
(f) not voluntarily relinquish its position as operator to anyone
other than the Purchaser with respect to any of the Member
Properties or abandon any of the Member Properties;
25
<PAGE>
(g) not, without the prior written consent of the Purchaser, (i)
enter into any agreement or arrangement transferring, selling or
encumbering any of the Member Properties; (ii) grant any
preferential or other right to purchase or agree to require the
consent of any party to the transfer and assignment of the
Member Properties to the Purchaser; (iii) enter into any new
sales contracts or supply contracts; or (iv) incur or agree to
incur any material contractual obligation or liability (absolute
or contingent) with respect to the Member Properties except as
otherwise provided herein; and
(h) promptly provide the Purchaser with written notice of (i) any
claims, demands, suits or actions made against the Members which
materially affect the Member Properties; or (ii) any proposal
from a third party to engage in any material transaction (e.g. a
farmout) with respect to the Member Properties.
6.4 ADDITIONAL COVENANTS OF TOMLINSON CONCERNING MAINTENANCE OF THE
TOMLINSON PROPERTIES. From the date of this Agreement until Closing,
Tomlinson covenants and agrees to:
(a) administer and operate the Tomlinson Properties in good and
workmanlike manner, and conduct its business and operations in a
prudent manner, and in substantially the same mariner as prior
to the date of this Agreement;
(b) not introduce any new methods of management, operation or
accounting with respect to any or all of the Tomlinson
Properties;
(c) maintain and keep the Tomlinson Properties in good condition and
working order; preserve the Tomlinson Properties in full force
and effect; and fulfil all contractual or other covenants,
obligations and conditions imposed upon Tomlinson with respect
to the Tomlinson Properties, including, but not limited, to
payment of royalties, delay rentals, shut-in gas royalties and
any and all other required payments;
(d) operate or cause to be operated the TP Wells (as defined in
Schedule "C") in accordance with generally accepted oil field
practices and standards;
(e) not enter into agreements to drill new wells or to rework, plug
back, deepen, plug or abandon any existing well or wells on the
TP Leases (as defined in Schedule "C"), nor commence any
drilling, reworking or completing or other operations or make or
authorize any expenditures (except for emergency operations and
operations required under presently existing contractual
obligations) without giving notice to and consulting with the
Purchaser; provided that such notice to and consultation with of
the Purchaser shall not be required with respect to any single
expenditure that does not exceed Fifty Thousand Dollars
($50,000.00) or aggregate expenditures that do not exceed One
Hundred Thousand Dollars ($100,000.00) (in either case, net to
Tomlinson's working interest), and provided further that the
terms of this paragraph
26
<PAGE>
shall not apply to any expenditures of the Tomlinson which will
not be charged to the Purchaser.
(f) not voluntarily relinquish its position as operator to anyone
other than the Purchaser with respect to any of the Tomlinson
Properties or abandon any of the Tomlinson Properties;
(g) not, without the prior written consent of the Purchaser, (i)
enter into any agreement or arrangement transferring, selling or
encumbering any of the Tomlinson Properties; (ii) grant any
preferential or other right to purchase or agree to require the
consent of any party to the transfer and assignment of the
Tomlinson Properties to the Purchaser; (iii) enter into any new
sales contracts or supply contracts; or (iv) incur or agree to
incur any material contractual obligation or liability (absolute
or contingent) with respect to the Tomlinson Properties except as
otherwise provided herein; and
(h) promptly provide the Purchaser with written notice of (i) any
claims, demands, suits or actions made against the Members which
materially affect the Tomlinson Properties; or (ii) any proposal
from a third party to engage in any material transaction (e.g. a
farmout) with respect to the Tomlinson Properties.
6.5 COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the
Vendor as follows:
(a) until the Closing Date, the Purchaser will not perform any act or
enter into any transaction or negotiation which interferes or is
inconsistent with the completion of the transactions contemplated
herein or would render inaccurate in any material way any of the
representations and warranties set forth in section 5.5 as if
such representations and warranties were made at a date
subsequent to such act, transaction or negotiation unless such
transactions or negotiations are entered into with the consent of
Calibre LLC, the Members and Tomlinson;
(b) forthwith after execution and delivery of this Agreement, the
Purchaser will take such steps and proceedings in good faith as
may be reasonably required to obtain all consents, approvals,
waivers (including preferential rights) and agreements of all
other parties and Governmental Authorities which are required
for the Purchaser to complete the transactions contemplated
herein;
(c) the Purchaser will promptly apply for and diligently seek
approval of the Exchange for the transactions contemplated herein;
(d) the Purchaser will, subject to the terms of this Agreement, pay
the MP Purchase Price to the Members, the TP Purchase Price to
Tomlinson and issue the Purchaser's
27
<PAGE>
Shares to Calibre LLC as fully paid and non-assessable shares in
accordance with the terms of this Agreement;
(e) the Purchaser will in good faith make reasonable efforts to cause
all the conditions precedent on its part to be performed, as set
out in sections 7.3 and 7.5, to be complied with on or before the
Closing Date;
(f) as soon as reasonably possible after the Purchaser has determined
that a state of facts exists which results in or will result in
the non-fulfilment of any of the material conditions precedent
set forth in sections 7.3 or 7.5, the Purchaser will notify
Calibre LLC, the Members and Tomlinson of such state of facts; and
(g) provided the conditions set forth in sections 7.3 and 7.5 have
been satisfied or waived by the Closing Date, the Purchaser will
execute and deliver all such documents and certificates required
to carry out the transactions contemplated herein to which the
Purchaser is a party.
7. CLOSING
7.1 TIME AND PLACE OF CLOSING. The Closing shall take place at 10:00 a.m.
(PST time) on the Closing Date at the offices of Porter & Hedges, L.L.P., in
Suite 3500,700 Louisiana, Houston, Texas 77002 or such other place as the
parties may agree.
7.2 CLOSING DOCUMENTS. On the Closing Date the parties will table the
following documents and instruments and take the following steps:
(a) Calibre LLC will table any Approvals required for the transfer of
the C1 Shares to the Purchaser;
(b) Calibre LLC will table for delivery to the Purchaser written
opinions of one or more counsel to Calibre LLC dated the Closing
Date in a form reasonably satisfactory to the Purchaser that:
(i) Calibre has all requisite power and capacity to execute and
deliver all documents set out in this Agreement and to duly
observe and perform all its covenants set out herein;
(ii) the execution, delivery and performance by Calibre of the
agreements to effect the transactions contemplated
herewith to which it is a party has been duly authorized
by all necessary legal action on the part of Calibre;
(iii) which confirms Calibre Inc.'s corporate status and power;
28
<PAGE>
(c) Calibre will table for delivery to the Purchaser share
certificates evidencing ownership of the CI Shares duly endorsed
(or accompanied by duly executed stock powers) for transfer into
the name of the Purchaser;
(d) the Purchaser will table for delivery to Calibre LLC a share
certificate or certificates evidencing ownership of the
Purchaser's Shares duly registered in the name of Calibre LLC;
(e) the Members shall deliver to the Purchaser, in form satisfactory
to the Members and the Purchaser and the appropriate government
agencies, an Assignment and Bill of Sale effecting the sale,
transfer, conveyance and assignment of the Member Properties in
the forms set forth as Exhibit D to Schedule "B";
(f) the Purchaser will table for delivery to the Members, the Texstar
Promissory Notes, as set out in section 3.2 hereof;
(g) Tomlinson shall deliver to the Purchaser, in form satisfactory to
Tomlinson and the Purchaser and the appropriate government
agencies, an Assignment and Bill of Sale effecting the sale,
transfer, conveyance and assignment of the Tomlinson Properties
in the forms set forth as Exhibit D to Schedule "C";
(h) the Purchaser will table for delivery to Tomlinson, the Texstar
Promissory Note, as set out in section 4.2 hereof;
(i) each of the parties hereto will execute and table for delivery,
or cause to be executed and tabled for delivery, to the
appropriate parties all such other documents and instruments
reasonably required by the parties to effectively consummate the
transactions hereunder.
7.3 JOINT CONDITIONS PRECEDENT TO CLOSING. The respective obligations of
each of the parties hereto to complete the Closing shall be subject to
satisfaction, on or before the Closing Date, of the following, conditions, any
of which may be waived by both the Purchaser and Calibre LLC, the Members and
Tomlinson acting together:
(a) there shall not be in force any order or decree of a court of
competent jurisdiction or any Governmental Authority restraining,
interfering with or enjoining the consummation of the
transactions contemplated herein;
(b) all Approvals required for the completion of the transactions
contemplated herein shall have been obtained or received from the
Persons having jurisdiction in the circumstances; and
(c) this Agreement shall not have been terminated under Article 8.
29
<PAGE>
7.4 CONDITIONS TO OBLIGATIONS OF CALIBRE LLC, THE MEMBERS AND TOMLINSON. The
obligation of Calibre LLC, the Members and Tomlinson to complete the Closing is
subject to the satisfaction, on or before the Closing Date, of the following
conditions, any of which may be waived by it without prejudice to its rights to
rely on any other or others of them:
(a) each of the covenants, agreements, acts and undertakings of the
Purchaser to be performed on or before the Closing Date pursuant
to the terms of this Agreement shall have been duly performed by
it, including the delivery of the documents specified in
subsections 7.2(d), (f) and (h);
(b) the warranties and representations of the Purchaser contained in
section 5.5 shall be true in all material respects on the Closing
with the same effect as though made at and as of such time;
(c) the results of Calibre LLC's due diligence examination of the
Purchaser shall be satisfactory to Calibre LLC, the Members and
Tomlinson;
(d) there shall have been no material adverse change in the financial
condition or assets of the Purchaser.
(e) no Governmental Authority shall have enacted any statute,
regulation or bylaws or announced any policy that will materially
and adversely affect the value of the Purchaser's Shares except
as otherwise contemplated by the terms of this Agreement.
7.5 CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligation of the
Purchaser to complete the Closing is subject to the satisfaction, on or before
the Closing Date, of the following conditions, any of which may be waived by it
without prejudice to its right to rely on any other or others of them:
(a) each of the covenants, agreements, acts and undertakings of
Calibre LLC, the Members and Tomlinson, as the case may be, to be
performed on or before the Closing Date pursuant to the terms of
this Agreement shall have been duly performed by them, including
the execution and delivery of the documents specified in
subsections 7.2(a), (b), (c), (e) and (g);
(b) the warranties and representations of each of Calibre LLC, the
Members and Tomlinson contained in Sections 5.1 through 5.4 shall
be true in all material respects on the Closing with the same
effect as though made at and as of such time;
(c) the results of the Purchaser's due diligence examination of
Calibre LLC, Calibre Inc., the Calibre Properties, the Member
Properties and the Tomlinson Properties shall be satisfactory to
the Purchaser;
30
<PAGE>
(d) there shall have been no material adverse change in the
financial condition or assets of Calibre Inc.;
(e) there shall have been no options, warrants or other rights to
acquire shares of Calibre Inc. or agreements or options to
acquire the CI Shares other than this Agreement;
(f) there shall be no increase in the number of shares of Calibre
Inc. issued and outstanding above the numbers of such shares
issued and outstanding as at the date hereof; and
(g) no Governmental Authority shall have enacted any statute,
regulation or bylaws or announced any policy that will
materially and adversely affect the value of the CI Shares, the
Calibre Properties, the Member Properties or the Tomlinson
Properties.
7.6 ESCROW OF CLOSING DOCUMENTS. The parties recognize that certain
formalities for the completion of the transactions contemplated by this
Agreement and Approvals may not be completed as at the Closing Date. In such
circumstance, the parties will place all closing documents in escrow with
solicitors for the Purchaser until such time as confirmations regarding
completion of these formalities and Approvals are received by the Purchaser
or as otherwise required on terms agreeable by each of the parties, acting
reasonably. Upon receipt of such confirmations, the escrow will be terminated
and all closing documents will be released to the parties entitled thereto.
The parties will take all actions as may be necessary to formalize the
transactions contemplated hereby.
8. TERMINATION
8.1 MUTUAL TERMINATION. This Agreement may, prior to the Closing Date, be
terminated by the Purchaser, Calibre LLC, the Members and Tomlinson by
written agreement notwithstanding anything contained herein.
8.2 UNILATERAL TERMINATION.
(a) If any of the conditions contained in section 7.3 shall not be
fulfilled or performed on or before the Closing Date and such
condition has not been waived by the parties in accordance with
the provisions of section 7.3, either of the parties may
terminate this Agreement by notice to the other party and in
such event both parties shall be released from all obligations
under this Agreement and all rights of specific performance by
either party shall terminate. Calibre LLC's, the Members' and
Tomlinson's right to so terminate shall be exercised by Calibre
LLC.
(b) If any of the conditions contained in section 7.4 shall not be
fulfilled or performed on or before the Closing Date, Calibre
LLC, the Members and Tomlinson may terminate this Agreement by
written notice to the Purchaser signed by Calibre LLC
31
<PAGE>
and in such event Calibre LLC, the Members and Tomlinson shall
be released from all obligations hereunder and all rights of
specific performance by any of the parties hereto shall
terminate.
(c) If any of the conditions contained in section 7.5 shall not be
fulfilled or performed on or before the Closing Date, the
Purchaser may terminate this Agreement by written notice to
Calibre LLC as representative of Calibre LLC, the Members, and
Tomlinson, and in such event the Purchaser shall be released
from all obligations hereunder and all rights of specific
performance by any of the parties hereto shall terminate.
8.3 NOTICE OF UNFULFILLED CONDITIONS. If any party hereto shall determine
at any time prior to the Closing Date that it intends to terminate this
Agreement because of any unfulfilled and/or unperformed condition precedent
contained in this Agreement on the part of the other party to be fulfilled
and/or performed, it shall so notify the other party forthwith upon making
such determination to the end that such other party shall have the right and
opportunity to take such steps, at its own expense, as may be necessary for
the purpose of fulfilling and/or performing such condition precedent within a
reasonable period of time, but in no event later than 30 days after the
receipt of such Written notice by such other party of its intention to
terminate this Agreement.
9. GENERAL PROVISIONS
9.1 Time is and will be of the essence of each and every provision of this
Agreement.
9.2 Each of the parties will, at their respective expense, execute and
deliver all such further documents and instruments, give all such further
assurances, and do all such acts and things as the other or its solicitors
may, either before or after the Closing Date, reasonably require to carry out
the full intent and meaning of this Agreement.
9.3 This Agreement contains the whole agreement among Calibre LLC, the
Members, Tomlinson and the Purchaser in respect of the subject matter hereof
and supersedes and replaces the Letter of Understanding and all prior
negotiations, communications and correspondence. There are no warranties,
representations, terms, conditions or collateral agreements, express or
implied, statutory or otherwise, other than as expressly set forth in this
Agreement.
9.4 This Agreement will entire to the benefit of and be binding upon the
parties and each of them and their respective heirs, successors, liquidators,
executors and assigns. No party may assign any of its right, title or
interest in, to or under this Agreement, nor will any such purported
assignment be valid amongst the parties hereto, except with the prior written
consent of all parties hereto, such consent not to be unreasonably withheld.
9.5 This Agreement is being delivered in and is intended to be performed
in British Columbia, and shall be construed and interpreted in accordance
with the laws of British Columbia and the laws
32
<PAGE>
of Canada applicable therein. The parties irrevocably attorn to the
jurisdiction of the arbitrators and courts of British Columbia and the venue
for any actions or arbitrations arising out of this Agreement will be
Vancouver, British Columbia.
9.6 Any notices required or permitted to be given under this Agreement
will be in writing and will be duly and properly given and received if
delivered, telecopied or mailed by prepaid post, in each case addressed to
the intended recipient at its respective address appearing on the first page
of this Agreement (or at such other address as a party may from time to time
designate by notice in writing to the other parties in accordance with this
section), and any such notice will be deemed to have been given and received,
if delivered, when delivered to such address, and if telecopied, on the next
business day after the telecopying of the same or, if mailed, on the tenth
business day after depositing the same in any post office in Canada unless
postal service is disrupted after the mailing of such notice, in which case
the party giving notice will forthwith give such notice in another permitted
manner.
9.7 No amendment, waiver, termination or variation of the terms,
conditions, warranties, covenants, agreements and undertakings set out herein
will be of any force or effect unless the same is reduced to writing duly
executed by all parties hereto in the same manner and with the same formality
as this Agreement is executed.
9.8 In the event that any date on which any action is required to be taken
or by which notice is to be received hereunder is not a Business Day, such
action shall be required to be taken on and such notice shall be required to
be received by the next succeeding day which is a Business Day.
9.9 No waiver of any of the provisions of this Agreement will constitute a
waiver of any other provision (whether or not similar) and no waiver will
constitute a continuing waiver unless otherwise expressly provided.
9.10 The representations, warranties, covenants and agreements contained in
this Agreement shall not merge in the Closing and shall have no further force
or effect from and after the Closing Date.
9.11 WAIVER OF REPRESENTATION TO THE EXTENT REQUIRED BY APPLICABLE LAW TO
BE OPERATIVE, THE DISCLAIMERS OF CERTAIN REPRESENTATIONS AND WARRANTIES IN
THIS SECTION 9.11 ARE "CONSPICUOUS DISCLAIMERS" FOR PURPOSES OF ANY
APPLICABLE LAW, RULE OR ORDER. THE EXPRESS REPRESENTATIONS OF CALIBRE LLC,
THE MEMBERS AND TOMLINSON CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE
IN LIEU OF, AND CALIBRE LLC, THE MEMBERS AND TOMLINSON EXPRESSLY DISCLAIM AND
NEGATE AND PURCHASER HEREBY WAIVES, ANY REPRESENTATION OR WARRANTY, EXPRESS
OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, WITH RESPECT TO THE
QUALITY, QUANTITY OR VOLUME OF THE RESERVES, IF ANY, OF OIL, GAS OR OTHER
HYDROCARBONS IN OR UNDER THE PROPERTIES, THE ENVIRONMENTAL CONDITION, BOTH
SURFACE AND
33
<PAGE>
SUBSURFACE, OR OTHER CONDITIONS OF THE PROPERTIES, OR THE OWNERSHIP OR
OPERATION OF THE PROPERTIES OR ANY PART THEREOF OR FOR CLAIMS BY PURCHASER
FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN. EXCEPT AS OTHERWISE
PROVIDED HEREIN AND EXCEPT FOR THE TITLE WARRANTY CONTAINED IN THE ASSIGNMENT
AND BILL OF SALE, PURCHASER AGREES THAT CALIBRE LLC, THE MEMBERS AND
TOMLINSON ARE CONVEYING THE ASSETS WITHOUT REPRESENTATION OR WARRANTY AND
CALIBRE LLC, THE MEMBERS AND TOMLINSON DO NOT MAKE OR PROVIDE, AND PURCHASER
HEREBY WAIVES, ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AT COMMON
LAW, BY STATUTE OR OTHERWISE AND SPECIFICALLY IN THE CASE OF THE PERSONAL
PROPERTY WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING
TO THE QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, CONFORMITY
TO SAMPLES, OR CONDITIONS OF ANY OF THE PROPERTIES. CALIBRE LLC, THE MEMBERS
AND TOMLINSON DISCLAIM AND NEGATE, AND PURCHASER HEREBY WAIVES ALL OTHER
REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE
OR FOR CLAIMS BY PURCHASER FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR
UNKNOWN. THE ITEMS OF PERSONAL PROPERTY, EQUIPMENT, IMPROVEMENTS, FIXTURES
AND APPURTENANCES CONVEYED AS PART OF THE PROPERTIES ARE SOLD, AND PURCHASER
ACCEPTS SUCH ITEMS "AS IS, WITH ALL FAULTS." THERE ARE NO WARRANTIES THAT
EXTEND BEYOND THE FACE OF THIS AGREEMENT. PURCHASER ACKNOWLEDGES THAT THIS
WAIVER IS CONSPICUOUS.
10. COUNTERPARTS
10.1 This Agreement, and any certificates or other writing delivered in
connection herewith, may be executed in any number of counterparts with the
same effect as if all parties had all signed the same documents, and all such
counterparts and adopting instruments will be construed together and will
constitute one and the same instrument. The execution of this Agreement and
any other writing by any party hereto or thereto will not become effective
until counterparts hereof or thereof, as the case may be, have been executed
by all the parties hereto or thereto, and executed copies delivered to each
party who is a party hereto or thereto. Such delivery may be made by
facsimile transmission of the execution page or pages, hereof or thereof, to
each of the other parties by the party signing the
34
<PAGE>
particular counterpart, provided that forthwith after such facsimile
transmission, an originally executed execution page or pages is forwarded by
prepaid express courier to each of the other parties by the party signing
the particular counterpart.
IN WITNESS WHEREOF the parties have executed and delivered this Agreement as
of the day and year first above written.
BENZ ENERGY LTD. )
)
By: /s/ [illegible] )
--------------------------------- )
Authorized Signatory )
CALIBRE ENERGY, L.L.C. )
)
)
)
By: /s/ Heather J. Tomlinson )
--------------------------------- )
Authorized Signatory Manager )
CALIBRE OIL & GAS, INC. )
)
)
)
)
By: /s/ Heather J. Tomlinson )
--------------------------------- )
Authorized Signatory Director )
35
<PAGE>
THE SLATTERY TRUST )
)
)
)
By: /s/ Prentis Tomlinson )
---------------------------------
Name: Prentis Tomlinson, Trustee
THE STARBUCKS TRUST )
)
)
)
By: /s/ Heather J. Tomlinson )
--------------------------------- )
Name: Heather Tomlinson, Trustee )
)
)
)
/s/ Todd Grabois )
- ------------------------------------ )
TODD GRABOIS )
)
)
)
/s/ Robert Novak )
- ------------------------------------ )
ROBERT NOVAK )
)
)
)
/s/ Prentis B. Tomlinson, Jr. )
- ------------------------------------ )
PRENTIS B. TOMLINSON, JR. )
36
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement ("Agreement") is made and entered
into on this 25th day of August, 1999, among TEXSTAR PETROLEUM, INC., a Texas
corporation ("Texstar"), BENZ ENERGY INC., a Delaware corporation ("Benz"),
whose addresses are 1000 Louisiana, 15th Floor, Houston, Texas 77002 (Texstar
and Benz shall be referred to herein collectively as "Seller"), and PRIME
NATURAL RESOURCES, INC., a Texas corporation, whose address is 5151 San
Felipe, Suite 1200, Houston, Texas 77056 ("Buyer").
RECITALS
WHEREAS, Seller owns interests in and to (i) the Leases (hereinafter
defined) more fully described in EXHIBIT A attached hereto, (ii) the Options
(as hereinafter defined) more fully described in EXHIBIT B attached hereto,
(iii) the Contracts (as hereinafter defined) more fully described in EXHIBIT
C and (iv) assets related to such Leases, Options and Contracts; and
WHEREAS, Seller desires to sell to Buyer and Buyer desires to purchase
from Seller an undivided thirty seven and one-half percent (37 1/2%) of all
of Seller's rights, titles and interests including, without limitation, an
undivided thirty seven and one-half percent (37 1/2%) of all of the rights,
titles and interests which Seller acquired pursuant to the assignments and
agreements described in EXHIBIT A-1 attached hereto (such assignments and
agreements being hereinafter collectively referred to as the "Acquisition
Documents"), in and to the Leases, Options, Contracts and related assets upon
the terms and subject to the conditions hereinafter set forth; and
WHEREAS, in accordance with the Contracts, (as hereinafter defined),
Seller is subject to that certain Area of Mutual Interest ("AMI") as shown on
the Plat attached hereto as EXHIBIT D, covering the lands (the "Lands")
affected by the Leases, Options, Contracts and related assets; and
WHEREAS, Benz joins as Seller for the sole purpose of selling,
assigning, conveying and delivering to Buyer 37.5% of Benz's rights, titles
and interests in and to the Seismic Data (as hereinafter defined) and the
Option Interest (as hereinafter defined) relating thereto to which Benz,
rather than Texstar, is the owner.
WHEREAS, the parties hereto acknowledge that Buyer has asserted that
it intends to vote to begin drilling activities on the Subject Interests, (as
hereinafter defined), as soon as possible after Closing, as hereinafter
defined.
NOW, THEREFORE, in consideration of the premises, the considerations
enumerated herein and the respective representations, warranties, covenants,
agreements and conditions contained herein, the parties hereto hereby agree
as follows. Unless defined elsewhere in this Agreement, all capitalized
terms used herein shall have the respective meanings given them in APPENDIX A
hereto, which is incorporated herein by reference and shall be deemed to be a
part of this Agreement for all purposes.
<PAGE>
ARTICLE 1.
AGREEMENT TO PURCHASE AND SALE
1.1 SALE AND PURCHASE OF THE SUBJECT INTERESTS. Seller and Buyer
hereby agree that, simultaneously with the execution of this Agreement, upon
the terms and subject to the conditions herein set forth, Seller shall sell,
assign, convey and deliver to Buyer, and Buyer shall purchase and acquire
from Seller, an undivided thirty seven and one-half percent (37 1/2%) of all
of Seller's rights, titles and interests, including without limitation, an
undivided thirty seven and one-half percent (37 1/2%) of all of the rights,
titles and interests which Seller acquired pursuant to the Acquisition
Documents, in and to the following:
(a) The oil, gas and/or mineral leases and the leasehold
estates created thereby described in the attached EXHIBIT A (the
"Leases");
(b) All geophysical options described in the attached EXHIBIT B
(the "Options");
(c) All contracts and agreements appertaining to the Leases,
Options and Lands, including, but not limited to, those described in the
attached EXHIBIT C (the "Contracts");
(d) All mineral interests, royalty interests, mineral
servitudes, production payments, overriding royalty interests, net
profits interests and interests of any kind or type whatsoever in and to
the Lands, together with corresponding interests in and to the Lands and
rights incident thereto, including all rights in any pooled or unitized
acreage by virtue of the Lands being a part thereof, all production from
the pool or unit allocated to any such Lands, and all interests in any
wells within the pool or unit associated with the Lands;
(e) All oil, gas, casinghead gas, condensate, distillate,
liquid hydrocarbons, gaseous hydrocarbons and all products refined
therefrom, together with all minerals produced in association with these
substances (collectively called "Hydrocarbons") on and under and which
may be produced and saved from or attributable to the Leases, Options,
Contracts or Lands, and all rents, issues, profits, proceeds, products,
revenues and other income from or attributable thereto;
(f) All easements, rights-of-way, licenses, authorizations,
permits, and similar rights and interests to the extent that they are
appurtenant to or affect any of the properties and interests referred to
in (a) through (e) above or are used or held for use in connection with
the ownership or operation of such properties and interests applicable
to, or used or useful in connection with, any or all of such properties
and interests; and
(g) The Seismic Data.
The properties and interests described in Sections 1.1(a) through (g)
above are hereinafter called the "Properties", and such undivided thirty
seven and one-half percent (37 1/2%) of Seller's rights, titles and interests
in and to the Properties are hereinafter called the "Subject Interests."
2
<PAGE>
1.2 OVERRIDING ROYALTY INTERESTS. The Subject Interests to be
conveyed to Buyer shall be subject to those certain Assignments of Overriding
Royalty Interests described in SCHEDULE 1.2. The Subject Interests to be
conveyed to Buyer shall not be subject to and shall be free and clear of
those certain Assignments of Overriding Royalty Interests described in
SCHEDULE 1.2A.
1.3 SELLER'S RESERVED OVERRIDING ROYALTY INTEREST: It is further
understood and agreed that any additional oil and gas interests acquired by
Buyer or Seller within the AMI will be subject to overriding royalty
interests reserved or assigned in favor of Seller or its designee as set
forth on SCHEDULE 1.3 hereto.
ARTICLE 2.
PURCHASE PRICE; PAYMENT; OPTION
2.1 PURCHASE PRICE. The total purchase price for the Subject
Interests shall be $5,478,098.00 (the "Purchase Price") payable in accordance
with the following terms:
(a) An initial payment shall be due and payable to Seller at
Closing in an amount equal to $3,500,000.00 to be remitted as follows:
(i) $133,862.00 to Seller; (ii) $3,366,138.00 for the account of Seller
to Western Geophysical Company, each by wire transfer of immediately
available funds.
(b) The second payment shall be due and payable to Seller on
September 15, 1999, in an amount equal to $1,978,098.00 (the "Deferred
Portion") to be remitted to Seller by wire transfer of immediately
available funds; provided, however, in the event Buyer has not received
on or before September 15, 1999, a fully executed Subordination Agreement
in recordable form (the "Subordination Agreement"), the form of which is
attached hereto as EXHIBIT F, Buyer shall pay only one-half of the
Deferred Portion to Seller. Subsequent to September 15, 1999, at the
time Buyer receives the Subordination Agreement, Buyer shall use its best
efforts as are reasonably practical under the circumstances to pay Seller
as soon as possible the remaining one-half of the Deferred Portion, plus
interest on said one half of the Deferred Portion at the prime rate, per
annum in effect from time to time, which interest shall begin to accrue
after September 15, 1999, but in all events such payment shall be made by
Buyer to Seller within seven business days of Buyer's receipt of the
Subordination Agreement. Notwithstanding anything herein to the
contrary, including the terms and provisions of Article 12, after Seller
delivers to Buyer the Subordination Agreement and thereafter Buyer does
not pay the Deferred Portion of the Purchase Price to Seller in the
amount and within the time set forth herein, Seller, at its sole option,
may elect to either (i) enforce its rights to receive the Deferred
Portion of the Purchase Price or (ii) receive from Buyer an assignment of
the Subject Interests, including the Seismic Data, (in the same form as
the Assignment attached hereto as EXHIBIT E) conveyed to Buyer at
Closing, such reconveyance to Seller to be free and clear of all liens
and burdens placed thereon after Closing, for and in consideration of
return from Seller to Buyer of the portion of the Purchase Price actually
paid by Buyer for the Subject Interests, without interest, and (iii)
pursue any other available legal or equitable remedies insofar as same
relate to the elections Seller makes in either (i) or (ii) above. In
such event, Buyer agrees to pay all costs of pursuing such remedies
incurred by Seller including reasonable attorneys fees, expenses and
3
<PAGE>
interest. In addition, Buyer agrees to return the Seismic Data, destroy
any notes or interpretations arising out of such data, and, from and
after the reconveyance to Seller, maintain the data as a proprietary and
confidential trade secret of Seller.
2.2 OPTION. The parties hereto recognize that Buyer is acquiring
37 1/2% of all of Seller's rights, titles and interests in the Properties.
In addition to the purchase of the Subject Interests and for the
consideration described below, Buyer also is acquiring and Seller hereby
grants to Buyer an option, at Buyer's sole election, to purchase an
additional 12.5% interest (the "Option Interest") of all of Seller's rights,
titles and interests in the Properties, including, without limitation, an
undivided twelve and one-half percent (12 1/2%) of all of the rights, titles
and interests which Seller acquired pursuant to the Acquisition Documents,
such percentage being calculated prior to the initial conveyance of the
Subject Interests, which means that after the purchase of the Subject
Interests hereunder and the Option Interest (if Buyer elects to purchase the
Option Interest), Buyer will have fifty percent (50%) of Seller's rights,
titles and interests in the Properties. This option may be exercised by
payment by Buyer to Seller on or before February 25, 2000, of an amount of
$1,826,033.00 plus an additional amount of $214,276.00 payable in a manner
mutually agreed to by Seller and Buyer. In the event that the parties cannot
mutually agree as to a manner of payment, Buyer shall pay Seller by wire
transfer in immediately available funds. During the period from the Closing
hereof until February 25, 2000, Buyer shall make any payments for drilling,
completion, re-working, logging, testing, lease operating, oil and gas lease
acquisition, geophysical option acquisition, independent landman fees, and
title examination and opinion fees that are required of Seller and relate to
the Option Interest; provided, however, in the event Buyer notifies Seller
that Buyer is relinquishing the Option Interest, Buyer's obligation to make
said payments shall cease on the fifth day following Seller's receipt of said
notice. Upon exercise by Buyer of the Option Interest and payment therefore
to Seller, Seller will execute and deliver to Buyer an Assignment of the
Properties covered by the Option Interest using a form substantially similar
to the one attached hereto as EXHIBIT E. All of Seller's representations,
warranties and covenants contained in this Agreement shall apply to the
Option Interest. The Option Interest may not be transferred or assigned by
Buyer without the express written consent of Seller, which consent may be
withheld, except that Seller does hereby consent to such a transfer or
assignment by Buyer to an entity in which the general partner of Elliot
Associates, L.P. has an interest.
ARTICLE 3.
SELLER'S REPRESENTATIONS AND WARRANTIES
All enumerated schedules referred to in this Article 3 shall be
referred to collectively as the "Disclosure Schedule." All references in
this Article 3 to the Subject Interests shall be deemed to also include
reference to the Option Interest. Seller represents and warrants to Buyer as
follows, as of Closing:
3.1 ORGANIZATION. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and is duly qualified to carry on its business in the State of
Texas.
3.2 AUTHORITY. Seller has full power and authority and has taken
all requisite action, corporate or otherwise, to authorize each Seller to
carry on Seller's business as presently conducted,
4
<PAGE>
to own the Subject Interests, to enter into this Agreement and to perform
Seller's obligations under this Agreement.
3.3 ENFORCEABILITY. This Agreement has been duly executed and
delivered on behalf of Seller and constitutes the legal, valid and binding
obligation of Seller enforceable in accordance with its terms. At the
Closing, all documents required hereunder to be executed and delivered by
Seller shall be duly authorized, executed and delivered and shall constitute
legal, valid and binding obligations of Seller enforceable in accordance with
their respective terms.
3.4 NON-CONTRAVENTION. Except for approvals required to be
obtained from governmental entities who are lessors under leases forming a
part of the Subject Interests (or who administer such leases on behalf of
such lessors) which are customarily obtained post-closing, neither the
execution, delivery, and performance by Seller of this Agreement and each
other agreement, instrument, or document executed or to be executed by Seller
in connection with the transactions contemplated hereby to which it is a
party nor the consummation by it of the transactions contemplated hereby and
thereby do or will (a) conflict with or result in a violation of any
provision of the charter or bylaws or other governing instruments of Seller,
(b) conflict with or result in a violation of any provision of, or constitute
(with or without the giving of notice or the passage of time or both) a
default under, or give rise (with or without the giving of notice or the
passage of time or both) to any right of termination, cancellation, or
acceleration under, any bond, debenture, note, mortgage, indenture, lease,
contract, agreement, or other instrument or obligation to which Seller is a
party or by which Seller or any of its properties may be bound, (c) result in
the creation or imposition of any lien or other encumbrance upon the
properties of Seller, or (d) violate any applicable law, rule or regulation
binding upon Seller.
3.5 APPROVALS. Except for approvals required to be obtained from
governmental entities who are lessors under leases forming a part of the
Subject Interests (or who administer such leases on behalf of such lessors)
which are customarily obtained post-closing, no consent, approval, order, or
authorization of, or declaration, filing, or registration with, any court or
governmental agency or of any third party is required to be obtained or made
by Seller in connection with the execution, delivery, or performance by
Seller of this Agreement and each other agreement, instrument, or document
executed or to be executed by Seller in connection with the transactions
contemplated hereby to which it is a party or the consummation by it of the
transactions contemplated hereby and thereby.
3.6 PENDING CLAIMS AND LITIGATION. Except as otherwise set forth
in SCHEDULE 3.6, there are no pending claims, demands, suits, actions, or
other proceedings in which Seller is a party or to the best of Seller's
knowledge, its predecessors in interest are or may be made a party, which
affect the Subject Interests in any material respect, or affect the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby or that would, if determined adversely to Seller, or any
of the Subject Interests (i) result in the impairment or loss, in whole or in
material part, of Seller's title to the Subject Interests, (ii) hinder or
impede the operation of all or any portion of any Subject Interests or (iii)
restrain, prohibit or impose damage on Buyer or Seller with respect to the
transactions contemplated herein.
5
<PAGE>
3.7 FINDER'S FEES. Seller has not incurred any liability,
contingent or otherwise, for brokers' or finders' fees in respect to this
transaction for which Buyer shall have any responsibility whatsoever. Seller
shall indemnify and hold Buyer harmless from and against all claims, demands,
suits, actions or causes of action whatsoever arising from any allegation by
a broker, finder or other intermediary that it is entitled to a commission,
finder's fee or other compensation as a result of having dealt with Seller.
3.8 TITLE. Seller makes no representation or warranty as to title
to the Subject Interests except for claims arising by, through or under
Seller, but not otherwise.
3.9 MATERIAL CONTRACTS. Except as set forth on SCHEDULE 3.9, at
Closing, the Subject Interests are not subject to (i) any instrument or
agreement evidencing or related to indebtedness for borrowed money, whether
directly or indirectly; or (ii) any agreement not entered into in the
ordinary course of business in which the amount involved is in excess of One
Hundred Thousand Dollars ($100,000.00). With respect to the Subject
Interests, (A) to the best of Seller's knowledge, all Material Contracts are
in full force and effect and are the valid and legally binding obligations of
the parties thereto and are enforceable in accordance with their respective
terms; (B) Seller is not in material breach or default with respect to any of
its obligations pursuant to any such Material Contract; (C) all payment
(including, without limitation, valid calls for advance payment under unit or
operating agreements) due by Seller thereunder have been made by Seller; and
(D) neither Seller nor any other party to any Material Contract has given
notice of any action to terminate, cancel, rescind, or procure a judicial
reformation of a Material Contract or any provision thereof. Except as set
forth on SCHEDULE 3.9, no contracts contain any provision that prevents Buyer
from owning, managing and operating the Subject Interests in accordance with
historical practices.
3.10 NO OPERATIONS OR CURRENTLY DUE PAYMENTS. Except as set forth
on SCHEDULE 3.10, with respect to the Subject Interests, (i) there are no
outstanding calls for payments which are due or which Seller has committed to
make with respect to the Subject Interests which have not been made; (ii)
there are no material operations with respect to which Seller has become a
party; (iii) there are no commitments for the expenditure of funds for
drilling or other capital projects; and (iv) there are no existing contracts
solely between Seller and any of its Affiliates, affecting or providing
services or support to any of the Subject Interests or operations on the
Subject Interests.
3.11 EQUIPMENT. There is no Equipment owned by Seller appertaining
to the Subject Interests.
3.12 CONSENTS AND PREFERENTIAL RIGHTS. Except as set forth on
SCHEDULE 3.12, no consents required from governmental agencies or entities as
part of an ordinary course transfer, no preferential purchase rights,
consents, approvals or other action by, or filing with any person or
governmental agency or entity is required in connection with the execution,
delivery and performance by Seller of this Agreement.
3.13 PARTNERSHIP TREATMENT. The Subject Interests are not subject
to any tax partnership agreement or provisions requiring a partnership income
tax return to be filed under Subchapter K of Chapter 1 of Subtitle A of the
Internal Revenue Code of 1986, as amended, or any similar state statute.
6
<PAGE>
3.14 CANCELLATION OF LEASES OR OPTIONS. Seller has not received
notice of any pending claims for cancellation from any lessors or other third
parties with respect to the Leases or Options.
3.15 FUTURE DELIVERY. Except as set forth in SCHEDULE 3.15, Seller
is not obligated by virtue of any prepayment arrangement under any contract
for the sale of Hydrocarbons, including take-or-pay obligation, imbalance of
production or similar provisions or a production payment or any other
arrangement to deliver Hydrocarbons from the Subject Interests at some future
time without then or otherwise receiving full payment therefor. There are no
gas balancing obligations or makeup rights relating to the Subject Interests,
and there are no calls on production, forward sales, or price hedging
arrangements in place and affecting the Subject Interests.
3.16 [THIS SECTION INTENTIONALLY LEFT BLANK]
3.17 BANKRUPTCY. There are no bankruptcy proceedings pending which
have been initiated by Seller. Seller has initiated a reorganization of a
portion of its debt with certain creditors. Seller has made available for
review to Buyer true and correct copies of all documents and instruments
related to such reorganization.
3.18 TAXES. All ad valorem, property, production, severance and
similar taxes and assessments, if any, based on or measured by the ownership
of property with respect to the Subject Interests for all periods prior to
the Closing Date shall be paid prior to the Closing Date by Seller.
3.19 RESTRICTIONS ON VOTING. Except as set forth in SCHEDULE 3.19,
to the best of Seller's knowledge, no restrictions exist with regard to the
Subject Interests, which would diminish Buyer's right or ability to vote to
begin drilling activities with respect to any of the Subject Interests at any
time.
ARTICLE 4.
BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to Seller as follows, as of Closing:
4.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation and is qualified to do business and is in good standing under
the laws of the State of Texas.
4.2 AUTHORITY. Buyer has full power and authority to carry on its
business as presently conducted, to enter into this Agreement, to purchase
the Subject Interests on the terms described in this Agreement and to perform
its obligations under this Agreement. Neither the execution and delivery of
this Agreement nor the performance of Buyer's obligations hereunder will (i)
violate its articles of incorporation or bylaws; or (ii) violate or
constitute a default under any law, regulation, contract, agreement, consent,
decree or judicial order by which Buyer or any of its officers, directors,
stockholders are bound.
7
<PAGE>
4.3 ENFORCEABILITY. This Agreement has been duly executed and
delivered on behalf of Buyer and constitutes the legal, valid and binding
obligation of Buyer enforceable in accordance with its terms. At the
Closing, all documents required hereunder to be executed and delivered by
Buyer shall be duly authorized, executed and delivered and shall constitute
legal, valid and binding obligations of Buyer enforceable in accordance with
their respective terms.
4.4 NON-CONTRAVENTION. The execution, delivery, and performance by
Buyer of this Agreement and each other agreement, instrument, or document
executed or to be executed by Buyer in connection with the transactions
contemplated hereby to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby do not and will not (a) conflict
with or result in a violation of any provision of the charter or bylaws or
other governing instruments of Buyer, (b) conflict with or result in a
violation of any provision of, or constitute (with or without the giving of
notice or the passage of time or both) a default under, or give rise (with or
without the giving of notice or the passage of time or both) to any right of
termination, cancellation, or acceleration under, any bond, debenture, note,
mortgage, indenture, lease, contract, agreement, or other instrument or
obligation to which Buyer is a party or by which Buyer or any of its
properties may be bound, (c) result in the creation or imposition of any lien
or other encumbrance upon the properties of Buyer, or (d) violate any
applicable law, rule or regulation binding upon Buyer.
4.5 APPROVALS. No consent, approval, order, or authorization of,
or declaration, filing, or registration with, any court or governmental
agency or of any third party is required to be obtained or made by Buyer in
connection with the execution, delivery, or performance by Buyer of this
Agreement and each other agreement, instrument, or document executed or to be
executed by Buyer in connection with the transactions contemplated hereby.
4.6 PENDING LITIGATION. There are no pending suits, actions, or
other proceedings in which Buyer is a party which affect the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
4.7 DUE DILIGENCE. Buyer represents that it has performed
sufficient review and due diligence with respect to the Subject Interests,
which includes reviewing files and performing necessary evaluations,
assessments and other tasks relating to the Subject Interests to enable it to
acquire the Subject Interests under the terms of this Agreement. The
provisions of this Section 4.7 in no way modify or waive any rights of Buyer
resulting from a breach of any representation or warranty of Seller contained
in Article 3.
4.8 KNOWLEDGEABLE PURCHASER. Buyer represents that by reason of
its knowledge and experience in the evaluation, acquisition, and operation of
oil and gas properties, Buyer has evaluated the merits and risks of
purchasing the Subject Interests from Seller and has formed an opinion based
solely on Buyer's knowledge and experience and not on any representations or
warranties by Seller. The provisions of this Section 4.8 in no way modify or
waive any rights of Buyer resulting from a breach of any representation or
warranty of Seller contained in Article 3.
4.9 SECURITIES ACT; DECEPTIVE TRADE PRACTICES ACT. Buyer is
acquiring the Subject Interests for its own account and without a view to the
distribution thereof within the meaning of the
8
<PAGE>
Securities Act of 1933, (and the rules and regulations pertaining thereto) as
amended. Buyer can and does expressly waive the provisions of the Texas
Deceptive Trade Practices Act.
4.10 FINDER'S FEES. Buyer has not incurred any liability,
contingent or otherwise, for brokers' or finders' fees in respect to this
transaction for which Seller shall have any responsibility whatsoever. Buyer
shall indemnify and hold Seller harmless from and against all claims,
demands, suits, actions or causes of action whatsoever arising from any
allegation by a broker, finder or other intermediary that it is entitled to a
commission, finder's fee or other compensation as a result of having dealt
with Buyer.
ARTICLE 5.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
The obligations of Seller to be performed at the Closing are subject to the
fulfillment (or waiver by Seller in its sole discretion), before or at the
Closing, of each of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties by Buyer set forth in this agreement shall be true and correct in
all material respects at and as of the Closing as though made at and as of
the Closing; and Buyer shall have performed and complied with in all material
respects all agreements required to be performed and satisfied by it at or
prior to Closing.
5.2 NO LITIGATION. There shall be no suits, actions or other
proceedings pending or threatened to enjoin the consummation of the
transactions contemplated by this Agreement or seeking substantial damages
against Seller in connection therewith.
5.3 CONSENTS. All consents and approvals required to be obtained
for the assignment of the Subject Interests to Buyer shall have been obtained
or waived or shall have expired without being exercised, except for those
consents and approvals which are customarily obtained after closing.
ARTICLE 6.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
The obligations of Buyer to be performed at the Closing are subject to the
fulfillment (or waiver by Buyer in its sole discretion), before or at the
Closing, of each of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties by Seller set forth in this Agreement shall be true and correct in
all material respects at and as of the Closing as though made at and as of
the Closing; and Seller shall have performed and complied with in all
material respects all agreements required to be performed and satisfied by it
at or prior to Closing.
6.2 NO CLAIMS OR LITIGATION. There shall be no claims or demands,
and no suits, actions or other proceedings pending or threatened to enjoin
the consummation of the transactions contemplated by this Agreement or
seeking substantial damages against Buyer in connection therewith.
9
<PAGE>
6.3 CONSENTS. All consents and approvals required to be obtained
for the assignment of the Subject Interests to Buyer shall have been obtained
or waived or shall have expired without being exercised, except for those
consents and approvals which are customarily obtained after closing.
6.4 CONFIRMATION OF ASSIGNMENT. Buyer shall have received from
Seller a confirmation dated and signed by Western Geophysical Company
("Western"), which states that upon receipt of $3,366,138.00 from Seller by
Western, Western shall convey all rights, title and interest in the Seismic
Data to Seller and shall consent to any subsequent assignment of the Seismic
Data.
ARTICLE 7.
CLOSING
7.1 THE CLOSING. The closing ("Closing") of the transactions
contemplated hereby shall take place at the offices of Thompson Knight Brown
Parker & Leahy L.L.P., 1200 Smith Street, Suite 3600, Houston, Texas, at
10:00 a.m. Central Standard Time on or before August 30, 1999, or at such
other date and time as the Buyer and Seller may mutually agree upon ("Closing
Date").
7.2 CLOSING OBLIGATIONS. At the Closing the following events shall
occur, each event under the control of one Party hereto being a condition
precedent to the events under the control of the other Party, and each event
being deemed to have occurred simultaneously with the other events:
(a) Seller shall execute and deliver to Buyer and Buyer shall
execute and receive:
(1) this Agreement
(2) an Assignment and Bill of Sale (the "Assignment")
in substantially the form annexed hereto as EXHIBIT E, with the
blanks and exhibit(s) appropriately completed, conveying the
Subject Interests; and
(3) such other documents and instruments as are
contemplated by this Agreement.
(b) Buyer shall, by wire transfer, deliver the initial portion
of the Purchase Price as set forth in Section 2.1 hereof.
(c) Except for the Seismic Data, Seller shall deliver to Buyer
possession of the Subject Interests at the Closing. The Seismic Data
will be delivered to Buyer within twenty-four hours of Closing.
ARTICLE 8.
ASSUMPTION OF CERTAIN OBLIGATIONS
Upon and after Closing, Buyer shall own the Subject Interests, together with
all the rights, duties, obligations and liabilities accruing after Closing,
including the Assumed Obligations. Buyer agrees to assume and pay, perform,
fulfill and discharge all Assumed Obligations arising from and after the
10
<PAGE>
Closing Date; including, but not limited to, the obligations to make payments
on behalf of Seller in accordance with Section 2.2.
ARTICLE 9.
OPERATIONS; NO REDUCTION OF BUYER'S INTEREST
9.1 OPERATOR. It is understood and agreed that, unless otherwise
required by the Unitization Agreement or any other agreement to which the
Subject Interests are subject (the Unitization Agreement and each such other
agreement being hereinafter in this Section 9.1 referred to individually as a
"Third Party Agreement"), Buyer shall be the Operator for the drilling and
operation of all wells hereafter drilled on the Properties. In the event a
Third Party Agreement provides for the selection of an Operator, Seller shall
vote and take all such other necessary actions as are reasonably practical
under the circumstances under such Third Party Agreement to select Buyer as
the Operator under such Third Party Agreement. With respect to any portion
of the Properties in which the oil, gas and mineral leasehold estate therein
is owned solely by Seller and Buyer, operations on such portion of the
Properties shall be conducted pursuant to the Operating Agreement, with Buyer
as the Operator. Notwithstanding anything to the contrary contained in this
Purchase and Sale Agreement, Seller shall not be required to vote or take any
action to approve or maintain Buyer as Operator in the event Buyer does not
adequately fulfill its obligations as a reasonably prudent Operator under the
same or similar circumstances as more particularly set forth in the Operating
Agreement; or if Seller or another party to the Operating Agreement initiates
an action to remove Buyer as Operator for good cause as more particularly set
forth in the Operating Agreement. Additionally, the parties agree that this
Article 9.1 shall be stated in the Operating Agreement.
9.2 AVOIDANCE OF REDUCTION OF BUYER'S INTEREST. The Mobil Term
Assignment provides that upon the occurrence of certain events that the
Assignee under said Assignment may be required to reassign to the Assignor
under said Agreement portions of the assigned premises not producing in
paying quantities (all as more particularly set forth and defined in the
Mobil Term Assignment). Seller hereby covenants and agrees to and with Buyer,
that in the event Buyer's interest in the production of oil, gas and/or other
minerals in lands which Buyer retained pursuant to the Mobil Term Assignment
is to be reduced for any reason as a result of the Unitization Agreement,
Seller shall execute an additional assignment or assignments to Buyer
covering a sufficient amount of Seller's interest in the Properties to
prevent such interests of Buyer from being reduced.
9.3 NOTICE OF CONTRACTUAL RIGHTS. Seller hereby covenants and
agrees to and with Buyer that at Closing Seller will execute and deliver to
Buyer a "Notice of Contractual Rights", in recordable form, which reflects
that Seller's interest in the Properties is burdened by the agreements and
covenants set forth in this Article 9. In the event Seller obtains and
delivers to Buyer an amendment to the Mobil Term Assignment which renders the
reason for Article 9.2 unnecessary, Buyer shall execute and deliver to Seller
a release of said Notice of Contractual Rights.
11
<PAGE>
ARTICLE 10.
INDEMNIFICATION
10.1 SELLER'S INDEMNIFICATION OF BUYER. Seller agrees to indemnify
and hold harmless Buyer and its shareholders, directors, officers, partners,
employees, and their agents and assigns, from and against any loss or damage
(including, without limitation, reasonable attorneys' fees and costs)
reasonably incurred (excluding any consequential damage or loss) (a "Loss")
by Buyer resulting from, based upon, or arising from, directly or indirectly:
(i) Any inaccuracy in or breach of Seller's representations and
warranties set forth herein.
(ii) Any other matter as to which Seller in other provisions of this
Agreement has expressly agreed to indemnify Buyer;
(iii) Any lawsuits, liens, judgments, costs, reasonable attorneys'
fees, claims or proceedings of any nature relating to the ownership or
operations of the Subject Interests and arising out of any act, transaction
or circumstance involving Buyer, whether based on negligence or otherwise,
and occurring prior to the Closing Date; and
(iv) Any claims, losses, damages, lawsuits, liens, judgments, costs,
reasonable attorneys' fees, claims or proceedings of any nature made by third
parties, including any and all governmental agencies or entities, relating to
the ownership and operation of the Subject Interests occurring before the
Closing Date.
10.2 BUYER'S INDEMNIFICATION OF SELLER. Buyer agrees to indemnify
and hold harmless Seller and its shareholders, directors, officers, partners,
employees, and their agents and assigns, from and against any Loss of Seller
resulting from, based upon, or arising from, directly or indirectly:
(i) Any inaccuracy in, or breach any of the representations or
warranties of Buyer set forth in this Agreement;
(ii) Any other matter as to which Buyer in other provisions of this
Agreement has expressly agreed to indemnify Seller;
(iii) Any lawsuits, liens, judgments, costs, reasonable attorneys'
fees, claims or proceedings of any nature relating to the ownership or
operations of the Subject Interests and arising out of any act, transaction
or circumstance involving Seller, whether based on negligence or otherwise,
and occurring after the Closing Date; and
(iv) Any claims, losses, damages, lawsuits, liens, judgments, costs,
reasonable attorneys' fees, claims or proceedings of any nature made by third
parties, including any and all governmental agencies or entities, relating to
the ownership and operation of the Subject Interests occurring after the
Closing Date.
12
<PAGE>
10.3 NOTICE AND OPPORTUNITY TO DEFEND. After receipt by any party
thereto (the "Indemnified Party") of notice of any demand, claim, or
circumstances that, with the lapse of time, could give rise to a claim, or
the commencement (or threatened commencement) of any action, proceeding, or
investigation, that in either case could give rise to a right to
indemnification pursuant to this Article 10 (an "Asserted Liability"), the
Indemnified Party will give the party that may become obligated to provide
indemnification under this Article 10 (the "Indemnifying Party") written
notice describing the Asserted Liability in reasonable detail and indicating
the amount (estimated, if necessary) of the Loss that has been or may be
suffered by the Indemnified Party. After accepting in writing an obligation
to indemnify the Indemnified Party against the assumed liability, the
Indemnifying Party may defend, at its own expenses and by its own counsel,
any Asserted Liability, and the Indemnified Party will cooperate in such
defense against such Asserted Liability. If the Indemnified Party fails to
defend the Asserted Liability with thirty (30) calendar days after notice
thereof (or sooner if the nature of the Asserted Liability so requires) or
contests its obligation to indemnify under this Agreement, the Indemnified
Party may pay, compromise, or defend such Asserted Liability for the account,
and at the expense of, the Indemnifying Party. Notwithstanding the foregoing,
neither the Indemnifying Party nor the Indemnified Party may settle or
compromise any claim over the objection of the other; provided, however, that
consent to settlement or compromise will not be unreasonably withheld. In
connection with the defense of any claim, the Indemnified Party will make
available to the Indemnifying Party any books, records, or other documents
within its control that are necessary or appropriate for such defense. In
addition, any Indemnifying Party will be subrogated to the rights of the
Indemnified Party with respect to the respective Loss.
10.4 RECOVERABLE AMOUNT. Neither Buyer nor Seller shall be entitled
to recover from Seller or Buyer, respectively, for any losses, costs,
expenses, or damages arising under this Agreement or in connection with or
with respect to the transactions contemplated in this Agreement any amount in
excess of the actual compensatory damages, court costs and reasonable
attorney fees, suffered by such party. Buyer and Seller shall have no right
to recover punitive, special, exemplary and consequential damage arising in
connection with or with respect to the transactions contemplated in this
Agreement.
10.5 NO SETTLEMENT IF ADVERSE IMPACT. No person entitled to
indemnification hereunder or otherwise to damages in connection with or with
respect to the transactions contemplated in this Agreement shall settle,
compromise or take any other action with respect to any claim, demand,
assertion of liability or legal proceeding that could prejudice or otherwise
adversely impact the ability of the person providing such indemnification or
potentially liable for such damages to defend or otherwise settle or
compromise with respect to such claim, demand, assertion of liability or
legal proceeding.
10.6 WAIVER OF BREACH. Neither Seller nor Buyer shall have any
obligation or liability under this Agreement or in connection with or with
respect to the transactions contemplated in this Agreement for any breach,
misrepresentation or noncompliance with respect to any representation,
warranty, covenant or obligation if such breach, misrepresentation or
noncompliance shall have been expressly waived by the other party.
13
<PAGE>
ARTICLE 11.
LIMITATION OF WARRANTIES
11.1 LIMITATION OF WARRANTIES. Anything in this Agreement to the
contrary notwithstanding, the Subject Interests are being sold by Seller to
Buyer without recourse, covenant, or warranty of any kind, express, implied,
or statutory, with the sole exception that each Seller will warrant title to
its respective ownership of the Subject Interests, subject to the Permitted
Encumbrances, against every person whomsoever lawfully claiming or to claim
the same or any part thereof by, through, or under each Seller, but not
otherwise. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING
SENTENCE, SELLER CONVEYS ALL PERSONAL PROPERTY, EQUIPMENT, IMPROVEMENTS, AND
FIXTURES COMPRISING THE PROPERTIES AS-IS, WHERE-IS AND WITH ALL FAULTS AND
EXPRESSLY DISCLAIMS AND NEGATES (a) ANY IMPLIED OR EXPRESS WARRANTY OF
MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE, AND (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS. SELLER ALSO EXPRESSLY DISCLAIMS AND NEGATES
ANY IMPLIED OR EXPRESS WARRANTY AT COMMON LAW, BY STATUTE OR OTHERWISE
RELATING TO THE ACCURACY OF ANY OF THE INFORMATION FURNISHED WITH RESPECT TO
THE EXISTENCE OR EXTENT OF RESERVES OR THE VALUE OF THE PROPERTIES BASED
THEREON OR THE CONDITION OR STATE OF REPAIR OF ANY OF THE PROPERTIES; THIS
DISCLAIMER AND DENIAL OF WARRANTY ALSO EXTENDS TO THE EXPRESS OR IMPLIED
REPRESENTATION OR WARRANTY AS TO THE PRICES BUYER AND SELLER ARE OR WILL BE
ENTITLED TO RECEIVE FROM PRODUCTION OF OIL, GAS OR OTHER SUBSTANCES FROM THE
PROPERTIES, IT BEING UNDERSTOOD THAT ALL RESERVE, PRICE AND VALUE ESTIMATES
UPON WHICH BUYER HAS RELIED OR IS RELYING HAVE BEEN DERIVED BY THE INDIVIDUAL
EVALUATION OF BUYER.
ARTICLE 12.
MISCELLANEOUS
12.1 FURTHER ASSURANCES. After the Closing, Seller and Buyer shall
execute, acknowledge and deliver or cause to be executed, acknowledged and
delivered such instruments and take such other action as may be necessary or
advisable to carry out their obligations under this Agreement and under any
exhibit, document, certificate or other instrument delivered pursuant hereto.
12.2 DELIVERY OF RECORDS TO BUYER. Within thirty (30) days after
Closing, Seller shall deliver to Buyer, at Seller's address, or at such other
place as any of same may be kept, duplicate copies of all items which Buyer
requested to be delivered at Closing.
12.3 NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be delivered personally or by
certified mail, postage prepaid and return receipt requested or by telecopier
as follows:
14
<PAGE>
Seller: Texstar Petroleum, Inc.
1000 Louisiana, 15th Floor
Houston, Texas 77002
Telephone: (713) 739-0351
Telecopier: (713) 739-8402
Attention: Thomas E. Hardisty
Hand Delivery: Land Department
Buyer: Prime Natural Resources, Inc.
5151 San Felipe, Suite 1200
Houston, Texas 77056
Telephone: (713) 513-3979
Telecopier: (713) 513-3870
Attention: Land Manager, Kenny Tidwell
Hand Delivery: Land Department
or to such other place within the United States of America as either party
may designate as to itself by written notice to the other. All notices given
by personal delivery or mail shall be effective on the date of actual receipt
at the appropriate address. Notices given by telecopier shall be effective
upon actual receipt if received during recipient's normal business hours or
at the beginning of the next business day after receipt if received after the
recipient's normal business hours. All notices by telecopier shall be
confirmed in writing on the day of transmission by either mailing by postage
prepaid certified mail with return receipt requested, or by personal delivery.
12.4 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
12.5 ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and
assigns. No such assignment shall release any party of any of its
obligations under this Agreement. Nothing in this Agreement shall entitle
any person other than the parties hereto or their respective permitted
successors and assigns to any claim, cause of action, remedy or right of any
kind.
12.6 ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. This Agreement
constitutes the entire Agreement between the parties hereto with respect to
the subject matter hereof, superseding all prior negotiations, discussions,
agreements and understandings, whether oral or written, relating to such
subject matter. This Agreement may not be amended and no rights hereunder
may be waived except by a written document signed by the party to be charged
with such amendment or waiver. No waiver of any of the provisions of the
Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
12.7 SEVERABILITY. If a court of competent jurisdiction determines
that any clause or provision of this Agreement is void, illegal, or
unenforceable, the other clauses and provisions of the Agreement shall remain
in full force and effect and the clauses and provisions which are determined
15
<PAGE>
to be void, illegal, or unenforceable shall be limited so that they shall
remain in effect to the extent permissible by law.
12.8 HEADINGS. The headings of the Articles and Sections of this
Agreement are for guidance and convenience of reference only and shall not
limit or otherwise affect any of the terms or provisions of this Agreement.
12.9 COUNTERPARTS. This Agreement may be executed by Buyer and
Seller in any number of counterparts, each of which shall be deemed an
original instrument, but all of which together shall constitute but one and
the same instrument.
12.10 EXPENSES, FEES AND TAXES. Each of the parties hereto shall pay
its own fees and expenses incident to the negotiation and preparation of this
Agreement and consummation of the transactions contemplated hereby, including
broker fees. Buyer shall be responsible for the cost of all fees for the
recording of transfer documents. All other costs shall be borne by the party
incurring them. Notwithstanding anything to the contrary herein, it is
acknowledged and agreed by and between Seller and Buyer that the Purchase
Price excludes any sales taxes or other taxes in connection with the sale of
property pursuant to this Agreement. If a determination is ever made that a
sales tax or other transfer tax applies, Buyer shall be liable for such tax
as well as any applicable conveyance, transfer and recording fees, and real
estate transfer stamps or taxes imposed on any transfer of property pursuant
to this Agreement. Buyer shall indemnify and hold Seller harmless with
respect to the payment of any of such taxes, including any interest or
penalties assessed thereon.
12.11 LAWS AND REGULATIONS. From and after the Closing, (a) Buyer
shall comply with all applicable laws, ordinances, rules and regulations and
shall properly obtain and maintain all permits required by public authorities
with regard to the Subject Interests, and shall provide and maintain with the
applicable regulatory agency(ies) all required bonds and permits.
12.12 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, INDEMNITIES
AND AGREEMENTS. All of the representations, warranties, covenants,
indemnities and agreements contained in this Agreement shall survive the
Closing and execution and delivery of all of the documents contemplated
hereby for a period ending August 25, 2000; provided, however, the
representations, warranties, covenants, indemnities and agreements contained
in Sections 1.3, 2.1, 3.8, 9.1, 9.2, 9.3 and 11.1 shall survive the Closing
and execution and delivery of all of the documents contemplated hereby
indefinitely.
12.13 TIME LIMITATIONS FOR NOTICE OF CLAIM BY BUYER. After the
Closing, any assertion by Buyer that Seller is liable (a) for the inaccuracy
of any representation or warranty, (b) for the breach of any covenant, (c)
for indemnity under the terms of this Agreement or (d) otherwise in
connection with the transactions contemplated in this Agreement, must be made
by Buyer in writing and must be given to Seller on or prior to August 25,
2000. It is the intent of the parties that this time limitation will be in
lieu of the applicable statutes of limitations. However, this Article 12.13
shall not apply to Sections 1.3, 2.1, 3.8, 9.1, 9.2, 9.3 and 11.1 of this
Agreement.
12.14 TIME LIMITATIONS FOR NOTICE OF CLAIM BY SELLER. After the
Closing, any assertion by Seller that Buyer is liable (a) for the inaccuracy
of any representation or warranty, (b) for the
16
<PAGE>
breach of any covenant, (c) for indemnity under the terms of this Agreement
or (d) otherwise in connection with the transactions contemplated in this
Agreement, must be made by Seller in writing and must be given to Buyer on or
prior to August 25, 2000. It is the intent of the parties that this time
limitation will be in lieu of the applicable statutes of limitations.
However, this Article 12.14 shall not apply to Sections 1.3, 2.1, 3.8, 9.1,
9.2, 9.3 and 11.1 of this Agreement.
12.15 SELLER'S LIABILITY THRESHOLD. Buyer shall not be entitled to
assert any right to indemnification hereunder or to otherwise seek any
damages or other remedies for or in connection with (a) the inaccuracy of any
representations of Seller contained in this Agreement or any other agreement
or instrument, executed or delivered in connection with this Agreement; (b)
the breach of, or failure to perform or satisfy any of the covenants of
Seller set forth in this Agreement or in any other agreement or instrument,
executed or delivered in connection with this Agreement; or (c) any
liabilities otherwise arising in connection with or with respect to the
transactions contemplated in this Agreement until the amount of the
Liabilities for such misrepresentations and breaches actually suffered by
Buyer exceeds $150,000.00, and then only to the extent of such excess.
12.16 BUYER'S LIABILITY THRESHOLD. Seller shall not be entitled to
assert any right to indemnification hereunder or to otherwise seek any
damages or other remedies for or in connection with (a) the inaccuracy of any
representations of Buyer contained in this Agreement or any other agreement
or instrument, executed or delivered in connection with this Agreement; (b)
the breach of, or failure to perform or satisfy any of the covenants of Buyer
set forth in this Agreement or in any other agreement or instrument, executed
or delivered in connection with this Agreement; or (c) any liabilities
otherwise arising in connection with or with respect to the transactions
contemplated in this Agreement until the aggregate amount of the Liabilities
for such misrepresentations and breaches actually suffered by Seller exceeds
$150,000.00, and then only to the extent of such excess.
12.17 MAXIMUM LIABILITY OF SELLER. Seller shall not be required to
indemnify Buyer or pay any other amount in connection with or with respect to
the transactions contemplated in this Agreement in any amount exceeding one
half of the aggregate of the Purchase Price, or, in the event Buyer acquires
the Option Interest, one half of the sum of the aggregate of the Purchase
Price, plus the amount pertaining to the Option Interest set forth in Article
2.2, including the $1,826,033.00 payment, the $214,276.00 payment, and any
payments required of Buyer as set forth in Article 2.2 concerning expenses
and fees.
12.18 MAXIMUM LIABILITY OF BUYER. Buyer shall not be required to
indemnify Seller or pay any other amount in connection with or with respect
to the transactions contemplated in this Agreement in any amount exceeding
one half of the aggregate of the Purchase Price, or, in the event Buyer
acquires the Option Interest, one half of the sum of the aggregate of the
Purchase Price, plus the amount of the $1,826,033.00 payment and the
$214,276.00 payment as set forth in Article 2.2 concerning payment for the
Option Interest.
12.19 SOLE REMEDY. If the Closing occurs, the sole and exclusive
remedy of Buyer and Seller with respect to the purchase and sale of the
Subject Interests shall be pursuant to the express provisions of this
Agreement. Any and all (a) claims relating to the representations,
warranties, covenants and agreements contained in this Agreement, (b) other
claims pursuant to or in connection with this Agreement or (c) other claims
relating to the Subject Interests and the purchase and sale
17
<PAGE>
thereof shall be subject to the provisions set forth in this SECTION 12. If
the Closing occurs, Buyer and Seller shall be deemed to have waived, to the
fullest extent permitted under applicable law, any and all rights, claims and
causes of action it may have against Seller or Buyer, respectively, arising
under or based on any federal, state or local statute, law, ordinance, rule
or regulation or common law or otherwise.
18
<PAGE>
12.17 EXHIBITS AND SCHEDULES. The following Appendix, enumerated
Exhibits, and Disclosure Schedule are incorporated herein and are a part
hereof.
<TABLE>
<CAPTION>
<S> <C>
APPENDIX A Definitions
EXHIBIT A Description of Leases
EXHIBIT A-1 Description of Acquisition Documents
EXHIBIT B Description of Options
EXHIBIT C Description of Contracts
EXHIBIT D Area of Mutual Interest
EXHIBIT E Form of Assignment and Bill of Sale
EXHIBIT F Subordination Agreement
SCHEDULE 1.2 Overriding Royalty Conveyances Burdening Buyer
SCHEDULE 1.2A Overriding Royalty Conveyances Not Burdening Buyer
SCHEDULE 1.3 Overriding Royalty Interests on AMI Acquisitions
SCHEDULE 3.6 Pending Claims and Litigation
SCHEDULE 3.9 Material Contracts
SCHEDULE 3.10 Pending AFEs
SCHEDULE 3.12 Consents and Preferential Rights
SCHEDULE 3.15 Prepayments
SCHEDULE 3.19 Restrictions
</TABLE>
19
<PAGE>
Executed as of the date set forth above.
SELLER:
TEXSTAR PETROLEUM, INC.
By: /s/ Prentis B. Tomlinson, Jr.
-----------------------------------------
Prentis B. Tomlinson, Jr.
Chairman and Chief Executive Officer
BENZ ENERGY INC.
By: /s/ Prentis B. Tomlinson, Jr.
------------------------------------------
Prentis B. Tomlinson, Jr.
Chairman and Chief Executive Officer
BUYER:
PRIME NATURAL RESOURCES, INC.
By: /s/ W. Richard Anderson
------------------------------------------
W. Richard Anderson
Executive Vice President and
Chief Financial Officer
THIS IS A SIGNATURE PAGE TO THE PURCHASE AND SALE AGREEMENT
<PAGE>
APPENDIX A
DEFINITIONS
Capitalized terms used in this Agreement shall have the meanings
ascribed to them in this Appendix A unless such terms are defined elsewhere
in this Agreement:
"AFFILIATES" shall mean any person or entity, directly or indirectly
controlling or controlled by or under direct or indirect control with such
person or entity as defined in the Securities Act of 1933, as amended.
"AGREEMENT" shall mean this Purchase and Sale Agreement.
"AMI" shall have the meaning ascribed to such term in the third
recital to this Agreement.
"AMI ACQUISITIONS" shall have the meaning ascribed to such term in
SECTION 1.3.
"ASSIGNMENT" shall have the meaning ascribed to such term in SECTION
7.2(a).
"ASSUMED OBLIGATIONS" shall mean all pro rata liabilities, duties and
obligations that arise on or after the Closing from ownership or operations
of the Subject Interests, including, but not limited to, (A) all duties,
liabilities and obligations arising on or after the Closing under any
Contract or other agreement affecting the Subject Interests, including, but
not limited to, (i) the Options, (ii) the Mobil Term Assignment, (iii) the
Exploration Agreement, (iv) the Unitization Agreement, (v) the Operating
Agreement and (B) all duties, liabilities and obligations that arise under
the Leases, assignments in the chain of title of the Leases, and burdens on
production; and (C) the Option Interest and (D) all other duties, liabilities
and obligation assumed by Buyer under this Agreement.
"CLOSING" shall have the meaning ascribed to such term in SECTION 7.1.
"CLOSING DATE" shall have the meaning ascribed to such term in
SECTION 7.1.
"CONTRACTS" shall have the meaning ascribed to such term in
SECTION 1.1(c).
"EQUIPMENT" shall mean all personal property, movables, equipment,
fixtures, gathering lines, pipelines, and improvements located on and
appurtenant to the Leases and Lands insofar as they are used or held in
connection with the operation of the Leases insofar as they cover the Lands
or relate to the production, treatment, sale, or disposal of hydrocarbons or
water produced therefrom or attributable thereto.
"EXPLORATION AGREEMENT" shall mean that certain Agreement dated
effective October 15, 1997, by and between Amoco Production Company, Mobil
Producing Texas and New Mexico Inc. and Cheyenne Petroleum Company, as
amended.
"HYDROCARBONS" shall have the meaning ascribed to such term in Section
1.1(e).
Appendix A, Page 1
<PAGE>
"LANDS" shall have the meaning ascribed to such term in the third
paragraph of the Recitals.
"LEASES" shall have the meaning ascribed to such term in SECTION 1.1(a).
"MATERIAL CONTRACT" shall mean a contract to which Seller is a party
and involves payments of over $100,000.00 in any twelve month period.
"MOBIL TERM ASSIGNMENT" shall mean that certain Term Assignment of Oil
and Gas Lease dated effective December 31, 1998, from Mobil Producing Texas
and New Mexico Inc. to Texstar Petroleum, Inc., as amended.
"OPERATING AGREEMENT" shall mean the Operating Agreement Seller and Buyer
intend to enter into in accordance with the Exploration Agreement and in the
form annexed thereto.
"OPTIONS" shall have the meaning ascribed to such term in SECTION 1.1(B).
"PERMITTED ENCUMBRANCES" shall mean any or all of the following:
(i) encumbrances that arise under operating agreements to
secure payment of amounts not yet delinquent and are of a type and
nature customary in the oil and gas industry;
(ii) encumbrances that arise as a result of pooling and
unitization agreements, declarations, orders or laws to secure payment
of amounts not yet delinquent;
(iii) encumbrances securing payments to mechanics and
materialmen and encumbrances securing payment of taxes or assessments
that are, in either case, not yet delinquent;
(iv) consents to assignment by governmental authorities that
are customarily obtained after the consummation of transactions of the
nature contemplated by this Agreement;
(v) easements, rights-of-way, servitudes, permits, surface
leases, surface use restrictions and other surface uses and impediments
on, over or in respect of any of the Subject Interests that are not such
as to interfere materially with the operation, value or use of any of the
Subject Interests;
(vi) such title defects as Buyer has expressly waived in
writing;
(vii) rights reserved to or vested in any municipality or
governmental, tribal, statutory or public authority to control or
regulate any of the Subject Interests in any manner, and all applicable
laws, rules and orders of any municipality or governmental or tribal
authority; and
(viii) the terms and conditions of (A) the Leases, (B) the
Options, (C) the Mobil Term Assignment, (D) the Exploration Agreement,
(E) the Unitization Agreement, (F) the
Appendix A, Page 2
<PAGE>
Operating Agreement, and (G) all other agreements required to be
executed under the terms and conditions of items (A) through (G) above.
"PURCHASE PRICE" shall have the meaning ascribed to such term in
SECTION 2.1.
"SEISMIC DATA" shall mean all of the three dimensional seismic data
acquired over the Lands and processed by Western Geophysical Company in
accordance with that certain General Agreement for Acquisition of Geophysical
Data dated October 5, 1998, the Supplemental Agreement No. 1 dated October 5,
1998, as amended, and the Letter Agreement dated January 6, 1999 (Bid
#010598G1) between Benz Energy LTD (now Benz Energy Inc.) and Western
Geophysical Company.
"SUBJECT INTERESTS" shall have the meaning ascribed to such term in
SECTION 1.1.
"UNITIZATION AGREEMENT" shall mean that certain Old Ocean Field
Unitization Agreement dated January 30, 1947, recorded in Vol. 412, Pg. 1, of
the Deed Records of Brazoria County, Texas, and in Vol. 176, Pg. 55 of the
Deed Records of Matagorda County, Texas.
Appendix A, Page 3
<PAGE>
[LETTERHEAD]
December 15, 1998
Mr. Bud Foster
Texstar Petroleum, Inc.
1000 Louisiana, Suite 3950
Houston, Texas 77002
RE: Sale of Wausau Pipeline System, A. Foote Estate #1 and Fairchild #1 Wells
Wayne and Jones Counties, Mississippi
Dear Mr. Foster:
Reference is made to the December 14, 1998 letter of intent by Texstar
offering to purchase the TransTexas eight-inch pipeline, and related
facilities, running from the TransTexas Foote Estate #1 well in Wayne County,
Mississippi to the Tennessee Gas Transmission Line in Jones County,
Mississippi, and the TransTexas A. Foote Estate #1 and Fairchild #1 wells.
TransTexas is interested in selling the pipeline and wells subject to
general terms and conditions stated in your letter of intent, but altered as
set forth below:
(i) Cash consideration for the pipeline and wells in the amount of
Four Hundred Twenty-five Thousand Dollars ($425,000) for
TransTexas' right, title and interest (assumed to be 100% in the
pipeline and a net revenue interest of 70% in each well);
(ii) Free gas transportation as set forth in paragraph 3 of your
letter of intent is no longer necessary because Texstar will be
buying the wells;
(iii) The execution by both parties of definitive conveyancing
documents which set forth mutually acceptable terms and
conditions of the transaction; and
(iv) The approval by the Board of Directors of TransTexas Gas
Corporation.
If the foregoing alterations to the provisions set forth in the Texstar
December 14, 1998 letter of intent represent acceptable revised general terms
and conditions for the purchase and sale of these assets, please sign in the
space provided below and return one executed copy to TransTexas.
Very truly yours,
/s/ Arnold Brackenridge
---------------------------------------
Arnold Brackenridge
President
AGREED TO AND ACCEPTED:
/s/ William G. Foster
- ------------------------------
William G. Foster, Land Manager
<PAGE>
DEBT RESTRUCTURE AGREEMENT
BETWEEN
BENZ ENERGY, INC.,
TEXSTAR PETROLEUM, INC.
STEWART PECK, IN HIS CAPACITY AS
COLLATERAL AGENT, STEWART PECK,
IN HIS CAPACITY AS DEPOSIT AGENT,
PARTICIPATING CREDITORS AND,
SOLELY FOR THE PURPOSES INDICATED IN
SECTION 25.09, AQUILA ENERGY CAPITAL CORPORATION
<PAGE>
DEBT RESTRUCTURE AGREEMENT
This Debt Restructure Agreement ("Agreement") is made by and among
Benz Energy, Inc., Texstar Petroleum, Inc., Stewart Peck, in his capacity as
Collateral Agent, Stewart Peck, in his capacity as Deposit Agent,
Participating Creditors and, solely for the purposes indicated in Section
25.09, Aquila Energy Capital Corporation.
ARTICLE I
DEFINITIONS
The following terms, as used in this Agreement, shall have the
meanings indicated below, unless the context otherwise requires:
1.01 "ALLOWED AMOUNT" shall mean the amount of a creditor's claim
which is either (i) acknowledged and agreed to by the Companies, or (ii) is
established as due and owing by the Companies pursuant to the arbitration
procedures set forth in Section 6.03. In no event shall the Allowed Amount
include interest for the period prior to the Closing Date or attorneys' fees.
1.02 "AQUILA" shall mean Aquila Energy Capital Corporation, a
Delaware corporation, its successors and assigns.
1.03 "AVERAGE ADJUSTED SHARE PRICE" shall mean the average of the
closing price of shares of Benz common stock for the thirty (30) trading days
prior to payment in full of the Participating Creditor Claims as provided in
this Agreement (excluding the Upside Payment) adjusted for share
consolidations and dilutions from issuance of stock at less than market price
(other than that resulting from the exercising, existing or proposed warrants
or options disclosed in the Benz Energy Inc. Offer to Exchange and Offer to
Sell dated June 15, 1999 or options and warrants issued in the future at
exercise price less than the then market price).
1.04 "BENZ" shall mean Benz Energy, Inc.
1.05 "BUSINESS DAY" shall mean a day other than a Saturday, a
Sunday, or any federal holiday.
1.06 "CAPITAL EXPENDITURES" shall mean, from and after the first day
of the month following the Closing Date, all costs required to be capitalized
initially according to generally accepted accounting procedures under the
full cost accounting method, and shall include oil and gas lease acquisition
costs, seismic data acquisition expenses, seismic data processing expenses,
delay rental payments, plugging and abandonment expenses, and (to the extent
not treated as lease operating expenses) costs to comply with governmental
regulations.
1.07 "CASH" means legal tender of the United States or equivalents
thereof.
1
<PAGE>
1.08 "CLOSING DATE" shall mean the first Business Day following
satisfaction of all conditions to this Agreement set forth in Article II,
which shall be August 6, 1999 unless extended by the Companies in their sole
discretion; provided that in no event shall the Closing Date be extended
beyond September 30, 1999.
1.09 "COLLATERAL AGENT" shall mean Stewart Peck or his successor
appointed pursuant to the terms of this Agreement and the Collateral Agent
Agreement.
1.10 "COLLATERAL AGENT AGREEMENT" shall mean the Collateral Agent
Agreement in the form of Exhibit 8.
1.11 "COLLATERAL DOCUMENTS" shall mean the Deeds of Trust,
Assignment of Production, Security Agreement and Financing Statement and Act
of Mortgage, Pledge and Security Agreement substantially in the form of
Exhibits 3, 4 and 5 and the Security Agreement substantially in the form of
Exhibit 6 to this Agreement.
1.12 "COMPANIES" shall mean Benz and Texstar.
1.13 "CONVENIENCE CLAIM" shall mean any claim against either or both
of the Companies that is (i) $10,000 or less, or (ii) more than $10,000 if
the holder has elected on a timely basis, to reduce its claim to $10,000.
1.14 "CREDITOR RATIFICATION" shall mean the Ratification and Limited
Power of Attorney in the form attached as Exhibit 1.
1.15 "DEBT SERVICE" shall mean payments of principal and interest
that are required to be made on the Senior Indebtedness, the Enabling Loan
and Future Loans from and after the first day of the month following the
Closing Date.
1.16 "DEDICATED PORTION OF NET LOAN PROCEEDS" shall mean fifty
percent (50%) of the Net Loan Proceeds.
1.17 "DEDICATED PORTION OF NET PROPERTY SALE PROCEEDS" shall mean on
a property-by-property basis fifty percent (50%) of the Net Property Sales
Proceeds.
1.18 "DEDICATED RECEIVABLES" shall mean the dollar amount owed to
Texstar by (i) Century Offshore Management Co. for operations on the Oakvale
Dome property and Wausau property through June 30, 1999, and (ii) Akasha
Partners LLC for operations on the Wausau property and the East Morgantown
property through June 30, 1999.
1.19 "DEPOSIT AGENT" shall mean Stewart Peck.
1.20 "DISPUTED CLAIM" shall mean that portion of an Eligible Claim
held by a Participating Creditor in excess of the Allowed Amount.
2
<PAGE>
1.21 "DISPUTED CLAIM RESERVE" shall mean the dollar amount which at
any point in time would have been paid to a Participating Creditor for and on
account of its Disputed Claim if such Disputed Claim was an Allowed Amount.
1.22 "ELIGIBLE CLAIMS" shall mean the claims held by the creditors
of the Companies for services, materials or supplies provided on or before
June 14, 1999 listed on Exhibit 2 to this Agreement and in the amounts which
are listed in Exhibit 2, plus (i) any additional amounts which are later
determined to have been owed in accordance with Article VI, and (ii) any
additional creditor and claim which the Companies elect at any point
(including after the Closing Date) to include as Eligible Claims. The dollar
amount of Eligible Claims shall be adjusted to reflect any settlements or
arbitration awards.
1.23 "ENABLING LOAN" shall mean all loans by Aquila (and other
amounts due Aquila) pursuant to the loan agreement entered into on or about
the Closing Date between Texstar and Aquila, which loans shall not be in an
aggregate amount less than $25,000,000 nor greater than $35,000,000 unless
the Requisite Majority otherwise consents in writing.
1.24 "EVENT OF DEFAULT" shall mean the occurrence of any conditions,
events or acts described in Article XXII.
1.25 "EXEMPTED MERGER" shall mean a merger by Benz approved by a
majority of Senior Management with a U.S. corporation that is effected for
the primary purpose of enabling Benz to list its common shares on the NASDAQ
or similar system or American Stock Exchange. A merger with any company
listed on the NASDAQ, American Stock Exchange or similar system will be
deemed to be effectively for the primary purpose of enabling Benz to list its
common shares on such exchange or system if the other company has an
Enterprise Value equal to or less than half of the Enterprise Value of Benz.
For the purpose of this section, "Enterprise Value" is the aggregate of total
debt, principal amount of preferred stock not traded on a public market and
the market value of all publicly traded stock.
1.26 "FUTURE LOAN" shall mean any lending transactions (other than
vendor financing), including any loans by Aquila other than the Enabling
Loan, which are entered into subsequent to the Closing Date.
1.27 "G&A EXPENSES" shall mean, from and after the first day of the
month following the Closing Date, all customary and routine expenses
generated or incurred by the Companies for legal, accounting, data
processing, geological, engineering or secretarial services, group services
and costs, depreciation (other than depreciation relating to real property),
travel, office rent, telephone, reasonable employee compensation and benefits
comparable to that paid by similar publicly traded oil and gas exploration
companies (compensation in accordance with existing agreements or past levels
is deemed reasonable), maintenance of the publicly traded status of the Benz
Stock, and other items of a general and administrative nature, whether like
or unlike the foregoing, and any other incidental expenses reasonably
necessary to conduct the Companies' business.
1.28 "INITIAL PAYMENTS" shall mean the payments to Participating
Creditors provided for
3
<PAGE>
in Section 8.01.
1.29 "LOAN EXPENSES" shall mean, from and after the first day of the
month following the Closing Date, the direct costs, fees and expenses
incurred by the Companies in connection with obtaining financing or
refinancing on the Oil and Gas Properties, including but not limited to,
commissions, finders fees, title policy premiums, endorsement charges,
escrow fees, reasonable and actual legal fees and charges of the lender
(i.e., engineering, repairs and repair allowances, legal, appraisal and loan
fees), survey expenses, and title company charges and legal fees incurred by
the Companies.
1.30 "NET LOAN PROCEEDS" means the gross proceeds from a Future Loan
minus the sum of (i) Loan Expenses, (ii) the dollar amount of such loan
proceeds used to repay any loan (including the Senior Indebtedness, the
Enabling Loan and any Future Loan) secured by liens with priority greater
than that of the liens securing the obligations to the Collateral Agent, and
(iii) the portion of the loan proceeds required by the lender to be dedicated
for purposes other than repayment of existing debt.
1.31 "NET PROPERTY SALE PROCEEDS" shall mean the gross proceeds from
the sale of one or more of the Oil and Gas Properties less the sum of the
Selling Expenses, Senior Indebtedness, Enabling Loan and Future Loan.
1.32 "NET REVENUE FROM OPERATIONS" shall mean the amount by which
cumulative Revenue from Operations exceeds cumulative Operation Expenses.
1.33 "NON-PARTICIPATING CLAIMS" shall mean the amount of Eligible
Claims of creditors that fail to become Participating Creditors.
1.34 "NON PARTICIPATING CREDITOR RESERVE" shall mean the dollar
amount which at any point in time would have been paid to holders of Non
Participating Claims pursuant to this Agreement if they had elected to be
Participating Creditors.
1.35 "OIL AND GAS PROPERTIES" shall mean the Companies' interest in
oil and gas leases pledged as collateral pursuant to the Collateral Documents
(excluding third party royalties, overriding royalties, net profit interests
or interests held in trust for the benefit of third parties), together with
the interest in any oil and gas leases acquired by the Companies (excluding
third party royalties, overriding royalties, net profit interests or
interests held in trust for the benefit of third parties) subsequent to the
Closing Date that are required to be pledged as collateral pursuant to
Article XIX. The security interest in the Old Ocean property pledged as
collateral shall be fifty percent (50%) of the Companies' working interest as
of July 1, 1999. Accordingly, any interest in the Old Ocean property in
excess of a fifty percent (50%) of the Companies' working interest as of July
1, 1999 is not included within the definition of an Oil and Gas Property for
purposes of this Agreement. The security interest in the Rayburn property
pledged as collateral shall be a sixty percent (60%) working interest.
Accordingly, any interest in the Rayburn property in excess of a sixty
percent (60%) working interest is not included within the definition of an
Oil and Gas Property for purposes of this Agreement. The Plum Grove property
shall not be included as an Oil and Gas
4
<PAGE>
Property.
1.35 "OPERATING AGREEMENT" means the operating agreements in effect
as of the date hereof, and from time to time hereafter, for the Oil and Gas
Properties between either of the Companies and other working interest owners.
1.36 "OPERATION EXPENSES" shall mean and shall include the following
costs and expenses actually incurred by the Companies from and after the
first day of the month following the Closing Date:
(i) all costs of gathering, transporting and marketing
production from the Oil and Gas Properties;
(ii) all costs of operating, producing and maintaining the Oil
and Gas Properties (including any third party non-operating interest
owner's share of expenses advanced by the Companies pursuant to the terms
of an Operating Agreement);
(iii) Capital Expenditures;
(iv) all costs of processing production from the Oil and Gas
Properties;
(v) G&A Expenses;
(vi) Debt Service;
(vii) Taxes;
(viii) the Non Participating Creditor Reserves and payments to Non
Participating Creditors up to the amount of the Non Participating
Creditor Reserve; and
(ix) payments for and on account of Participating Creditors'
Claims.
1.37 "PARTICIPATING CREDITOR'S CLAIM" shall mean the Allowed Amount
of an Eligible Claim of a Participating Creditor and shall not include the
Upside Payment Amount.
1.38 "PARTICIPATING CREDITORS" shall mean the holders of Eligible
Claims that satisfy the requirements to become Participating Creditors.
1.39 "PRO RATA" means the proportion that the balance of the Allowed
Amount of a Participating Creditor Claim bears to the aggregate balance of
all Eligible Claims held by Participating Creditors unless otherwise provided.
1.40 "REQUISITE MAJORITY" shall mean Participating Creditors holding
at least sixty percent (60%) by number of all Participating Creditor Claims
that timely return ballots in response to a Solicited Action, provided that
such claims must have originally totaled at least $3,500,000
5
<PAGE>
(based on Allowed Amounts prior to crediting payments pursuant to this
Agreement).
1.41 "REVENUE FROM OPERATIONS" shall mean the following amounts
actually earned and received by the Companies from and after the first day of
the month following the Closing Date:
(i) gross proceeds from the sale of hydrocarbons produced from
the Oil and Gas Properties;
(ii) funds received from third party non-operating interest
owners to reimburse the Companies for advances pursuant to an Operating
Agreement;
(iii) all material proceeds received by the Companies from the
sale, from and after the Closing Date, of any materials, supplies,
equipment and other personal property or fixtures, or any part thereof or
interest therein, located on or used in connection with the Oil and Gas
Properties;
(iv) all insurance proceeds received by the Companies as a
consequence of the loss or damage from and after the Closing Date to the
Oil and Gas Properties, or any part thereof or interest therein, or any
materials, supplies, equipment or other personal property or fixtures
located on or used in connection with any of the Oil and Gas Properties,
unless such proceeds are used by the Companies within 180 days of receipt
to replace any such lost or damaged materials, supplies, equipment and
other personal property; and
(v) the proceeds of all judgments and claims received by the
Companies (excluding the Dedicated Receivables) for damages from and
after the Closing Date directly related to the Oil and Gas Properties, or
any part thereof or interest therein, or any materials, supplies,
equipment or other personal property or fixtures, or any part thereof or
interest therein, located on or used in connection with any of the Oil
and Gas Properties and which is specifically allocated to the Oil and Gas
Properties or the materials, supplies, equipment or other personal
property or fixtures or any part thereof located on or used in connection
with any of the Oil and Gas Properties.
Proceeds from the sale of Oil and Gas Properties and loan proceeds are not
included within Revenue from Operations.
1.42 "SELLING EXPENSES" shall mean the direct costs, fees and
expenses incurred by the seller in connection with the sale of an Oil and Gas
Property, including but not limited to, all transfer gains and sales taxes,
sales commissions, employee supplemental compensation of ten percent (10%) of
Net Property Sales Proceeds from undeveloped properties net of all other
Selling Expenses, finders fees, title policy premiums, endorsement charges,
escrow fees, survey expenses and title company charges, repair costs and
repair allowances, actual legal costs and fees.
1.43 "SENIOR INDEBTEDNESS" shall mean the indebtedness described in
Exhibit 7.
1.44 "SENIOR MANAGEMENT" shall mean Prentis Tomlinson, Bob Herlin
and Todd Grabois.
6
<PAGE>
1.45 "SOLICITED ACTION" shall mean any proposed action or agreement
that Participating Creditors are requested to approve in accordance with the
procedures set forth in Section 24.02.
1.46 "SUBSTANTIAL MANAGEMENT CHANGE" shall mean the termination or
resignation of two (2) or more of the existing Senior Management.
1.47 "TAXES" means all taxes of any type including income,
franchise, transfer, ad valorem, property, occupation, gathering, pipeline
regulating, windfall profit, severance, gross production, energy, excise and
other taxes and governmental charges and assessments imposed on the Oil and
Gas Properties, regardless of whether incurred before or after the Closing
Date.
1.48 "TEXSTAR" shall mean Texstar Petroleum, Inc.
1.49 "UPSIDE PAYMENT" shall mean the payment provided for in Article X.
1.50 "UPSIDE PAYMENT AMOUNT" shall mean one percent (1%) of the
balance of Participating Creditor Claims, after crediting the Initial
Payment, for every $.05 (Canadian) that the Average Adjusted Share Price
exceeds $.70 (Canadian) up to a maximum of five percent (5%). For purposes
of this calculation, the Average Adjusted Share Price will be rounded to the
nearest number evenly divisible by five. For example, if the Average
Adjusted Share Price was $.82 (Canadian) a Participating Creditor's Upside
Payment Amount would be two percent (2%) of the balance of that claim after
crediting the Initial Payment. In the event that the shares of Benz common
stock become denominated in U.S. dollars, the above amounts that are in
Canadian dollars will be converted to U.S. dollars at the exchange rate
between Canada and U.S. currency published by Bloomberg on the Business Day
preceding such change in denomination.
ARTICLE II
CONDITIONS
2.01 CONDITIONS TO BE SATISFIED BY TEXSTAR. The obligations of
Benz, Participating Creditors and the Collateral Agent under this Agreement
are conditioned upon the completion of the following conditions on or before
the Closing Date, each of which constitute a condition precedent to their
covenants and agreements under this Agreement.
(a) AGREEMENT. Texstar shall execute and deliver this
Agreement to the Deposit Agent.
(b) COLLATERAL DOCUMENTS. Texstar shall execute and deliver
the Collateral Documents to the Deposit Agent.
(c) COLLATERAL AGENT AGREEMENT. Texstar shall execute and
deliver the Collateral Agent Agreement to the Deposit Agent.
(d) INITIAL PAYMENT. Texstar shall execute and deliver to the
Deposit Agent
7
<PAGE>
company checks payable to Participating Creditors for Participating
Creditor Claims in the amount of the required Initial Payments as
provided in Section 8.01.
(e) REPRESENTATION. The representations of Texstar set forth in
this Agreement shall be true in all material respects as of the Closing
Date.
2.02 CONDITIONS TO BE SATISFIED BY BENZ. The obligations of
Texstar, Participating Creditors and the Collateral Agent under this
Agreement are conditioned upon completion of the following conditions on or
before the Closing Date.
(a) AGREEMENT. Benz shall execute and deliver this Agreement
to the Deposit Agent.
(b) REPRESENTATION. The representations of Benz set forth in
this Agreement shall be true in all material respects as of the Closing
Date.
2.03 CONDITION TO BE SATISFIED BY PARTICIPATING CREDITORS. The
obligations of the Companies and the Collateral Agent under this Agreement
are conditioned upon holders of Eligible Claims holding at least eighty-five
percent (85%) by dollar amount of all Eligible Claims timely satisfying the
requirements to become Participating Creditors as provided in Article V
hereof. Unless extended by the Companies, in their sole discretion, the
deadline for satisfaction of this condition is August 13, 1999. The timely
satisfaction of this condition constitutes a condition precedent to the
covenants and agreements of the Companies and the Collateral Agent under this
Agreement.
2.04 OTHER CONDITIONS TO BE SATISFIED. The obligations of the
Companies, the Collateral Agent and the Participating Creditors are
conditioned upon (i) closing and funding of the Enabling Loan, (ii) the Benz
Offer to Exchange Shares of Class A Series II Convertible Preferred Stock for
Convertible Debentures and Sell Class A Series II Convertible Preferred Stock
dated June 15, 1999, (iii) purchase of Class A Redeemable Preferred Stock
Series A by EnCap Energy Capital Fund III, L.P., and (iv) delivery by counsel
for the Companies to the Deposit Agent of an Opinion of Counsel substantially
in the form of Exhibit 9, on or before the Closing Date, each of which
constitutes a condition precedent to the covenants and agreements under this
Agreement.
ARTICLE III
DEPOSIT AGENT
3.01 DEPOSITS IN ESCROW. Pending satisfaction of the conditions set
forth in Article II, the instruments delivered to the Deposit Agent shall be
held in escrow.
3.02 DELIVERY TO COLLATERAL AGENT IN EVENT CONDITIONS ARE SATISFIED.
In the event the conditions set forth in Article II are timely satisfied, the
Deposit Agent shall deliver to the Collateral Agent (i) this Agreement fully
executed by the Companies, Participating Creditors and the Collateral Agent,
and (ii) copies of Creditor Ratifications executed by Participating
Creditors, and (iii) the
8
<PAGE>
Collateral Documents fully executed by Texstar.
3.03 DELIVERY TO PARTICIPATING CREDITORS IN THE EVENT CONDITIONS ARE
SATISFIED. In the event that the conditions set forth in Article II are
timely satisfied, then, within two (2) Business Days of satisfaction of all
conditions, the Deposit Agent shall mail the checks representing the Initial
Payment to each Participating Creditor.
3.04 DELIVERY TO THE COMPANIES IN THE EVENT CONDITIONS ARE
SATISFIED. In the event that the conditions set forth in Article II are
timely satisfied, the Deposit Agent shall simultaneous with receipt of the
checks for the Initial Payment deliver the originals of each Creditor
Ratification to Texstar.
3.05 INSTRUCTIONS IN EVENT CONDITIONS ARE NOT TIMELY SATISFIED. In
the event that the conditions set forth in Article II are not satisfied
within the times (including any extensions granted in accordance therewith)
set forth therein, then this Agreement shall be void and the instruments
delivered to the Deposit Agent shall be of no force and effect and shall be
destroyed by the Deposit Agent. The Collateral Agent shall have no
obligation or duties in the event the conditions set forth in Article II are
not timely satisfied.
3.06 LIMITATION ON DUTY AND LIABILITY OF DEPOSIT AGENT. The duties
and responsibilities of the Deposit Agent shall be limited to those expressly
set forth in this Agreement. No implied duties of the Deposit Agent shall be
read into this Agreement, and the Deposit Agent shall not be subject to, or
obliged to recognize, any other agreement between, or direction or
instruction of, any or all of the parties hereto even though reference
thereto may be made herein. The Deposit Agent is authorized, in its sole
discretion, to disregard any and all notices or instructions given by any
other party hereto or by any other person, firm or corporation, except only
such notices or instructions as are herein provided for or orders of any
court entered or issued with or without jurisdiction. If any property
subject hereto is at any time attached, garnished, or levied upon under any
court order or in case the payment, assignment, transfer, conveyance or
delivery of any such property shall be stayed or enjoined by any court order,
or in case any order, judgment or decree shall be made and entered by any
court affecting such property or any part hereof, then and in any such event
the Deposit Agent is authorized, in its sole discretion, to rely upon and
comply with any such order, writ, judgment or decree with which it is advised
by legal counsel of its own choosing is binding upon it; and if it complies
with any such order, writ, judgment or decree, it shall not be liable to any
other party hereto or to any other person, firm or corporation by reason of
such compliance even though such order, writ, judgment or decree may be
subsequently reversed, modified, annulled, set aside or vacated. The Deposit
Agent may rely, and shall be protected in acting or refraining from acting,
upon any instruments furnished to it hereunder and believed by it to be
genuine and believed by it to have been signed or presented by the
appropriate party or parties. The Deposit Agent shall not be responsible for
the sufficiency or accuracy, or the form, execution, validity or genuineness,
of documents hereafter deposited or received hereunder, or of any endorsement
thereon, or for lack of endorsement thereon, or for any description therein;
nor shall it be responsible or liable in any respect on account of the
identity, authority or rights of any person executing, depositing or
delivering or purporting to execute, deposit or deliver any such document,
security or endorsement or this Agreement, or on account of or by reason of
forgeries, false representations, or the exercise
9
<PAGE>
of its discretion in any particular manner; nor shall the Deposit Agent be
liable for any mistake of fact or any error of judgment, or for any act or
omission, except as a result of its gross negligence or willful malfeasance.
3.07 INDEMNITY. The Companies hereby agree to protect, defend,
indemnify and hold harmless the Deposit Agent against and from any and all
costs, losses, liabilities, expenses (including counsel fees and expenses)
and claims imposed upon or asserted against the Deposit Agent on account of
any action taken or omitted to be taken by it in good faith in connection
with its acceptance of or performance of its duties and obligations as
Deposit Agent under this Agreement as well as the costs and expenses of
defending itself against any claim or liability arising out of or relating to
this Agreement in such capacity only. The Participating Creditors hereby
release the Deposit Agent from any and all claims, demands and liabilities in
any manner arising from or related to the performance of his obligations
under this Agreement, whether for his acts or failure to act insofar as the
same shall have been in good faith.
3.08 RESIGNATION. It is understood that the Deposit Agent reserves
the right to resign as Deposit Agent at any time by giving ten (10) Business
Days written notice of its resignation, specifying the effective date
thereof, to each other party hereto. Within ten (10) Business Days after
receiving the aforesaid notice, the other party or parties hereto shall
appoint a successor Deposit Agent to which the Deposit Agent may distribute
the property then held hereunder, less its fees, costs and expenses
(including counsel fees and expenses).
ARTICLE IV
EFFECT OF FAILURE TO SATISFY CONDITIONS AND
EFFECT OF SATISFACTION OF CONDITIONS
4.01 EFFECT OF NOT SATISFYING CONDITIONS. This Agreement, all
stipulations and acknowledgments contained in this Agreement and all
agreements and instruments delivered or to be delivered pursuant to this
Agreement (including the Collateral Documents) shall be of no force or effect
unless the conditions set forth in Article II are satisfied.
4.02 EFFECT OF SATISFYING CONDITIONS. This Agreement and all
agreements and instruments delivered or to be delivered pursuant to this
Agreement (including the Collateral Documents) shall become effective
immediately upon the timely satisfaction of all the conditions set forth in
Article II.
ARTICLE V
PARTICIPATING CREDITORS AND RATIFICATION
5.01 CREDITOR RATIFICATION. In order for the holder of an Eligible
Claim to become a party to and entitled to the benefits of this Agreement, it
must execute and deliver to the Deposit Agent a Creditor Ratification within
the period set forth in Section 2.03 (as same may be extended in accordance
with Section 2.03), except as otherwise provided in Section 5.02.
10
<PAGE>
5.02 DISCRETIONARY EXTENSION OF TIME. A holder of an Eligible Claim
that fails to timely satisfy the requirements of Section 5.01 may become a
Participating Creditor only if (i) it executes and delivers the Creditor
Ratification to the Companies and the Collateral Agent, and (ii) the
Companies in their sole discretion agree to waive the deadline set forth in
Section 5.01.
5.03 RATIFICATION OF AGREEMENT. Subject to the provisions of
Article II, each Participating Creditor ratifies and is bound by the terms of
this Agreement and the Collateral Agent Agreement. Each Participating
Creditor shall evidence its agreement to be bound by the terms of this
Agreement by execution and delivery of the Creditor Ratification to the
Collateral Agent.
5.04 INITIAL COLLATERAL AGENT. Each Participating Creditor agrees
to the selection of Stewart Peck as the initial Collateral Agent.
ARTICLE VI
BENZ/TEXSTAR INDEBTEDNESS
6.01 JOINT AND SEVERAL. Provided that the conditions to this
Agreement are timely satisfied, the Companies agree to be jointly and
severally liable for the Allowed Amount of Participating Creditors' Claims.
6.02 DEBT. The full amount acknowledged by Texstar to be due and
owing to Participating Creditors as of June 14, 1999, is set forth in Exhibit
2 to this Agreement.
6.03 ARBITRATION OF CLAIM AMOUNT DISPUTES. Any claim by a
Participating Creditor that the Allowed Amount of its claim should be greater
than the amount listed on Exhibit 2 shall be resolved in accordance with this
Section.
(a) The Companies and the Participating Creditor in question
will attempt in good faith to resolve any controversy or
dispute concerning the amount owed promptly by negotiations
between themselves. No arbitration may be commenced by any
party unless and until a negotiation complying with the
foregoing subparagraph has been completed.
(b) If a controversy or dispute with respect to the Allowed
Amount of a claim is not resolved after completion of the
negotiation process described above, then, upon notice by
any party to the other parties (an "Arbitration Notice")
and to the American Arbitration Association, the
controversy or dispute shall be submitted for binding
arbitration in Houston, Texas, in accordance with the
American Arbitration Association's Commercial Arbitration
Rules (the "Rules"). The parties agree that they will
abide by and perform any award rendered by the arbitrator.
The arbitration shall be governed by the Federal
Arbitration Act, 9 U.S.C. Section 1-16 (or by the same
principles enunciated by such Act in the event it may not
be technically applicable). The determination of the
Allowed Amount of a claim by the arbitrator shall be
11
<PAGE>
final and binding on all parties and judgment upon the
award or judgment of the arbitrator may be entered and
enforced by any court having jurisdiction. The fees and
expenses of the arbitrator will be shared by all parties
engaged in the dispute or controversy on a basis determined
to be fair and equitable by the arbitrator, taking into
account the relative fault of each party, the relative
credibility and merit of all claims and defenses made by
each party and the cooperation, speed and efficiency of
each party in conducting the arbitration proceedings and
complying with the Rules and with orders and requests of
the arbitrator.
(c) Promptly after the Arbitration Notice is given, the
American Arbitration Association will select three possible
arbitrators that have experience in the oil and gas
business, to whom the American Arbitration Association will
give the identities of the parties and the general nature
of the controversy. If any of those arbitrators
disqualifies himself or declines to serve, the American
Arbitration Association shall continue to designate
potential arbitrators until the parties have three to
select from. After the panel of three potential
arbitrators has been completed, a two-page summary of the
background of each of the potential arbitrators will be
given to each of the parties, and the parties will have a
period of ten (10) days after receiving the summaries in
which to attempt to agree upon the arbitrator to conduct
the arbitration. If the parties are unable to agree upon
an arbitrator, then one of the parties shall notify the
American Arbitration Association, and the American
Arbitration Association shall select the arbitrator from
one of the three, or less, if one or more has been found to
be disqualified or removes himself from consideration (if
all three are disqualified or remove themselves, then the
American Arbitration Association shall start the
arbitration selection process over again). The decision of
the American Arbitration Association with respect to the
selection of the arbitrator will be final and binding in
such case.
(d) Within ten (10) days after the selection of the arbitrator,
the parties and their counsel will appear before the
arbitrator at a place and time in Houston, Texas, as may be
designated by the arbitrator for the purpose of each party
making a one hour or less presentation and summary of the
case. Thereafter, the arbitrator will set dates and times
for additional hearings until the proceeding is concluded.
The desire and goal of the parties is, and the arbitrator
will be advised that his goal should be, to conduct and
conclude the arbitration proceedings as expeditiously as
possible. If any party or his counsel fails to appear at
any hearing, the arbitrator shall be entitled to reach a
decision based on the evidence which has been presented to
him by the parties who did appear. Any arbitral award may
be confirmed by a Texas state court.
(e) The amount of Participating Creditor claims shall be
adjusted pursuant to any arbitration award made pursuant to
this Agreement
12
<PAGE>
ARTICLE VII
PAYMENT OF CONVENIENCE CLAIMS
7.01 PAYMENT. Within 45 days of the Closing Date, the Allowed
Amount of each Convenience Claim shall be paid in full.
7.02 ELECTION TO BE TREATED AS A CONVENIENCE CLAIM. By executing a
form titled "Election to be Treated as a Convenience Claim", the holder of an
Eligible Claim in an Allowed Amount greater than $10,000 may elect to reduce
the amount of such holder's claim to $10,000 and to receive treatment as a
Convenience Claim. Such election shall constitute a waiver of the right to
collect, and a release of, the amount of the Eligible Claim in excess of
$10,000, and the holder of such claim shall be deemed to have released the
Companies and their property from any and all liability for such excess
amount.
ARTICLE VIII
INITIAL PAYMENTS TO PARTICIPATING CREDITORS
8.01 INITIAL PAYMENT. Each Participating Creditor shall receive an
Initial Payment equal to ten percent (10%) of the Allowed Amount of its
claim. The Initial Payment shall be credited against the (i) Allowed Amount
of the claim, and (ii) any liens filed by the Participating Creditor in its
own right.
8.02 OBLIGATION AMOUNT. The unpaid balance of the Allowed Amount of
Participating Creditors' claims shall (i) be paid in accordance with Article
IX, and (ii) accrue interest at the rate of ten percent (10%) per annum from
the Closing Date.
ARTICLE IX
SUBSEQUENT PAYMENTS TO PARTICIPATING CREDITORS
9.01 PRO RATA ALLOCATION OF REQUIRED PAYMENTS. Subject to the
provisions of Article XI, each holder of a Participating Creditor Claim shall
receive its Pro Rata share of the payments to be made by the Companies
pursuant to this Article.
9.02 QUARTERLY PAYMENTS. Within sixty (60) days following the end
of each calendar quarter, the Companies shall pay to the holders of
Participating Creditor Claims fifty percent (50%) of Net Revenue from
Operations less (i) the Non Participating Creditor Reserve, and (ii) the
Disputed Claims Reserve. The first quarterly payment shall be due on
November 29, 1999 for the quarter ending September 30, 1999.
9.03 DEDICATED PORTION OF NET PROPERTY SALE PROCEEDS. Within ten
(10) Business Days of actual receipt by the Companies of the proceeds from
the sale of one or more of the Oil and Gas Properties, the Dedicated Portion
of Net Property Sales Proceeds, less (i) the Non Participating
13
<PAGE>
Creditor Reserve, and (ii) the Disputed Claims Reserve, shall be paid to the
holders of Participating Creditor Claims.
9.04 DEDICATED PORTION OF NET LOAN PROCEEDS. Within ten (10)
Business Days of actual receipt by the Companies of the proceeds from a
Future Loan, the Dedicated Portion of the Net Loan Proceeds, less (i) the Non
Participating Creditor Reserve, and (ii) the Disputed Claims Reserve, shall
be paid to the holders of Participating Creditor Claims.
9.05 DEDICATED RECEIVABLES. Any Cash payments received by the
Companies on the Dedicated Receivables, less the Non Participating Creditor
Reserve, and less the Disputed Claims Reserve, and after deduction for legal
fees and expenses, shall be held in trust until paid to the Participating
Creditors. Texstar shall not accept payment on the Dedicated Receivables in
any form other than cash without the consent of the Requisite Majority of
Participating Creditors. The Companies will prosecute the collection of the
Dedicated Receivables with reasonable diligence and pay the reasonable legal
fees and expenses incurred in connection therewith.
9.06 MATURITY DATE. The unpaid balance of Participating Creditor's
Claims plus interest as provided by this Agreement shall be due and payable
on the earlier of (i) the third year anniversary of the Closing Date, (ii)
twenty (20) Business Days following the effective date of a consolidation or
merger other than an Exempted Merger of Benz with or into any other entity,
(iii) upon a sale or transfer in a single transaction or series of related
transactions of all or substantially all of the assets of Benz and Texstar,
(iv) twenty (20) Business Days following the date on which a Substantial
Management Change occurs, or (v) ten (10) Business Days after the occurrence
of an Event of Default.
ARTICLE X
UPSIDE PAYMENT
10.01 CONDITION UNDER WHICH DUE. In the event that Participating
Creditor Claims are not paid in full on or before the second anniversary of
the Closing Date, the Participating Creditors shall be entitled to receive
the Upside Payment Amount.
10.02 PAYMENT DATE. The Upside Payment Amount, if any, shall be paid
to each Participating Creditor within ninety (90) Business Days following the
third anniversary of the Closing Date.
10.03 DISCLAIMER. No representation, express or implied, is made by
the Companies as to what the amount, if any, the Upside Payment Amount may
ultimately be determined to be.
10.04 UNSECURED. The obligations of Texstar and Benz pursuant to
this Article shall be unsecured and, accordingly, will not be collateralized
by the property pledged pursuant to the Collateral Documents.
14
<PAGE>
ARTICLE XI
RESERVES FOR NON-PARTICIPATING CREDITOR CLAIMS
As provided in Article IX, the amount of the Net Revenue from
Operations, Dedicated Portion of Net Property Sale Proceeds, Dedicated
Portion of Net Loan Proceeds and Dedicated Receivables collections which
would otherwise be paid to the holders of Participating Creditor Claims shall
be reduced by the percentage of total Eligible Claims that are held by Non
Participating Creditors. For example, if holders of ninety-five percent
(95%) of Eligible Claims are Participating Creditors, then the dollar amount
of each of the installment payments to holders of Participating Creditor
Claims pursuant to Article IX would be reduced by five percent (5%).
ARTICLE XII
ACKNOWLEDGMENT AND SUBORDINATION
12.01 ACKNOWLEDGMENT CONCERNING THE SENIOR INDEBTEDNESS. Effective
as of the Closing Date, the Collateral Agent and each Participating Creditor
acknowledges that (i) any lien or claim filed by it as to Eligible Claims
(including, but not limited to, any lien pursuant to Chapter 56 of the Texas
Property Code or Mississippi Code Ann. Section 85-7-131, et seq. and all
other applicable statutory lien laws) is subordinate in right to payment and
lien priority to the liens securing the Senior Indebtedness, (ii) any lien
that it may file in the future with respect to its Eligible Claim shall be
subordinate in right to payment and lien priority to the liens securing the
Senior Indebtedness, and (iii) the liens securing payment of the Senior
Indebtedness are valid and properly perfected as to and against the Oil and
Gas Properties.
12.02 SUBORDINATION TO ENABLING LOAN. In order to fund the Initial
Payments, it will be necessary for the Companies to consummate the Enabling
Loan transactions. Effective as of the Closing Date, the Collateral Agent and
each Participating Creditor agrees that (i) any lien or claim filed by it as
to Eligible Claims (including, but not limited to, any lien pursuant to
Chapter 56 of the Texas Property Code or Mississippi Code Ann. Section
85-7-131, et seq. and all other applicable statutory lien laws) is
subordinate in right to payment and lien priority to the liens granted by the
Companies to secure payment of the full amount of the Enabling Loan
(including principal and interest), together with all renewals, modification
and extensions thereof, (ii) any right to file a lien and any lien that it
may file in the future against the Oil and Gas Properties to secure payment
of its Eligible Claim (including, but not limited to, any lien pursuant to
Chapter 56 of the Texas Property Code or Mississippi Code Ann. Section
85-7-131, et seq. and all other applicable statutory lien laws) is
subordinate in right to payment and lien priority to the liens securing the
Enabling Loan, and (iii) it will not contest the validity and perfection of
the liens granted by the Companies to secure payment of the Enabling Loan.
12.03 PRIORITY OF SENIOR INDEBTEDNESS AND ENABLING LOAN TO LIENS
CREATED BY COLLATERAL DOCUMENTS. The obligations to Participating Creditors
under this Agreement and the liens created by the Collateral Documents are
subordinate in right to payment to the Senior Indebtedness and Enabling Loan
and are subordinate in lien priority to the liens securing the Senior
15
<PAGE>
Indebtedness and Enabling Loan.
12.04 SUBORDINATION OF MECHANIC'S AND MATERIALMAN'S LIEN TO LIENS
CREATED BY THE COLLATERAL DOCUMENTS. Each Participating Creditor hereby
agrees that any lien or claim filed as well as any lien or claim that it may
in the future file against the Oil and Gas Properties, including, but not
limited to any lien pursuant to Chapter 56 of the Texas Property Code or
Mississippi Code Ann. Section 85-7-131, et seq. and all other applicable
statutory lien laws) to secure payment of an Eligible Claim is subordinate in
right to payment and lien priority to the liens created pursuant to the
Collateral Documents.
ARTICLE XIII
FUTURE LOANS
13.01 CONSENT TO FUTURE LOANS. The Companies shall be entitled to
attempt to arrange for Future Loans which would be secured by the property
pledged as collateral to the Collateral Agent pursuant to this Agreement and
the Collateral Documents. The Collateral Agent and Participating Creditors
consent to any Future Loan provided the requirements of Section 13.02 are
satisfied.
13.02 SUBORDINATION. The Collateral Agent and Participating
Creditors hereby agree to subordinate to any Future Loan (i) the right of
Participating Creditor's to payment of Eligible Claims, (ii) the priority of
any Participating Creditor's lien or lien claim on the Oil and Gas
Properties, which lien secures payment of an Eligible Claim (including, but
not limited to, any lien pursuant to Chapter 56 of the Texas Property Code or
Mississippi Code Ann. Section 85-7-131, et seq. and all other applicable
statutory lien laws), and (iii) the priority of the liens granted to the
Collateral Agent pursuant to this Agreement and the Collateral Documents,
subject only to and in accordance with the following provisions:
(1) Written notice of the Companies' intent to subordinate must
be given to the Collateral Agent;
(2) The instruments or documents evidencing the subordination
to be executed by the Collateral Agent shall be prepared by
the Companies;
(3) Such other documentation and information relating to the
Future Loan giving rise to the requested subordination, as
that documentation may be reasonably requested by the
Collateral Agent in connection with the subordination,
shall be provided to the Collateral Agent by the
Companies;
(4) The Participating Creditors are to receive out of the Net
Loan Proceeds from such Future Loan the sum, if any,
required to be paid in accordance with Section 9.04; and
(5) The Net Loan Proceeds from such Future Loan retained by the
Companies
16
<PAGE>
shall not be used (i) to purchase any shares of the
Companies' stock, (ii) pay dividends, (iii) to pay any
loan from Starbucks Trust, Prentis Tomlinson or Heather
Tomlinson or any entity which they collectively, directly
or indirectly own (beneficially or otherwise) or control at
least ten percent (10%) of the ownership interests of, (iv)
any future loans by an insider of the Companies, or (v) for
termination compensation to Prentis Tomlinson greater than
that specified in the December 15, 1998 Agreement by and
between Benz Energy Ltd., Texstar Petroleum, Inc. and
affiliates of EnCap Investments.
The obligation to subordinate under the terms of this Section is absolute and
irrevocable prior to the occurrence of an Event of Default by the Companies.
After the occurrence of an Event of Default by the Companies, the Collateral
Agent is authorized and obligated to subordinate the liens under the terms of
this Section, provided that such action is approved by the Requisite
Majority. The Collateral Agent shall execute and deliver to the Companies
such documents as are reasonably requested by the Companies to evidence the
subordination provided for in this Section.
ARTICLE XIV
SALE OF OIL AND GAS PROPERTIES
14.01 CONSENT TO SALE OF OIL AND GAS PROPERTIES. The Companies shall
be entitled to attempt to arrange for the sale of all or a portion of the
property pledged as collateral to the Collateral Agent pursuant to this
Agreement and the Collateral Documents. The Collateral Agent and
Participating Creditors consent to any future sale of all or a portion of the
Oil and Gas Properties provided that the requirements of Section 14.02 are
satisfied.
14.02 RELEASE OF LIENS. The Collateral Agent and Participating
Creditors hereby agree to release (i) any lien or lien right of a
Participating Creditor securing payment of an Eligible Claim, and (ii) any
lien created pursuant to this Agreement or the Collateral Documents, solely
to the extent such liens encumber the property to be sold by the Companies,
subject only to and in accordance with the following provisions:
(1) Written notice of the Companies' intent to sell property
and obtain a release must be given to the Collateral Agent;
(2) The instruments or documents evidencing the release to be
executed by the Collateral Agent shall be prepared by the
Companies;
(3) Such other documentation and information relating to the
terms of the sale, as that documentation may be reasonably
requested by the Collateral Agent in connection with the
release, shall be provided to the Collateral Agent by the
Companies;
(4) The purchaser is not an insider or affiliate of the
Companies as those terms
17
<PAGE>
are defined in 11 U.S.C. Section 101; and
(5) The Participating Creditors are to receive out of the Net
Property Sale Proceeds from such sale the sum, if any,
required to be paid in accordance with Section 9.03.
The obligation to release the liens under the terms of this Section is
absolute and irrevocable prior to the occurrence of an Event of Default by
the Companies. After the occurrence of an Event of Default by the Companies,
the Collateral Agent is authorized and obligated to release the liens under
the terms of this Section, provided that such action is approved by the
Requisite Majority. The Collateral Agent shall execute and deliver to the
Companies such documents as are reasonably requested by the Companies to
evidence the release of liens provided for in this Section.
ARTICLE XV
RECORDS AND REPORTS
15.01 BOOKS AND RECORDS. The Companies shall at all times maintain
true and correct books and records sufficient to determine the amounts
payable to Participating Creditors hereunder, including, but not limited to,
books and records related to Revenue from Operations and Operation Expenses.
15.02 INSPECTIONS. The books and records referred to in Section
15.01 shall be open for inspection by the Collateral Agent or his duly
authorized representative at the Companies' offices during normal business
hours. The Companies will furnish to the Collateral Agent, if and whenever
requested, such detailed information as the Collateral Agent may reasonably
request concerning the Oil and Gas Properties, the operation thereof and the
determination of the Net Revenue from Operations.
15.03 QUARTERLY STATEMENTS. On or before the 25th day of the month
following the end of each calendar quarter, the Companies shall deliver to
the Collateral Agent a statement setting forth the computation of Net Revenue
from Operations for such quarter.
ARTICLE XVI
FUTURE SERVICES, EQUIPMENT AND MATERIALS
Until the earlier of the (i) occurrence of an Event of Default by
Texstar or Benz, or (ii) payment in full of Participating Creditor Claims in
accordance with this Agreement, Texstar, to the extent reasonably practical
and authorized under applicable agreements with non-operating working
interest owners, will favor Participating Creditors in contracting for
equipment, goods, materials and services for oilfield drilling operations
subsequent to the Closing Date, provided that the price, quality,
availability, deliverability and terms proposed by Participating Creditors
are at least equal to that proposed to be provided by third parties. The
foregoing commitment does not apply to any Participating Creditor that (i) in
the future fails to provide contracted for services in a good and
18
<PAGE>
workmanlike manner, or (ii) in the future provides defective materials or
equipment to Texstar. The obligation imposed by this Section is satisfied if
the service, equipment or material in question is provided by any
Participating Creditor.
ARTICLE XVII
MORATORIUM AND LIMITATIONS
17.01 MORATORIUM. Each Participating Creditor with respect to any
claim against the Companies for services, materials or equipment furnished
prior to June 14, 1999 will forebear from (i) prosecuting any litigation
against the Companies and the non-operating interest owners of the Oil and
Gas Properties, (ii) attempting to attach, garnish, levy or execute upon any
of the Companies' assets or the non-operating interest owners of the Oil and
Gas Properties, (iii) attempting to sequester or impound the proceeds of sale
of oil, gas, or production runs for the sale of oil or gas, attributable to
the interest of the Companies or mineral interest owners who obtained title
through the Companies, (iv) pursuing any act of foreclosure or instituting
and pursuing legal proceedings upon or against the Companies or their assets,
(v) filing or joining in any petition in bankruptcy with respect to the
Companies, (vi) making, joining, or participating in an application for
appointment of a receiver for the Companies, or for liquidation or
dissolution of the Companies under any state or federal law, and (vii) filing
a mechanic's and materialman's lien against the non-operating interest owners
of the Oil and Gas Properties to secure payment of an Eligible Claim. The
moratorium does not apply to the filing of mechanic's and materialman's liens
against the interests of the Companies.
17.02 STATUTES OF LIMITATION. Any period of limitation on
prosecution or enforcement of rights by a Participating Creditor against the
Companies shall be tolled as of the Closing Date, until the occurrence of an
Event of Default pursuant to Article XXII which is not waived. The Companies
will not raise any contractual or statutory period of limitation on
prosecution as a defense in any legal proceeding which may subsequently be
brought by a Participating Creditor who forbears from the taking of legal
action under the terms of this Agreement prior to the occurrence of an Event
of Default which is not waived.
ARTICLE XVIII
SATISFACTION OF CLAIMS
18.01 SATISFACTION AS TO THE COMPANIES. A Participating Creditor's
Claim will be deemed paid in full upon payment of the Allowed Amount plus
interest of such claim as provided for in this Agreement. The Upside Payment
is not part of the Participating Creditors' Claims.
18.02 RELEASE OF NON-OPERATING INTEREST OWNERS. To facilitate
collection by Texstar of accounts receivable, effective as of the Closing
Date, the Collateral Agent and each Participating Creditor agree that as to
(i) any lien or claim filed by a Participating Creditor as to a Eligible
Claim against an interest owner other than the Companies (including, but not
limited to, any lien pursuant to Chapter 56 of the Texas Property Code or
Mississippi Code Ann Section 85-7-131, et seq. and all other
19
<PAGE>
applicable statutory lien laws) is released, (ii) any right to file a lien
and any lien against the Oil and Gas Properties against an interest owner
other than the Companies to secure payment of its Eligible Claim (including ,
but not limited to, any lien pursuant to Chapter 56 of the Texas Property
Code or Mississippi Code Ann Section 85-7-131, et seq. and all other
applicable statutory lien laws) is released, and (iii) any claim against a
non-operating interest owner relating to or arising out of an Eligible Claim
(other than the rights under this Agreement) is released.
ARTICLE XIX
FUTURE ACQUIRED OIL AND GAS LEASES
Until such time as Participating Creditor Claims are satisfied in
full, the Companies shall, forthwith following the acquisition of an
additional oil and gas lease, execute such documents as are reasonably
necessary to include the Companies' interest in such oil and gas lease within
the collateral pledged pursuant to the Collateral Documents. This provision
does not apply to any oil and gas leases acquired in the Plum Grove property.
ARTICLE XX
REPRESENTATIONS AND WARRANTIES
OF THE COMPANIES
The provisions of this Article constitute representations and
warranties of the Companies.
20.01 REVIEW AND APPROVAL. The Companies warrant and represent that
their representative has reviewed this Agreement together with all exhibits,
including the Collateral Documents, and that the Companies (i) understand
fully the terms of this Agreement and the consequences of the issuance
thereof, (ii) have been afforded an opportunity to have this Agreement
reviewed by legal counsel, and (iii) have entered into this Agreement of
their own free will and accord and without threat or duress.
20.02 AUTHORITY. The Companies warrant and represent that the
undersigned representatives are fully authorized to execute this Agreement or
any other instrument required hereunder on their behalf.
20.03 ACCURACY OF INFORMATION. The information contained in (i) the
Independent Accountant Report prepared by Merdinger, Frutchter Rosen & Corso,
P.C. dated June 4, 1999, (ii) the Benz Energy, Inc. Offer to Exchange and
Offer to Sell dated June 15, 1999, and (iii) the Form SB-2 Registration
Statement dated July 1999, to the best of the Companies knowledge is accurate
in all material respects as of the dates reflected therein.
20.04 ORGANIZATION. The Companies have been and are validly existing
as corporations, with full power and authority to enter into this Agreement,
to consummate the transactions contemplated hereby and to carry out the terms
of this Agreement.
20
<PAGE>
20.05 LEGAL, VALID AND BINDING INSTRUMENT. This Agreement has been
duly authorized, executed and delivered by the Companies, and constitutes a
valid and legally binding instrument, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization,
and other laws of general applicability relating to or affecting creditors'
rights and to general equity principles. The execution, delivery and
performance of this Agreement by the Companies will not result in a breach or
violation of any of the terms or provisions or constitute a default under any
mortgage, deed of trust or material agreement to which the Companies are a
party and which will remain in force and effect after the Closing Date.
20.06 DEDICATED RECEIVABLES. The security interest in the Dedicated
Receivables created in favor of the Collateral Agent pursuant to the Security
Agreement shall (i) be first in priority, (ii) have not been assigned, and
(iii) the Companies are the lawful owners of same.
20.07 SENIOR INDEBTEDNESS. The Senior Indebtedness is a valid and
enforceable obligation of the Companies.
20.08 OWNERSHIP. Benz does not hold record title to an interest in
the Oil and Gas Properties.
ARTICLE XXI
REPRESENTATIONS AND WARRANTIES
OF PARTICIPATING CREDITORS
The provisions of this Article constitute representations and
warranties of the Participating Creditors.
21.01 REVIEW. Each Participating Creditor represents and warrants
that he/she/it or his/her/its representative has reviewed this Agreement
together with all exhibits and that they (i) understand fully the terms of
this Agreement and the consequences of the issuance thereof, (ii) have been
afforded an opportunity to have this Agreement reviewed by legal counsel, and
(iii) have entered into this Agreement to which each is a party of their own
free will and accord and without threat or duress. Each Participating
Creditor represents that the representative executing the Creditor
Ratification is fully authorized to ratify this Agreement or any other
instrument required hereunder on his/her/its behalf.
21.02 AUTHORITY. Each Participating Creditor warrants and represents
that he/she/it has all requisite power, authority and capacity to execute and
deliver this Agreement by means of the Creditor Ratification and to perform
the obligations to be performed by him/her/it hereunder. The execution,
delivery and performance of this Agreement by means of the Creditor
Ratification has been duly authorized by all necessary actions on the part of
each Participating Creditor. Upon delivery of the Creditor Ratification,
this Agreement will constitute a valid and binding obligation of such
Participating Creditor, enforceable against him/her/it in accordance with the
terms of this Agreement, subject to applicable bankruptcy, solvency,
reorganization, moratorium or similar laws affecting the enforceability of
creditors' rights generally. No consent, approval or authorization of
21
<PAGE>
any governmental authority, trustee, lessor, lender or other third party is
required in connection with the execution and delivery of the Creditor
Ratification and performance of this Agreement by each Participating
Creditor.
21.03 NON RELIANCE. Ware, Snow, Fogel, Jackson & Greene, P.C., has
not acted as counsel nor, except as set forth in the opinion of counsel
attached as Exhibit 9, provided legal advise to any Participating Creditor in
connection with the negotiation, evaluation or documentation of the
transactions contemplated by this Agreement or Collateral Agent Agreement.
Each Participating Creditor's decision to ratify this Agreement and the
Collateral Agent Agreement and execute the Ratification was based solely on
his/her/its own independent evaluation of the Participating Creditor's rights
and the facts which each Participating Creditor has independently
ascertained. Other than as expressly set forth herein, no representation has
been made by the Participating Creditors to induce any other party to execute
this Agreement and, where applicable, its exhibits.
ARTICLE XXII
EVENTS OF DEFAULT
22.01 EVENTS OF DEFAULT AS TO THE COMPANIES. The occurrence of any
one or more of the following events shall constitute an Event of Default as
to the Companies.
(a) Failure or refusal by either Benz or Texstar to punctually
and properly perform, observe and comply with any (i)
material covenant, (ii) representation or (iii) warranty
contained in this Agreement, the Collateral Documents or
any exhibits hereto, which failure or refusal shall
continue for a period of ten (10) days following receipt by
the Companies and Aquila of written notice thereof;
(b) The failure of Benz and/or Texstar to pay when due any
obligation required in this Agreement or the Collateral
Documents and such failure shall continue for a period of
ten (10) days after receipt of written notice of such
default by the Companies and Aquila from the Collateral
Agent;
(c) The filing or commencement by Benz or Texstar of a
voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect, or seeking the appointment
of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its
property; or Benz or Texstar shall consent to any such
relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment
for the benefit of creditors, or shall fail generally to
pay its debt as they become due, or shall take any
corporate action to authorize any of the foregoing;
22
<PAGE>
(d) The filing or commencement of an involuntary case or other
proceeding against either Benz or Texstar seeking
liquidation, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of
ninety (90) days; or an order for relief shall be entered
against either Benz or Texstar under the federal bankruptcy
laws as now or hereafter in effect;
(e) The liquidation or dissolution of either Benz or Texstar
prior to sale of all of its assets in accordance with the
terms of this Agreement;
(f) Posting property pledged as collateral to the Collateral
Agent for foreclosure by the holder of the Senior
Indebtedness, Enabling Loan, Future Loan or any other lien
superior in priority to the liens granted to the Collateral
Agent pursuant to the Collateral Documents;
(g) Benz or Texstar shall claim that the Collateral Agent does
not have a valid lien on the Companies' interest in the
property described in the Collateral Documents;
(h) Any court shall sign a judgment or order that provides that
the Collateral Agent does not have a valid fully perfected
lien on the Companies' interest in the property described
in the Collateral Documents;
(i) Benz or Texstar shall have concealed, removed, or permitted
to be concealed or removed, any material part of its
property, with intent to hinder, delay or defraud any of
its creditors, or make or suffered a transfer of any of its
property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law, or shall have made
any transfer of a material part of its property to or for
the benefit of a creditor at a time when other creditors
similarly situated have not been paid;
(j) A representation in Section XX is established to have been
materially inaccurate as of the date made;
(k) A default under the Collateral Documents shall constitute
an Event of Default hereunder; or
(l) An event of default as to Benz shall constitute an event of
default as to Texstar. An event of default as to Texstar
shall constitute an event of default as to Benz.
22.02 EVENT OF DEFAULT AS TO PARTICIPATING CREDITORS AND COLLATERAL
AGENT. The failure
23
<PAGE>
or refusal to perform, observe and comply with any covenant, representation,
warranty, agreement or condition contained in this Agreement or the
Collateral Agent Agreement.
ARTICLE XXIII
REMEDIES
23.01 DEFAULT BY BENZ OR TEXSTAR. In addition to any other provision
of this Agreement or the Collateral Documents, upon the occurrence of an
Event of Default, the Collateral Agent may, upon ten (10) days written notice
to Aquila, exercise any or all of the following rights, remedies and recourse:
a. Enter upon the collateral or any part thereof and take
exclusive possession thereof and of all books, records and accounts
relating thereto. If Benz or Texstar remains in possession of all or any
part of the collateral after an Event of Default occurs and is continuing
and without the Collateral Agent's prior written consent thereto, the
Collateral Agent may invoke any and all legal remedies to dispossess the
Companies, including specifically one or more actions for forcible entry
and detainer, trespass to try title and writ of restriction. Nothing
contained in the foregoing sentence shall, however, be construed to
impose any greater obligation or any prerequisites to acquiring
possession of the collateral or any part thereof after an Event of
Default occurs than would have existed in the absence of such sentence.
b. Hold, lease, manage, operate or otherwise use or permit the
use of the collateral, or any part thereof, either by itself or by other
persons, in such manner, for such time and upon such other terms as the
Collateral Agent may deem to be prudent and reasonable under the
circumstances (making such repairs, alterations, additions and
improvements thereto and taking any and all other action with reference
thereto, from time to time, as the Collateral Agent shall deem necessary
or desirable), and apply all proceeds from the collateral in accordance
with the provisions hereof.
c. Sell or offer for sale the collateral, or any part thereof,
in such portions, order and parcels as the Collateral Agent may
determine, with or without having first taken possession of same, in
accordance with the provisions of the applicable Collateral Documents and
applicable legal requirements.
d. Make application to a court of competent jurisdiction, as a
matter of strict right and, except as otherwise provided by applicable
law, without notice to the Companies or without regard to the adequacy of
the collateral for payment of the obligations to the Collateral Agent
hereunder for the appointment of a receiver of the collateral, or any
part thereof, and, to the extent permitted by applicable law, the
Companies do hereby irrevocably consent to such appointment. Any such
receiver shall have all the usual powers and duties of receivers in
similar cases, including the full power to rent, maintain, sell, dispose
and otherwise operate the collateral, any part thereof, upon such terms
that may be approved by the court, and shall apply all proceeds from such
operation of the collateral in accordance
24
<PAGE>
with the provisions hereof.
e. Exercise any and all other rights, remedies and recourses
granted hereunder or under the Collateral Documents or otherwise now or
hereafter existing in equity, at law, by virtue of statute or otherwise.
23.02 The collateral may be sold in one or more parcels and in such
manner and order as the Collateral Agent, in its sole discretion, may elect,
it being expressly understood and agreed that the right of sale arising out
of any Event of Default shall not be exhausted by any one or more sales.
23.03 The Collateral Agent shall have all rights, remedies and
recourses granted in the Collateral Documents, and available at law or equity
(including specifically those granted by the UCC in effect and applicable to
the collateral, or any portion thereof) and same (a) shall be cumulative and
concurrent, (b) may be pursued separately, successively or concurrently
against Benz or Texstar or against the collateral or against any one or more
of them, at the sole discretion of the Collateral Agent, (c) may be exercised
as often as the occasion therefor shall arise, it being agreed by the
Companies that the exercise or failure to exercise any of same shall in no
event be construed as a waiver or release thereof or of any other right,
remedy or recourse, and (d) are intended to be, and shall be, non-exclusive.
23.04 The Companies shall not, except as otherwise provided by
applicable law, be relieved of their obligations by reason of (a) the failure
of a trustee to comply with any request of the Companies, to foreclose the
liens on the collateral or to enforce any provisions of the Collateral
Documents, (b) the release, regardless of consideration, of any person or
entity obligated with respect to the obligations, or of the collateral or any
part thereof, or the addition of any other property to the collateral, (c)
any agreement or stipulation between any subsequent owner of the collateral
and the Collateral Agent extending, renewing, rearranging or in any other way
modifying the terms of the Collateral Documents without first having obtained
the consent of, given notice to or paid any consideration to Benz or Texstar,
or such other person, and in such event, Benz or Texstar, and all such other
persons shall continue to be liable to make payments in accordance with the
terms of any such extension or modification agreement unless expressly
released and discharged in writing by the Collateral Agent, and (d) any other
act or occurrence, save and except the satisfaction of the Companies'
obligations hereunder. The Companies waive any right to require the
Collateral Agent to proceed against any other person, exhaust any of the
collateral, or pursue any other remedy in the Collateral Agent's power.
23.05 The release or substitution of all or any part of the
collateral, regardless of consideration, shall not in any way impair, affect,
subordinate, or release the Collateral Agent's liens or its priority status
in and to any remaining collateral. For payment and performance of the
Companies' obligations hereunder, the Collateral Agent may resort to any
other security therefor held by a trustee in such order and manner as the
Collateral Agent may elect.
23.06 In case the Collateral Agent shall have proceeded to invoke any
right, remedy or recourse permitted under the Collateral Documents and shall
thereafter elect to discontinue or abandon same for any reason, the
Collateral Agent shall have the unqualified right to do so and, in
25
<PAGE>
such event, the Companies and the Collateral Agent shall be restored to their
former positions with respect to the Companies' obligations hereunder, the
Collateral Documents, the collateral and otherwise, and the rights, remedies,
recourses and powers of the Collateral Agent shall continue as if same had
never been invoked.
23.07 NO ELECTION OF REMEDIES. The Participating Creditors shall
have all rights, remedies and recourses granted in the Collateral Documents,
and available at law or equity and same (a) shall be cumulative and
concurrent, (b) may be pursued separately, successively or concurrently
against the Companies or against the subject collateral or against any one or
more of them, at the sole discretion of the Collateral Agent, (c) may be
exercised as often as the occasion therefor shall arise, it being agreed by
the Companies that the exercise or failure to exercise any of same shall in
no event be construed as a waiver or release thereof or of any other right,
remedy or recourse, and (d) are intended to be, and shall be, non-exclusive.
23.08 DEFAULT BY A PARTICIPATING CREDITOR. The representations,
warranties and covenants of the Participating Creditors are several and not
joint. Should an Event of Default as to a Participating Creditor occur, (i)
the defaulting Participating Creditor shall remain obligated to perform its
obligations under this Agreement including those set forth in Article XVII,
(ii) the rights of all parties other than the defaulting Participating
Creditor shall be unaffected, (iii) the Companies may suspend making any
further payments to the defaulting Participating Creditor until such time as
the damages incurred by the default are recovered, and (iv) the Participating
Creditors shall be liable for any actual damages sustained as a result of its
default.
23.09 DEFAULT BY COLLATERAL AGENT. Should an Event of Default as to
the Collateral Agent occur (i) the Collateral Agent, to the extent permitted
by the Collateral Agent Agreement, shall be liable for the actual damages
sustained as a result of his willful misconduct and/or fraud, and (ii) the
total amount of Participating Creditor Claims shall be reduced Pro Rata by
the damages sustained by the Companies.
ARTICLE XXIV
FURTHER ACTION
24.01 AMENDMENT OR WAIVER. Any (i) action, (ii) amendment to this
Agreement or the Collateral Documents, or (iii) waiver of a provision of this
Agreement or the Collateral Documents, that is approved (1) in writing by the
Companies, and (2) by the Requisite Majority in accordance with the
procedures set forth in Section 24.02 shall be binding upon all Participating
Creditors, the Collateral Agent and the Companies; provided, that no
amendment to this Section 24.01, to Article XII, or to Section 25.09 shall be
effective unless it is approved in writing by Aquila.
24.02 PROCEDURE FOR APPROVAL OF SOLICITED ACTION. The procedure for
obtaining approval of a Solicited Action is as follows:
(a) Notice of the Solicited Action together with a ballot shall
be sent to Participating Creditors in the manner and at the
address provided for in
26
<PAGE>
Section 25.17.
(b) In order to be counted, the ballot must be filled out,
executed by the authorized representative of the
Participating Creditor and delivered to the Companies
within fifteen (15) Business Days of delivery of receipt of
notice of the Solicited Action to the Participating
Creditors as provided in Section 25.17. Any ballots that
fail to satisfy the requirements of this Section shall not
be counted.
24.03 EFFECT. Any Solicited Action which is approved by the
Requisite Majority in accordance with Section 24.02 shall be binding upon all
Participating Creditors and the Collateral Agent.
ARTICLE XXV
MISCELLANEOUS
25.01 DISCLAIMER. No representation, express or implied, is made by
the Companies or their legal counsel as to the tax effects of any of the
transactions contemplated in this Agreement.
25.02 SURVIVAL. All representations, warranties, covenants and
agreements of the parties made in this Agreement and any of its exhibits
shall survive the execution and delivery of this Agreement and any of its
exhibits until such time as all of the obligations of the signatories to such
document shall have lapsed in accordance with their respective terms or shall
have been discharged in full.
25.03 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. No assignment of this Agreement or the rights
hereunder or against non-operating working interest owners of the Oil and Gas
Properties relating to an Eligible Claim may be made by a Participating
Creditor except in accordance with the terms of this Agreement No assignment
shall be effective until the Companies are notified in writing and the
Assignees have executed and delivered to the Companies a Creditor
Ratification. No assignment may be made by a Participating Creditor to a
person or entity engaged in the business of oil and gas exploration and
development other than another Participating Creditor. It is agreed that
Pioneer Natural Resources USA, Inc. may assign its Eligible Claim to Jordan
Oil & Gas L.P. The Companies are released from liability on an Eligible
Claim that is assigned by a Participating Creditor without complying with
this Section.
25.04 MODIFICATIONS AND WAIVERS. No delay on the part of the
Participating Creditors or the Companies in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver
of any right, power or privilege hereunder operate as a waiver of any other
right, power or privilege hereunder, nor shall any single or partial exercise
of any right, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. All rights and remedies herein provided are cumulative and are
not exclusive of any rights or remedies which the parties hereto may
otherwise have at law or in
27
<PAGE>
equity. Neither this Agreement nor any provision hereof may be changed,
waived, discharged or terminated orally, but only by written instrument
signed by the party against which enforcement of such amendment is sought.
25.05 ENTIRE AGREEMENT; NO ORAL AGREEMENTS. This Agreement, the
exhibits hereto and agreements referred to herein collectively contain the
entire agreement between the parties relating to the transactions
contemplated hereby. THIS AGREEMENT, THE EXHIBITS HERETO AND AGREEMENTS
REFERRED TO HEREIN REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES. The Companies agree to pay the reasonable fees and expenses of
the Deposit Agent and the reasonable fees and expenses of Lugenbuhl, Burke,
Wheaton, Peck, Rankin & Hubbard incurred in connection with negotiation,
drafting and closing on this Agreement.
25.06 FURTHER ASSURANCES. Benz or Texstar, as applicable, shall
promptly cure any defects in the execution and delivery of this Agreement,
any exhibit to this Agreement and all other documents contemplated by this
Agreement and shall promptly execute and deliver to the Companies upon
request all such other and further assurances, documents, agreements and
instruments in compliance with or accomplishment of the covenants and
agreements in this Agreement, or obtain any consents, all as may be necessary
or appropriate in connection therewith.
25.07 CAPTIONS. All section titles or captions contained in this
Agreement, in any exhibit annexed hereto or in any schedule referred to
herein are for convenience only, shall not be deemed a part of this Agreement
and shall not affect the meaning or interpretation of this Agreement.
25.08 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which, taken together, shall constitute one and the same
instrument.
25.09 AQUILA; THIRD PARTY BENEFICIARIES. AQUILA, ANY LENDER OF A
FUTURE LOAN AND ANY PURCHASER OF ANY OF THE OIL AND GAS PROPERTIES IS EACH AN
INTENDED BENEFICIARY OF THIS AGREEMENT. ALL PARTIES TO THIS AGREEMENT,
INCLUDING THE PARTICIPATING CREDITORS, ACKNOWLEDGE AND AGREE THAT AQUILA, ANY
LENDER OF A FUTURE LOAN AND ANY PURCHASER OF ANY OF THE OIL AND GAS
PROPERTIES IS ENTITLED TO RELY UPON AND ENFORCE THE PROVISIONS OF THIS
AGREEMENT AND THE COLLATERAL AGENT AGREEMENT. AQUILA, ANY LENDER OF A FUTURE
LOAN AND ANY PURCHASER OF ANY OF THE OIL AND GAS PROPERTIES IS HEREBY
EXPRESSLY GIVEN THE RIGHT TO BRING SUIT DIRECTLY AGAINST ANY PARTY TO THIS
AGREEMENT, INCLUDING PARTICIPATING CREDITORS, TO ENFORCE THE PROVISIONS OF
THIS AGREEMENT AND THE COLLATERAL AGENT AGREEMENT. THE RIGHTS OF AQUILA AND
ANY LENDER OF A FUTURE LOAN INCLUDE, BUT ARE NOT LIMITED TO, THE RIGHT TO
BRING SUIT TO ENFORCE THE EXPRESS SUBORDINATION BY PARTICIPATING CREDITORS
AND THE COLLATERAL AGENT OF ALL OF THEIR RESPECTIVE LIENS TO THE LIENS AND
SECURITY INTERESTS GRANTED TO (i) AQUILA PURSUANT TO THE ENABLING LOAN,
28
<PAGE>
AND (ii) A FUTURE LENDER PURSUANT TO A FUTURE LOAN. EXCEPT FOR AQUILA, ANY
LENDER OF A FUTURE LOAN AND ANY PURCHASER OF THE OIL AND GAS PROPERTIES, THIS
AGREEMENT SHALL BE FOR THE BENEFIT OF THE PARTIES HERETO AND IS NOT FOR THE
BENEFIT OF ANY OTHER PERSON. NO OTHER PERSON SHALL HAVE STANDING TO REQUIRE
SATISFACTION OF ANY PROVISION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS.
Aquila has joined in the execution of this Agreement solely for purposes of
establishing a direct contractual right to enforce the benefits provided
Aquila under this Agreement as an inducement to it to provide the Enabling
Loan. Each of the Companies, the Collateral Agent and the Deposit Agent
hereby acknowledges and agrees, and by its execution of a Creditor
Ratification, each Participating Creditor acknowledges and agrees that Aquila
has and shall have no obligations under this Agreement, whether to make the
Enabling Loan or otherwise, and that any obligation of Aquila to make the
Enabling Loan shall arise only under the terms of a written loan agreement
between Aquila and Texstar.
25.10 REFERENCES. The words "herein", "hereof", "hereunder" and
other words of similar import when used in this Agreement refer to this
Agreement as a whole and not to any particular article, section or
subsection. References in this Agreement to sections and exhibits shall
refer to the sections contained in this Agreement and the exhibits attached
to this Agreement, unless otherwise specified.
25.11 EXHIBITS. The exhibits attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for the
purposes stated herein.
25.12 SINGULAR AND PLURAL. Words used herein in the singular, where
the context so permits, shall be deemed to include the plural and vice versa.
The definitions of words in the singular herein shall apply to such words
when used in the plural where the context so permits and vice versa.
25.13 GOVERNING LAW. THIS AGREEMENT AND ANY EXHIBITS ATTACHED HERETO
SHALL BE CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF
TEXAS AND, TO THE EXTENT CONTROLLING, THE FEDERAL LAWS OF THE UNITED STATES
OF AMERICA.
25.14 JOINTLY DRAFTED AGREEMENT; CONSTRUCTION. This Agreement and
all exhibits have been drafted jointly by the attorneys of all parties, and
it is expressly agreed that neither this Agreement, any of the exhibits nor
any other document executed in connection herewith shall ever be construed
against any party hereto on the basis of who drafted the documents.
25.15 USURY. All agreements between the Companies and Participating
Creditors are expressly limited so that in no contingency or event shall the
amount paid or agreed to be paid to Participating Creditors for the use,
forbearance, or detention of the money to be lent hereunder exceed the
maximum amount permissible under the applicable federal and state usury laws.
It is therefore the intention of the Companies and Participating Creditors to
conform strictly to said state and federal usury laws applicable to this
transaction. Therefore, in this Agreement and the Collateral Documents, the
aggregate of all interest and any other charges constituting interest under
the
29
<PAGE>
applicable law contracted for chargeable or receivable under this Agreement
and the Collateral Documents or otherwise in connection with this transaction
shall under no circumstances exceed the maximum amount of interest permitted
by law. If any excess of interest or in such respect is provided for or
shall be adjudicated to be so provided for in this Agreement and the
Collateral Documents or in any of the documents securing payment hereof or
otherwise relating hereto, then in such event,
(a) The provisions of this paragraph shall govern and control;
(b) The Companies shall not be obligated to pay the amount of
such interest to the extent that it is in excess of the maximum permitted
by law;
(c) Any excess of said interest shall be deemed a mistake and
is hereby canceled automatically and if theretofore paid, shall at the
option of Participating Creditors be refunded to the Companies or
credited to the principal amount; and
(d) The effective rate of interest shall be automatically
subject to reduction to the maximum lawful contract rate allowed under
said laws or as is or as they may hereafter be construed by courts of
appropriate jurisdiction. To the extent permitted by law, the
determination of the rate of interest shall be made by amortizing,
prorating, allocating, and spreading in equal parts during the period of
the full stated term of the loan, all interest at any time contracted
for, charged, or received from the Companies in connection with said
loan.
25.16 SURVIVAL. The release and indemnification provided for herein
shall become effective as and when the conditions set forth in Article II are
satisfied and shall survive the termination of this Agreement.
25.17 NOTICE. Any notice required or permitted to be given under
this Agreement shall be given to each of the following and shall be dated and
in writing and shall be deemed to have been duly given when actually
delivered or three days after being deposited in either (i) United States
first class mail, or (ii) United States certified mail, return receipt
requested, postage pre-paid, and addressed as follows:
If to Benz:
Benz Energy, Inc.
1000 Louisiana, Suite 1500
Houston, TX 77002
Attention: Todd Grabois and Prentis Tomlinson
If to Texstar:
Texstar Petroleum, Inc.
1000 Louisiana, Suite 1500
Houston, TX 77002
Attention: Todd Grabois and Prentis Tomlinson
30
<PAGE>
If to the Collateral Agent:
Stewart Peck
Lugenbuhl, Burke, Wheaton, Peck, et al.
601 Poydras, Suite 2775
New Orleans, LA 70130
If to the Deposit Agent:
Stewart Peck
Lugenbuhl, Burke, Wheaton, Peck, et al.
601 Poydras, Suite 2775
New Orleans, LA 70130
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
BENZ ENERGY, INC.
BY:
-------------------------------------
NAME:
-------------------------------------
TITLE:
-------------------------------------
TEXSTAR PETROLEUM, INC.
BY:
-------------------------------------
NAME:
-------------------------------------
TITLE:
-------------------------------------
COLLATERAL AGENT
BY:
-------------------------------------
STEWART PECK
DEPOSIT AGENT
BY:
-------------------------------------
STEWART PECK
31
<PAGE>
AQUILA ENERGY CAPITAL CORPORATION
BY:
-------------------------------------
NAME:
-------------------------------------
TITLE:
-------------------------------------
32
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S>
ARTICLE I <C>
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.01 "ALLOWED AMOUNT". . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.02 "AQUILA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.03 "AVERAGE ADJUSTED SHARE PRICE". . . . . . . . . . . . . . . . . . . .1
1.04 "BENZ". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.05 "BUSINESS DAY". . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.06 "CAPITAL EXPENDITURES". . . . . . . . . . . . . . . . . . . . . . . .1
1.07 "CASH". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.08 "CLOSING DATE" . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.09 "COLLATERAL AGENT". . . . . . . . . . . . . . . . . . . . . . . . . .2
1.10 "COLLATERAL AGENT AGREEMENT" . . . . . . . . . . . . . . . . . . . .2
1.11 "COLLATERAL DOCUMENTS". . . . . . . . . . . . . . . . . . . . . . . .2
1.12 "COMPANIES" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.13 "CONVENIENCE CLAIM" . . . . . . . . . . . . . . . . . . . . . . . . .2
1.14 "CREDITOR RATIFICATION" . . . . . . . . . . . . . . . . . . . . . . .2
1.15 "DEBT SERVICE". . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.16 "DEDICATED PORTION OF NET LOAN PROCEEDS". . . . . . . . . . . . . . .2
1.17 "DEDICATED PORTION OF NET PROPERTY SALE PROCEEDS" . . . . . . . . . .2
1.18 "DEDICATED RECEIVABLES" . . . . . . . . . . . . . . . . . . . . . . .2
1.19 "DEPOSIT AGENT" . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.20 "DISPUTED CLAIM". . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.21 "DISPUTED CLAIM RESERVE". . . . . . . . . . . . . . . . . . . . . . .3
1.22 "ELIGIBLE CLAIMS" . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.23 "ENABLING LOAN" . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.24 "EVENT OF DEFAULT". . . . . . . . . . . . . . . . . . . . . . . . . .3
1.25 "EXEMPTED MERGER" . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.26 "FUTURE LOAN" . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.27 "G&A EXPENSES". . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.28 "INITIAL PAYMENTS". . . . . . . . . . . . . . . . . . . . . . . . . .4
1.29 "LOAN EXPENSES" . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.30 "NET LOAN PROCEEDS" . . . . . . . . . . . . . . . . . . . . . . . . .4
1.31 "NET PROPERTY SALE PROCEEDS". . . . . . . . . . . . . . . . . . . . .4
1.32 "NET REVENUE FROM OPERATIONS" . . . . . . . . . . . . . . . . . . . .4
1.33 "NON-PARTICIPATING CLAIMS". . . . . . . . . . . . . . . . . . . . . .4
1.34 "NON PARTICIPATING CREDITOR RESERVE". . . . . . . . . . . . . . . . .4
1.35 "OIL AND GAS PROPERTIES". . . . . . . . . . . . . . . . . . . . . . .4
1.35 "OPERATING AGREEMENT" . . . . . . . . . . . . . . . . . . . . . . . .5
1.36 "OPERATION EXPENSES". . . . . . . . . . . . . . . . . . . . . . . . .5
1.37 "PARTICIPATING CREDITOR'S CLAIM". . . . . . . . . . . . . . . . . . .5
1.38 "PARTICIPATING CREDITORS" . . . . . . . . . . . . . . . . . . . . . .6
1.39 "PRO RATA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
i
<PAGE>
1.40 "REQUISITE MAJORITY". . . . . . . . . . . . . . . . . . . . . . . . .6
1.41 "REVENUE FROM OPERATIONS" . . . . . . . . . . . . . . . . . . . . . .6
1.42 "SELLING EXPENSES". . . . . . . . . . . . . . . . . . . . . . . . . .7
1.43 "SENIOR INDEBTEDNESS" . . . . . . . . . . . . . . . . . . . . . . . .7
1.44 "SENIOR MANAGEMENT" . . . . . . . . . . . . . . . . . . . . . . . . .7
1.45 "SOLICITED ACTION". . . . . . . . . . . . . . . . . . . . . . . . . .7
1.46 "SUBSTANTIAL MANAGEMENT CHANGE" . . . . . . . . . . . . . . . . . . .7
1.47 "TAXES" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.48 "TEXSTAR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.49 "UPSIDE PAYMENT". . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.50 "UPSIDE PAYMENT AMOUNT" . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE II
CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.01 CONDITIONS TO BE SATISFIED BY TEXSTAR.. . . . . . . . . . . . . . . .8
2.02 CONDITIONS TO BE SATISFIED BY BENZ. . . . . . . . . . . . . . . . . .8
2.03 CONDITION TO BE SATISFIED BY PARTICIPATING CREDITORS. . . . . . . . .8
2.04 OTHER CONDITIONS TO BE SATISFIED. . . . . . . . . . . . . . . . . . .9
ARTICLE III
DEPOSIT AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.01 DEPOSITS IN ESCROW. . . . . . . . . . . . . . . . . . . . . . . . . .9
3.02 DELIVERY TO COLLATERAL AGENT IN EVENT CONDITIONS ARE SATISFIED. . . .9
3.03 DELIVERY TO PARTICIPATING CREDITORS IN THE EVENT CONDITIONS ARE
SATISFIED.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.04 DELIVERY TO THE COMPANIES IN THE EVENT CONDITIONS ARE SATISFIED.. . .9
3.05 INSTRUCTIONS IN EVENT CONDITIONS ARE NOT TIMELY SATISFIED.. . . . . .9
3.06 LIMITATION ON DUTY AND LIABILITY OF DEPOSIT AGENT.. . . . . . . . . .9
3.07 INDEMNITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.08 RESIGNATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE IV
EFFECT OF FAILURE TO SATISFY CONDITIONS ANDEFFECT OF SATISFACTION OF
CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.01 EFFECT OF NOT SATISFYING CONDITIONS. . . . . . . . . . . . . . . . 11
4.02 EFFECT OF SATISFYING CONDITIONS.. . . . . . . . . . . . . . . . . . 11
ARTICLE V
PARTICIPATING CREDITORS AND RATIFICATION. . . . . . . . . . . . . . . . . . . 11
5.01 CREDITOR RATIFICATION.. . . . . . . . . . . . . . . . . . . . . . . 11
5.02 DISCRETIONARY EXTENSION OF TIME. . . . . . . . . . . . . . . . . . 11
ii
<PAGE>
5.03 RATIFICATION OF AGREEMENT.. . . . . . . . . . . . . . . . . . . . . 11
5.04 INITIAL COLLATERAL AGENT. . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VI
BENZ/TEXSTAR INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.01 JOINT AND SEVERAL.. . . . . . . . . . . . . . . . . . . . . . . . . 12
6.02 DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.03 ARBITRATION OF CLAIM AMOUNT DISPUTES. . . . . . . . . . . . . . . . 12
ARTICLE VII
PAYMENT OF CONVENIENCE CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . 13
7.01 PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.02 ELECTION TO BE TREATED AS A CONVENIENCE CLAIM.. . . . . . . . . . . 14
ARTICLE VIII
INITIAL PAYMENTS TO PARTICIPATING CREDITORS . . . . . . . . . . . . . . . . . 14
8.01 INITIAL PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.02 OBLIGATION AMOUNT.. . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE IX
SUBSEQUENT PAYMENTS TO PARTICIPATING CREDITORS. . . . . . . . . . . . . . . . 14
9.01 PRO RATA ALLOCATION OF REQUIRED PAYMENTS. . . . . . . . . . . . . . 14
9.02 QUARTERLY PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 14
9.03 DEDICATED PORTION OF NET PROPERTY SALE PROCEEDS.. . . . . . . . . . 14
9.04 DEDICATED PORTION OF NET LOAN PROCEEDS. . . . . . . . . . . . . . . 14
9.05 DEDICATED RECEIVABLES.. . . . . . . . . . . . . . . . . . . . . . . 15
9.06 MATURITY DATE.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE X
UPSIDE PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.01 CONDITION UNDER WHICH DUE.. . . . . . . . . . . . . . . . . . . . . 15
10.02 PAYMENT DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.03 DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.04 UNSECURED.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE XI
RESERVES FOR NON-PARTICIPATING CREDITOR CLAIMS. . . . . . . . . . . . . . . . 16
iii
<PAGE>
ARTICLE XII
ACKNOWLEDGMENT AND SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . 16
12.01 ACKNOWLEDGMENT CONCERNING THE SENIOR INDEBTEDNESS.. . . . . . . . . 16
12.02 SUBORDINATION TO ENABLING LOAN. . . . . . . . . . . . . . . . . . . 16
12.03 PRIORITY OF SENIOR INDEBTEDNESS AND ENABLING LOAN TO LIENS
CREATED BY COLLATERAL DOCUMENTS.. . . . . . . . . . . . . . . . . . 16
12.04 SUBORDINATION OF MECHANIC'S AND MATERIALMAN'S LIEN TO LIENS
CREATED BY THE COLLATERAL DOCUMENTS.. . . . . . . . . . . . . . . . 17
ARTICLE XIII
FUTURE LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.01 CONSENT TO FUTURE LOANS.. . . . . . . . . . . . . . . . . . . . . . 17
13.02 SUBORDINATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE XIV
SALE OF OIL AND GAS PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . 18
14.01 CONSENT TO SALE OF OIL AND GAS PROPERTIES.. . . . . . . . . . . . . 18
14.02 RELEASE OF LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE XV
RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
15.01 BOOKS AND RECORDS.. . . . . . . . . . . . . . . . . . . . . . . . . 19
15.02 INSPECTIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
15.03 QUARTERLY STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XVI
FUTURE SERVICES, EQUIPMENT AND MATERIALS. . . . . . . . . . . . . . . . . . . 20
ARTICLE XVII
MORATORIUM AND LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 20
17.01 MORATORIUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
17.02 STATUTES OF LIMITATION. . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XVIII
SATISFACTION OF CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
18.01 SATISFACTION AS TO THE COMPANIES. . . . . . . . . . . . . . . . . . 21
18.02 RELEASE OF NON-OPERATING INTEREST OWNERS. . . . . . . . . . . . . . 21
iv
<PAGE>
ARTICLE XIX
FUTURE ACQUIRED OIL AND GAS LEASES. . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XX
REPRESENTATIONS AND WARRANTIES OF THE COMPANIES . . . . . . . . . . . . . . . 21
20.01 REVIEW AND APPROVAL.. . . . . . . . . . . . . . . . . . . . . . . . 21
20.02 AUTHORITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
20.03 ACCURACY OF INFORMATION.. . . . . . . . . . . . . . . . . . . . . . 22
20.04 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
20.05 LEGAL, VALID AND BINDING INSTRUMENT.. . . . . . . . . . . . . . . . 22
20.06 DEDICATED RECEIVABLES.. . . . . . . . . . . . . . . . . . . . . . . 22
20.07 SENIOR INDEBTEDNESS.. . . . . . . . . . . . . . . . . . . . . . . . 22
20.08 OWNERSHIP.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE XXI
REPRESENTATIONS AND WARRANTIESOF PARTICIPATING CREDITORS. . . . . . . . . . . 22
21.01 REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
21.02 AUTHORITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
21.03 NON RELIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XXII
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
22.01 EVENTS OF DEFAULT AS TO THE COMPANIES.. . . . . . . . . . . . . . . 23
22.02 EVENT OF DEFAULT AS TO PARTICIPATING CREDITORS AND COLLATERAL
AGENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE XXIII
REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE XXIV
FURTHER ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
24.01 AMENDMENT OR WAIVER.. . . . . . . . . . . . . . . . . . . . . . . . 28
24.02 PROCEDURE FOR APPROVAL OF SOLICITED ACTION. . . . . . . . . . . . . 28
24.03 EFFECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE XXV
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
25.01 DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
v
<PAGE>
25.02 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
25.03 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . 29
25.04 MODIFICATIONS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . 29
25.05 ENTIRE AGREEMENT; NO ORAL AGREEMENTS. . . . . . . . . . . . . . . . 29
25.06 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . . 30
25.07 CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
25.08 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
25.09 AQUILA; THIRD PARTY BENEFICIARIES . . . . . . . . . . . . . . . . . 30
25.10 REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
25.11 EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
25.12 SINGULAR AND PLURAL . . . . . . . . . . . . . . . . . . . . . . . . 31
25.13 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
25.14 JOINTLY DRAFTED AGREEMENT; CONSTRUCTION . . . . . . . . . . . . . . 31
25.15 USURY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
25.16 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
25.17 NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
EXHIBITS
EXHIBIT 1 Creditor Ratification
EXHIBIT 2 Eligible Creditors and Claim Amounts
EXHIBIT 3 Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement (Texas)
EXHIBIT 4 Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement (Mississippi)
EXHIBIT 5 Act of Mortgage, Pledge and Security Agreement (Louisiana)
EXHIBIT 6 Security Agreement
EXHIBIT 7 Senior Indebtedness
EXHIBIT 8 Collateral Agent Agreement
EXHIBIT 9 Opinion of Counsel
</TABLE>
vi
<PAGE>
Execution Copy
================================================================================
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
BENZ ENERGY INC.
AS SELLER
AND
ENCAP EQUITY 1996 LIMITED PARTNERSHIP
AND
ENERGY CAPITAL INVESTMENT COMPANY PLC
AS BUYER
DATED AUGUST 19, 1999
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT dated August 19, 1999, is made by
and between Benz Energy Inc., a Delaware corporation ("SELLER"), EnCap Equity
1996 Limited Partnership, a Texas limited partnership ("ENCAP LP"), and
Energy Capital Investment Company PLC, an English investment company ("ECIC")
(EnCap LP and ECIC being sometimes collectively called "BUYER").
WITNESSETH:
WHEREAS, Seller desires to sell the Preferred Shares to Buyer, and
Buyer desires to purchase the Preferred Shares from Seller,
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants and agreements contained herein, Seller and Buyer do hereby
agree as follows:
ARTICLE I -- DEFINITIONS, REFERENCES AND CONSTRUCTION
SECTION 1.1. CERTAIN DEFINED TERMS. When used in this Agreement, the
following terms shall have the respective meanings assigned to them in this
SECTION 1.1 or in the section, subsections or other subdivisions referred to
below:
"AFFILIATE" shall mean, as to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common control with, such Person. A
Person shall be deemed to be "controlled by" any other Person if such other
Person possesses, directly or indirectly, power: (a) to vote 20% or more of
the securities (on a fully diluted basis) having ordinary voting power for
the election of directors or managing general partners; or (b) to direct or
cause the direction of the management and policies of such Person whether by
contract or otherwise.
"AGREEMENT" shall mean this agreement, as hereafter changed, amended
or modified in accordance with the terms hereof.
"BUSINESS DAY" shall mean a day, other than a Saturday or Sunday, on
which commercial banks are open for business with the public in Houston,
Texas.
"BUYER" shall have the meaning assigned to such term in the
introductory paragraph to this Agreement.
"CLOSING" and "CLOSING DATE" shall have the meanings assigned to
such terms in SECTION 6.1.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONSOLIDATED" shall refer to the consolidation of any Person, in
accordance with GAAP, with its properly consolidated subsidiaries. References
herein to a Person's Consolidated financial statements, financial position,
financial condition, liabilities, and the like refer to the
1
<PAGE>
consolidated financial statements, financial position, financial condition,
liabilities, and the like of such Person and its properly consolidated
subsidiaries.
"DEBT RESTRUCTURE AGREEMENT" means that certain Debt Restructure
Agreement to be dated on or about August 20, 1999 between Seller, Texstar, as
such term is defined hereinafter, Stewart Peck, in his capacity as Collateral
Agent, Stewart Peck, in his capacity as Deposit Agent, Participating
Creditors and solely for the purposes indicated in Section 25.09, Aquila
Energy Capital Corporation.
"DISCLOSURE DOCUMENTS" shall refer to the Initial Financial
Statements, the loan documents under the Senior Credit Facility, the Debt
Restructure Agreement and Seller's Form S-B2 Initial Registration Statement
filed with the Securities and Exchange Commission on August __, 1999..
"ECIC" shall have the meaning assigned to such term in the
introductory paragraph to this Agreement.
"ENCAP LP" shall have the meaning assigned to such term in the
introductory paragraph to this Agreement.
"ENVIRONMENTAL LAWS" shall mean any and all laws relating to the
environment or to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment including ambient air, surface
water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA AFFILIATE" shall mean Seller and all members of a controlled
group of corporations and all trades or businesses (whether or not
incorporated) under common control that, together with Seller, are treated as
a single employer under Section 414 of the Internal Revenue Code of 1986, as
amended.
"ERISA PLAN" shall mean any employee pension benefit plan subject to
Title IV of ERISA maintained by any ERISA Affiliate with respect to which any
Restricted Person has a fixed or contingent liability.
"FISCAL QUARTER" shall mean a three-month period ending on March 31,
June 30, September 30, or December 31 of any year.
"FISCAL YEAR" shall mean a twelve-month period ending on December 31
of any year.
"GAAP" shall mean those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally
2
<PAGE>
recognized successor) and which, in the case of Seller and its Consolidated
subsidiaries, are applied for all periods after the date hereof in a manner
consistent with the manner in which such principles and practices were
applied to the audited Initial Financial Statements, as such term is defined
herein. If any change in any accounting principle or practice is required by
the Financial Accounting Standards Board (or any such successor) in order for
such principle or practice to continue as a generally accepted accounting
principle or practice, all reports and financial statements required
hereunder with respect to Seller and its Consolidated subsidiaries may be
prepared in accordance with such change, but all calculations and
determinations to be made hereunder may be made in accordance with such
change only after notice of such change is given to Buyer and Buyer agrees to
such change insofar as it affects the accounting of Seller and its
Consolidated subsidiaries.
"HAZARDOUS MATERIALS" shall mean any substance regulated under
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise.
"INDEBTEDNESS" of any Person shall mean Liabilities, as such term is
defined hereinafter, in any of the following categories: (a) Liabilities for
borrowed money; (b) Liabilities constituting an obligation to pay the
deferred purchase price of property or services; (c) Liabilities evidenced by
a bond, debenture, note or similar instrument; (d) Liabilities which would
under GAAP be shown on such Person's balance sheet as a liability, and is
payable more than one year from the date of creation thereof (other than
reserves for taxes and reserves for contingent obligations); (e) Liabilities
arising under futures contracts, forward contracts, swap, cap or collar
contracts, option contracts, hedging contracts, other derivative contracts,
or similar agreements; (f) Liabilities constituting principal under leases
capitalized in accordance with GAAP; (g) Liabilities arising under
conditional sales or other title retention agreements; (h) Liabilities owing
under direct or indirect guaranties of Liabilities of any other Person or
constituting obligations to purchase or acquire or to otherwise protect or
insure a creditor against loss in respect of Liabilities of any other Person
(such as obligations under working capital maintenance agreements, agreements
to keep-well, or agreements to purchase Liabilities, assets, goods,
securities or services), but excluding endorsements in the ordinary course of
business of negotiable instruments in the course of collection; (i)
Liabilities (for example, repurchase agreements) consisting of an obligation
to purchase securities or other property, if such Liabilities arises out of
or in connection with the sale of the same or similar securities or property;
(j) Liabilities with respect to letters of credit or applications or
reimbursement agreements therefor; (k) Liabilities with respect to payments
received in consideration of oil, gas, or other minerals yet to be acquired
or produced at the time of payment (including obligations under "take-or-pay"
contracts to deliver gas in return for payments already received and the
undischarged balance of any production payment created by such Person or for
the creation of which such Person directly or indirectly received payment);
or (l) Liabilities with respect to other obligations to deliver goods or
services in consideration of advance payments therefor; provided, however,
that the "Indebtedness" of any Person shall not include Liabilities that were
incurred by such Person on ordinary trade terms to vendors, suppliers, or
other Persons providing goods and services for use by such Person in the
ordinary course of its business.
"INITIAL FINANCIAL STATEMENTS" shall mean (a) the audited annual
Consolidated financial statements of Benz Energy Inc. (formerly known as Benz
Energy Ltd.), dated as of December 31,
3
<PAGE>
1998, and (ii) the unaudited quarterly Consolidated financial statements of
Benz Energy Inc. dated as of March 31, 1999, and June 30, 1999.
"LIABILITIES" shall mean, as to any Person, all indebtedness,
liabilities and obligations of such Person, whether matured or unmatured,
liquidated or unliquidated, primary or secondary, direct or indirect,
absolute, fixed or contingent, and whether or not required to be considered
pursuant to GAAP.
"MATERIAL ADVERSE CHANGE" shall mean a material and adverse change,
from the state of affairs presented in the Initial Financial Statements, to:
(a) Seller's or any of its Subsidiaries' financial condition taken on a
Consolidated basis; (b) the operations or properties of Seller or any of its
Subsidiaries taken on a Consolidated basis; or (c) Seller's ability to timely
perform its obligations with respect to the Preferred Shares.
"PERMITTED LIENS" means: (i) the liens, claims and encumbrances
described in the Debt Restructure Agreement and subordinated to the liens and
encumbrances of the Senior Credit Facility security documents thereunder;
(ii) liens of lessors, vendors, mechanics, materialmen, laborers, operators,
non-operators, joint interest owners, taxing and other governmental
authorities, and other similar liens arising by law, or otherwise arising in
the ordinary course of business; (iii) obligations under leases; (iv)
easements, rights-of-way, permits, surface leases and other rights in respect
of surface operations, pipelines, grazing, logging, canals, ditches,
reservoirs and the like, and easements of streets, alleys, highways,
pipelines, telephone lines, power lines, railways and other easements and
rights-of-way on, over or in respect of any interest; (v) non-consent
provisions in operating agreements, exploration agreements, and similar
agreements affecting the properties (but only to the extent such provisions
affect the Texstar's net revenue interest after the date hereof); (vi)
specific exceptions and encumbrances affecting each of the properties as
described in the exhibits to any Senior Credit Facility loan document INSOFAR
ONLY as said exceptions and encumbrances are valid and subsisting and are
enforceable against the particular lease which is made subject to said
exceptions and encumbrances; (vii) minor irregularities in title which do not
(a) materially interfere with the occupation, use and enjoyment by Texstar of
the subject property or (b) materially impair the value thereof; and (viii)
any lien explicitly approved in writing by the senior lender under the Senior
Credit Facility on or after the date hereof.
"PERSON" shall mean an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee
thereof, estate or executor thereof, unincorporated organization or joint
venture, or any other legally recognizable juridical person or entity.
"PREFERRED SHARES" shall mean Seller's Class A, Series I Preferred
Stock, par value $1.10 per share, having the terms, rights and preferences
set forth in the Certificate of Amendment of Certificate of Designation,
Preferences, Rights and Limitations of Class A Preferred Stock of the Company
to be filed on or about August 20, 1999.
"RETURNS" shall mean all returns, reports, estimates, declarations,
and statements of any nature regarding Taxes required to be filed by the
taxpayer relating to its income, properties or operations.
4
<PAGE>
"SECURITIES ACT" shall mean the U.S. Securities Act of 1933, as
amended, and all rules and regulations under such Act.
"SELLER" shall have the meaning assigned to such term in the
introductory paragraph to this Agreement.
"SENIOR CREDIT FACILITY" shall mean (a) the credit facilities under
that certain Credit Agreement of even date herewith, between Texstar and
Aquila Energy Capital Corporation in the maximum principal amount of
$40,000,000; or (b) any credit facility or facilities of Seller or any
Subsidiary in substitution thereof with respect to senior bank indebtedness.
"SUBSIDIARY" shall mean, with respect to any Person, any
corporation, association, partnership, joint venture, or other business or
corporate entity, enterprise or organization which is directly or indirectly
(through one or more intermediaries) controlled by or owned fifty percent or
more by such Person.
"TAXES" shall mean any federal, state, local, foreign or other taxes
(including, without limitation, income, alternative minimum, franchise,
property, sales, use, lease, excise, premium, payroll, wage, employment or
withholding taxes), fees, duties, assessments, withholdings or governmental
charges of any kind whatsoever (including interest, penalties and additions
to tax).
"TERMINATION EVENT" shall mean: (a) the occurrence with respect to
any ERISA Plan of: (i) a reportable event described in Sections 4043(b)(5) or
(6) of ERISA; or (ii) any other reportable event described in Section 4043(b)
of ERISA other than a reportable event not subject to the provision for
30-day notice to the Pension Benefit Guaranty Corporation pursuant to a
waiver by such corporation under Section 4043(a) of ERISA; (b) the withdrawal
of any ERISA Affiliate from an ERISA Plan during a plan year in which it was
a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (c) the
filing of a notice of intent to terminate any ERISA Plan or the treatment of
any ERISA Plan amendment as a termination under Section 4041 of ERISA; (d)
the institution of proceedings to terminate any ERISA Plan by the Pension
Benefit Guaranty Corporation under Section 4042 of ERISA; or (e) any other
event or condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any
ERISA Plan.
"TEXSTAR" means TEXSTAR Petroleum, Inc., a wholly-owned subsidiary
of Seller.
SECTION 1.2. REFERENCES AND CONSTRUCTION.
(a) All references in this Agreement to articles, sections,
subsections and other subdivisions refer to corresponding articles, sections,
subsections and other subdivisions of this Agreement unless expressly
provided otherwise.
(b) Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions.
5
<PAGE>
(c) The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly
so limited.
(d) Words in the singular form shall be construed to include
the plural and VICE VERSA, unless the context otherwise requires. Pronouns in
masculine, feminine and neuter genders shall be construed to include any
other gender.
(e) Unless the context otherwise requires or unless otherwise
provided herein, the terms defined in this Agreement which refer to a
particular agreement, instrument or document also refer to and include all
renewals, extensions, modifications, amendments or restatements of such
agreement, instrument or document, provided that nothing contained in this
subsection shall be construed to authorize such renewal, extension,
modification, amendment or restatement.
(f) Examples shall not be construed to limit, expressly or by
implication, the matter they illustrate.
(g) The word "includes" and its derivatives means "includes,
but is not limited to" and corresponding derivative expressions.
(h) No consideration shall be given to the fact or presumption
that one party had a greater or lesser hand in drafting this Agreement.
(i) Unless otherwise indicated, all references herein to "$" or
"dollars" shall refer to U.S. Dollars.
(j) EXHIBITS 5.1(d) AND 6.3 are attached hereto. Such Exhibits
are incorporated herein by reference for all purposes and references to this
Agreement shall also include such Exhibits unless the context in which used
shall otherwise require.
ARTICLE II -- SALE AND PURCHASE OF PREFERRED SHARES
Subject to the terms and provisions hereof, Seller agrees to sell
and Buyer agrees to purchase Preferred Shares in a principal amount equal to
$4,400,000 for the purchase price of $4,000,000, to be funded at Closing.
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
SECTION 3.1. ORGANIZATION AND EXISTENCE. Seller is a corporation
duly organized, legally existing and in good standing under the laws of the
jurisdiction of its formation and is qualified to do business in the State of
Texas. Seller is duly qualified to do business, and is in good standing in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary
except where the failure to be so qualified, when taken together with all
such failures, would not reasonably be expected to result in a Material
Adverse Change.
6
<PAGE>
SECTION 3.2. POWER AND AUTHORITY. Seller has full corporate power
and corporate authority to execute, deliver, and perform this Agreement and
each other agreement, instrument, or document executed or to be executed by
Seller in connection with the transactions contemplated hereby to which it is
a party and to consummate the transactions contemplated hereby and thereby.
The execution, delivery, and performance by Seller of this Agreement and each
other agreement, instrument, or document executed or to be executed by Seller
in connection with the transactions contemplated hereby to which it is a
party, and the consummation by it of the transactions contemplated hereby and
thereby, have been duly authorized by all necessary corporate action of
Seller.
SECTION 3.3. VALID AND BINDING AGREEMENT. This Agreement has been
duly executed and delivered by Seller and constitutes, and each other
agreement, instrument, or document executed or to be executed by Seller in
connection with the transactions contemplated hereby to which it is a party
has been, or when executed will be, duly executed and delivered by Seller and
constitutes, or when executed and delivered will constitute, a valid and
legally binding obligation of Seller, enforceable against it in accordance
with their respective terms, except that such enforceability may be limited
by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and
similar laws affecting creditors' rights generally and (b) equitable
principles which may limit the availability of certain equitable remedies
(such as specific performance) in certain instances.
SECTION 3.4. NON-CONTRAVENTION. The execution, delivery, and
performance by Seller of this Agreement and each other agreement, instrument,
or document executed or to be executed by Seller in connection with the
transactions contemplated hereby to which it is a party and the consummation
by it of the transactions contemplated hereby and thereby do not and will
not: (a) conflict with or result in a violation of any provision of the
charter or bylaws or other governing instruments of Seller; (b) conflict with
or result in a violation of any provision of, or constitute (with or without
the giving of notice or the passage of time or both) a default under, or give
rise (with or without the giving of notice or the passage of time or both) to
any right of termination, cancellation, or acceleration under, any bond,
debenture, note, mortgage, indenture, lease, contract, agreement, or other
instrument or obligation to which Seller is a party or by which Seller or any
of its properties may be bound; (c) result in the creation or imposition of
any lien or other encumbrance upon the properties of Seller; or (d) violate
any applicable law, rule or regulation binding upon Seller.
SECTION 3.5. APPROVALS. No consent, approval, order, or
authorization of, or declaration, filing, or registration with, any court or
governmental agency or of any third party is required to be obtained or made
by Seller in connection with the execution, delivery, or performance by
Seller of this Agreement and each other agreement, instrument, or document
executed or to be executed by Seller in connection with the transactions
contemplated hereby to which it is a party or the consummation by it of the
transactions contemplated hereby and thereby, other than compliance with any
applicable requirements of the Securities Act and any applicable state
securities laws.
SECTION 3.6. PENDING LITIGATION. There are no pending suits,
actions, or other proceedings in which Seller is a party which prevent the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby. Except as disclosed in
7
<PAGE>
the Disclosure Documents: (i) there are no actions, suits or legal,
equitable, arbitrative or administrative proceedings pending, or to the
knowledge of Seller, threatened, against Seller or any Subsidiary thereof;
and (ii) there are no outstanding judgments, injunctions, writs, rulings
orders by any tribunal against Seller's or any Subsidiary's stockholders,
partners, directors or officers which could cause a Material Adverse Change.
SECTION 3.7. CAPITAL STOCK. The total authorized capital stock of
Seller consists of: (i) 300,000,000 shares of common shares, par value $0.01
per share, of which (as of August 6, 1999) 39,870,617 are outstanding; and
(ii) 100,000,000 shares of preferred stock, par value $1.10 per share, of
which 9,488,140 Class A, Series I Preferred Stock (non-convertible 10%
dividend) are outstanding, and 238,201 shares of Class A, Series II
Convertible Preferred Stock are outstanding. All such outstanding shares of
capital stock have been validly issued and are fully paid and non-assessable,
and no shares of capital stock of Seller are subject to, nor have been issued
in violation of, preemptive or similar rights. Except as set forth in the
Disclosure Documents, there are no outstanding warrants, options, or other
rights to subscribe for or purchase any shares of capital stock of Seller.
Except as set forth in the Disclosure Documents, there are no outstanding
obligations of Seller or any Subsidiary to repurchase, redeem or otherwise
acquired any of the foregoing shares, securities, options, equity
equivalents, interests or rights. Except as set forth in the Disclosure
Documents, the Escrow Agreement dated September 15, 1997 among Texstar
Holdings, L.L.C, Trustee, the Slattery Trust, the Ruston Trust, the Houston
Trust, the Starbucks Trust, Boone Petroleum Inc. and C'est La Vie
Enterprises, as security holders, Montreal Trust Company of Canada, as
trustee, and Seller and the Stockholder Voting Agreement and Irrevocable
Proxy of even date herewith among certain stockholders of Seller, Seller is
not a party to, and is not aware of, any voting agreement, voting trust or
similar agreement or arrangement relating to any class or series of its
capital stock.
SECTION 3.8. ISSUANCE OF PREFERRED SHARES. The issuance of the
Preferred Shares has been duly authorized by Seller's board of directors, and
the Preferred Shares have been validly issued, fully paid and non-assessable.
The issuance of the Preferred Shares by Seller is not subject to any
preemptive or similar rights.
SECTION 3.9. INITIAL FINANCIAL STATEMENTS.
(a) Seller has heretofore delivered to Buyer true, correct and
complete copies of the Initial Financial Statements. The Initial Financial
Statements fairly present Seller's Consolidated financial position at the
respective dates thereof and the Consolidated results of Seller's operations
and Seller's Consolidated cash flows for the respective periods thereof. All
Initial Financial Statements were prepared in accordance with GAAP. Neither
Seller nor any Subsidiary thereof has any outstanding liabilities of any kind
(including contingent obligations, tax assessments, and unusual forward or
long-term commitments) which is, in the aggregate, material to Seller or such
Subsidiary or material with respect to Seller's Consolidated financial
condition and not shown in the Initial Financial Statements or otherwise
disclosed in the Disclosure Documents.
(b) Except as disclosed in the Disclosure Documents, since June
30, 1999, (i) no Material Adverse Change has occurred, nor any event or
condition that might reasonably be expected to result in any Material Adverse
Change; (ii) neither Seller nor any Subsidiary has
8
<PAGE>
declared, set aside or paid any dividend or distribution (whether in cash,
stock or property) with respect to the capital stock of Seller or any
Subsidiary (other than dividends or distributions between Seller and its
wholly-owned Subsidiaries); (iii) exclusive of actions taken with respect to
Seller's Class A Series I Preferred Stock and Seller's Class A Series II
Convertible Preferred Stock, Seller has not effected any stock split,
combination or reclassification of any of its capital stock or issued or
authorized the issuance of any other securities in respect of, in lieu of or
in substitution for, shares of Seller's capital stock; (iv) Seller has not
granted or amended the terms of any option to purchase shares of preferred
stock of Seller; or (v) Seller has not entered into any agreement (oral or
written), arrangement or understanding to do any of the foregoing.
SECTION 3.10. FULL DISCLOSURE. To the best knowledge of Seller
(after due inquiry), no certificate, statement or other information delivered
herewith or heretofore by Seller to Buyer in connection with the negotiation
of this Agreement or in connection with any transaction contemplated hereby
contains any untrue statement of a material fact or omits to state any
material fact known to Seller (other than industry-wide risks normally
associated with the types of businesses conducted by Seller and its
Subsidiaries) necessary to make the statements contained herein or therein
not misleading as of the date made or deemed made. There is no fact known to
Seller that has not been disclosed to Buyer in writing which could cause a
Material Adverse Change.
SECTION 3.11. LABOR DISPUTES AND ACTS OF GOD. Neither the business
nor the assets or properties of Seller or any Subsidiary thereof has been
affected by any fire, explosion, accident, strike, lockout or other labor
dispute, drought, storm, hail, earthquake, embargo, act of God or of the
public enemy or other casualty (whether or not covered by insurance), which
could cause a Material Adverse Change.
SECTION 3.12. ERISA PLANS AND LIABILITIES. All currently existing
ERISA Plans are listed in the Disclosure Documents. Except as disclosed in
the Disclosure Documents, no Termination Event has occurred with respect to
any ERISA Plan and all ERISA Affiliates are in compliance with ERISA in all
material respects. No ERISA Affiliate is required to contribute to, or has
any other absolute or contingent liability in respect of, any "multiemployer
plan" as defined in Section 4001 of ERISA. Except as set forth in the
Disclosure Documents: (i) no "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) exists with
respect to any ERISA Plan, whether or not waived by the Secretary of the
Treasury or his delegate; and (ii) the current value of each ERISA Plan's
benefits does not exceed the current value of such ERISA Plan's assets
available for the payment of such benefits by more than $500,000.
SECTION 3.13. ENVIRONMENTAL AND OTHER LAWS. Except as set forth in
the Disclosure Documents: (a) to the best of Seller's knowledge (after due
inquiry), Seller and its Subsidiaries are conducting their businesses in
material compliance with all applicable laws, including Environmental Laws,
and have and are in material compliance with all licenses and permits
required under any such laws; (b) none of the operations or properties of
Seller or any of its Subsidiaries is the subject of federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Materials into the environment or to
the improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (c) neither Seller nor any Subsidiary
thereof has filed any
9
<PAGE>
notice under any Law indicating that it is responsible for the improper
release into the environment, or the improper storage or disposal, of any
material amount of any Hazardous Materials or that any Hazardous Materials
have been improperly released, or are improperly stored or disposed of, upon
any property of Seller or any Subsidiary thereof; (d) to the best of Seller's
knowledge, neither Seller nor any Subsidiary thereof has transported or
arranged for the transportation of any Hazardous Material to any location
which is: (i) listed on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
listed for possible inclusion on such National Priorities List by the
Environmental Protection Agency in its Comprehensive Environmental Response,
Compensation and Liability Information System List, or listed on any similar
state list; or (ii) the subject of federal, state or local enforcement
actions or other investigations which may lead to material claims against
Seller or any Subsidiary thereof for clean-up costs, remedial work, damages
to natural resources or for personal injury claims (whether under
Environmental Laws or otherwise); and (e) neither Seller nor any Subsidiary
thereof otherwise has any known material contingent liability under any
Environmental Laws or in connection with the release into the environment, or
the storage or disposal, of any Hazardous Materials.
SECTION 3.14. NAMES AND PLACES OF BUSINESS. Neither Seller nor any
Subsidiary thereof has, during the preceding five years, had, been known by,
or used any other trade or fictitious name, except as disclosed in the
Disclosure Documents. Except as otherwise indicated in the Disclosure
Documents, the chief executive office and principal place of business of
Seller and each Subsidiary thereof are (and for the preceding five years have
been) located at the address of Seller set out in ARTICLE IX. Except as
indicated in the Disclosure Documents, neither Seller nor any Subsidiary
thereof has any other office or place of business.
SECTION 3.15. SELLER'S SUBSIDIARIES.
(a) Seller does not presently have any Subsidiary or own any
stock in any other corporation or association except those listed in the
Disclosure Documents.
(b) Seller owns, directly or indirectly, the equity interest in
each of its Subsidiaries which is indicated in the Disclosure Documents.
There are no existing options, warrants, calls, convertible securities or
other rights, agreements or commitments of any character relating to the
issued or unissued capital stock or other securities of any of the
Subsidiaries.
(c) Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction or
organization and has the corporate or similar power to carry on its business
as it is now being conducted or currently proposed to be conducted. Each
Subsidiary is duly qualified to do business, and is in good standing, in each
jurisdiction (except as to Texstar in Mississippi, which shall be within ten
days after the consummation of the Senior Credit Facility) where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary except where the failure to be
so qualified, when taken together with all such failures, would not
reasonably be expected to result in a Material Adverse Change.
SECTION 3.16. TITLE TO PROPERTIES; LICENSES.
10
<PAGE>
(a) To the best of Seller's knowledge (after due inquiry),
Seller and each of it Subsidiaries has good and marketable title to all of
its material properties and assets, free and clear of all Liens other than
Permitted Liens and of all impediments to the use of such properties and
assets in such Person's business, except that no representation or warranty
is made with respect to any oil, gas or mineral property or interest to which
no proved oil or gas reserves are properly attributed.
(b) Seller and each of its Subsidiaries possesses all licenses,
permits, franchises, patents, copyrights, trademarks and trade names, and
other intellectual property (or otherwise possesses the right to use such
intellectual property without violation of the rights of any other Person)
which are necessary to carry out its business as presently conducted and as
presently proposed to be conducted hereafter, and neither Seller nor any
Subsidiary thereof is in violation in any material respect of the terms under
which it possesses such intellectual property or the right to use such
intellectual property.
SECTION 3.17. GOVERNMENT REGULATION. Neither Seller nor any of its
Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Investment Company Act of
1940 (as any of the preceding acts have been amended) or any other Law which
regulates the issuance of capital stock, including laws relating to common
contract carriers or the sale of electricity, gas, steam, water or other
public utility services.
SECTION 3.18. OFFICERS, DIRECTORS AND SHAREHOLDERS. The officers and
directors of Seller are those persons disclosed in the definitive
registration statement prepared by Seller and filed with the appropriate U.S.
securities authorities, copies of which registration statement have been
previously furnished in connection with the negotiation hereof.
SECTION 3.19. TAX MATTERS. Each of the following is true with
respect to each of Seller and its Subsidiaries to the extent applicable to
such member:
(a) all Returns have been or will be timely filed by Seller and
its Subsidiaries when due in accordance with all applicable laws; all Taxes
shown on the Returns have been or will be timely paid when due (except as to
Texstar in Mississippi, which shall be paid within ten days after the
consummation of the Senior Credit Facility); the Returns have been properly
completed in compliance with all applicable laws and regulations and
completely and accurately reflect the facts regarding the income, expenses,
properties, business and operations required to be shown thereon; the Returns
are not subject to penalties under Section 6662 of the Code (or any
corresponding provision of state, local or foreign tax law);
(b) Seller and its Subsidiaries has paid all Taxes required to
be paid by it (whether or not shown on a Return) or for which it could be
liable (except as to Texstar in Mississippi, which shall be paid within ten
days after the consummation of the Senior Credit Facility) (provided that it
shall not be considered a breach of this representation if it is ultimately
determined that additional tax payments are due but such assessment is based
on an adjustment to a return or position, if such member has a reasonable
basis for the position taken with respect to such Taxes), whether to taxing
authorities or to other persons under tax allocation agreements or otherwise,
and the charges, accruals, and
11
<PAGE>
reserves for Taxes due, or accrued but not yet due, relating to its income,
properties, transactions or operations as reflected on its books (including,
without limitation, the balance sheet included in the Initial Financial
Statements for the quarter ended June 30, 1999) are adequate to cover such
Taxes;
(c) there are no agreements or consents currently in effect for
the extension or waiver of the time: (i) to file any Return; or (ii) for
assessment or collection of any taxes relating to the income, properties or
operations of Seller or its Subsidiaries, nor has Seller and its Subsidiaries
been requested to enter into any such agreement or consent;
(d) there are no liens for Taxes (other than for current Taxes
not yet due and payable) upon the assets of Seller or its Subsidiaries; and
(e) each of Seller and its Subsidiaries has complied in all
material respects with all applicable tax laws.
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF BUYER
Each of EnCap LP and ECIC hereby severally represents and warrants
as to itself to Seller as follows:
SECTION 4.1. ORGANIZATION AND EXISTENCE. Such entity is duly formed
and validly existing under the laws of the jurisdiction of its formation.
SECTION 4.2. POWER AND AUTHORITY. Such has full partnership or
corporate (as applicable) power and authority to execute, deliver, and
perform this Agreement and to consummate the transactions contemplated hereby
and thereby. The execution, delivery, and performance by such entity of this
Agreement and the consummation by it of the transactions contemplated hereby
have been duly authorized by all necessary partnership or corporate (as
applicable) action of such entity.
SECTION 4.3. INVESTMENT INTENT. Such entity is acquiring the
Preferred Shares for its own account for investment and not with a view to,
or for sale or other disposition in connection with, any distribution of all
or any part thereof except (i) in an offering covered by a registration
statement filed with the Securities and Exchange Commission under the
Securities Act covering the Preferred Shares, (ii) pursuant to an applicable
exemption under the Securities Act, or (iii) in compliance with applicable
federal securities laws.
SECTION 4.4. RESTRICTED SECURITIES. Such entity understands that the
Preferred Shares are issued pursuant to exemptions from the registration
requirements of the Securities Act and applicable state securities laws of
the United States, that the Preferred Shares are characterized as "restricted
securities" under U.S. federal securities laws, and that under such laws and
applicable regulations the Preferred Shares cannot be sold or otherwise
disposed of in the United States without registration under the Securities
Act or an exemption therefrom.
12
<PAGE>
SECTION 4.5 LEGEND. It is agreed and understood by such entity that
the certificates representing the Preferred Shares shall conspicuously set
forth on the face or back thereof, in addition to any legends required by
applicable law or other agreement, a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
PURSUANT TO THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS OF THE UNITED STATES. SUCH SHARES MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IN THE UNITED STATES UNLESS THEY ARE FIRST
REGISTERED PURSUANT TO THAT ACT AND APPLICABLE STATE SECURITIES LAWS OR
UNLESS THE CORPORATION RECEIVES A WRITTEN OPINION OF COUNSEL, WHICH
OPINION AND COUNSEL ARE SATISFACTORY TO THE CORPORATION, TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED IN THE UNITED STATES.
ARTICLE V -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES;
TERMINATION RIGHTS
SECTION 5.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The
obligations of Buyer under this Agreement are subject to each of the
following conditions being met:
(a) Each and every representation of Seller under this
Agreement shall be true and accurate in all material respects as of the date
when made and shall be deemed to have been made again at and as of the time
of Closing and shall at and as of such time of Closing be true and accurate
in all respects except as to changes specifically contemplated by this
Agreement or consented to by Buyer.
(b) Seller shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by Buyer) each
and every covenant, agreement and condition required by this Agreement to be
performed or complied with by Seller prior to or at the Closing.
(c) No suit, action or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental agency
seeking to restrain, prohibit, or obtain damages or other relief in
connection with the consummation of the transactions contemplated by this
Agreement.
(d) Buyer shall have received (or shall have received
confirmation of the matters contained therein, to be followed within five
days after Closing by receipt of) an opinion Lanier Yeates, A Professional
Corporation, counsel for Seller, dated the Closing Date and substantially in
the form of EXHIBIT 5.1(d).
(e) Seller shall have contemporaneously consummated the
transactions under the Senior Credit Facility and shall have delivered a
Standstill Agreement in favor of
13
<PAGE>
Buyer substantially in the form of that certain Standstill Agreement dated
December 28, 1998 among Seller and certain of its affiliates.
(f) Buyer shall have reviewed and reasonably approved the use
of proceeds of the sale of the Preferred Shares and shall have paid to EnCap
Investments, L.L.C. a $100,000 placement fee in cash.
(g) Seller shall have paid all outstanding invoices of Thompson
& Knight, L.L.P., as counsel to Buyer and its affiliates, rendered in
connection with various prior and ongoing transactions between Buyer and its
affiliates and Seller and its affiliates, an invoice from McDavid, Noblin &
West PLLC in the amount of approximately $11,000, and an invoice from Well
Springs in the amount of approximately $13,000.
If any such condition on the obligations of Buyer under this Agreement is not
met as of the Closing Date, or in the event the Closing does not occur on or
before the Closing Date, and (in either case) Buyer is not in breach of its
obligations hereunder in the absence of Seller also being in breach of its
obligations hereunder, this Agreement may, at the option of Buyer, be
terminated, in which case the parties shall have no further obligations to
one another hereunder.
SECTION 5.2. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The
obligations of Seller under this Agreement are subject to each of the
following conditions being met:
(a) Each and every representation of Buyer under this Agreement
shall be true and accurate in all material respects as of the date when made
and shall be deemed to have been made again at and as of the time of Closing
and shall at and as of such time of Closing be true and accurate in all
respects except as to changes specifically contemplated by this Agreement or
consented to by Seller.
(b) Buyer shall have performed and complied in all material
respects with (or compliance therewith shall have been waived by Seller) each
and every covenant, agreement and condition required by this Agreement to be
performed or complied with by Buyer prior to or at the Closing.
(c) No suit, action or other proceedings shall, on the date of
Closing, be pending or threatened before any court or governmental agency
seeking to restrain, prohibit, or obtain damages or other relief in
connection with the consummation of the transactions contemplated by this
Agreement.
If any such condition on the obligations of Seller under this Agreement is
not met as of the Closing Date, or in the event the Closing does not occur on
or before the Closing Date, and (in either case) Seller is not in breach of
its obligations hereunder in the absence of Buyer also being in breach of its
obligations hereunder, this Agreement may, at the option of Seller, be
terminated, in which case the parties shall have no further obligations to
one another hereunder.
14
<PAGE>
ARTICLE VI -- CLOSING OF TRANSACTION
SECTION 6.1. THE CLOSING. The closing (herein called the "CLOSING")
of the transaction contemplated hereby shall take place in the offices of
Akin Gump Strauss Hauer & Feld, L.L.P. at 711 Louisiana Street, Suite 1900
South, Houston, Texas, at 10:00 a.m. Central Standard Time, on the date
hereof (such date and time being herein called the "CLOSING DATE").
SECTION 6.2. SELLER'S CLOSING OBLIGATIONS. At the Closing, Seller
shall issue a treasury order to its transfer agent requesting issuance of
certificates evidencing the Preferred Shares as follows:
EnCap LP 3,300,000
ECIC 1,100,000
SECTION 6.3. BUYER'S CLOSING OBLIGATIONS. At the Closing, EnCap LP
and ECIC shall deliver to the Seller $3,000,000 and $1,000,000, respectively,
in immediately available funds; Seller hereby instructs such funds to be
wired pursuant to the wire instructions set forth on Exhibit 6.3 attached
hereto.
ARTICLE VII -- CERTAIN POST-CLOSING AFFIRMATIVE COVENANTS OF SELLER
To induce Buyer to enter into this Agreement and purchase the
Preferred Shares, Seller covenants and agrees that until Buyer owns less than
25% of the Preferred Shares:
SECTION 7.1. BOOKS, FINANCIAL STATEMENTS AND REPORTS. Seller will
maintain and will cause its Subsidiaries to maintain a standard system of
accounting, will maintain its Fiscal Year, and will furnish the following
statements and reports to Buyer at Seller's expense:
(a) As soon as available, and in any event within one
hundred forty (140) days after the end of each Fiscal Year, complete
Consolidated (and, upon the request of Buyer, consolidating) financial
statements of Seller together with all notes thereto, prepared in
reasonable detail in accordance with GAAP, together with an unqualified
opinion, based on an audit using generally accepted auditing standards,
by Mordinger, Fruchter, Rosen & Corso, or other independent certified
public accountants selected by Seller and reasonably acceptable to
Buyer, stating that such Consolidated financial statements have been so
prepared. These financial statements shall contain a Consolidated
balance sheet as of the end of such Fiscal Year and Consolidated
statements of earnings, of cash flows, and ofchanges in owners' equity
for such Fiscal Year, each setting forth in comparative form the
corresponding figures for the preceding Fiscal Year.
(b) As soon as available, and in any event within
forty-five (45) days after the end of each Fiscal Quarter, Seller's
Consolidated (and, upon the request of Buyer, consolidating) balance
sheet as of the end of such Fiscal Quarter and
15
<PAGE>
Consolidated statements of Seller's earnings and cash flows for the
period from the beginning of the then current Fiscal Year to the end
of such Fiscal Quarter, all in reasonable detail and prepared in
accordance with GAAP, subject to changes resulting from normal year-
end adjustments.
(c) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by
Seller or any of its Subsidiaries to its stockholders and all
registration statements, periodic reports and other statements and
schedules filed by Seller or any Subsidiary thereof with any securities
exchange, any Canadian securities authority, or any similar
governmental authority.
(d) By March 31 of each year, a reserve report, effective
as of December 31 of the prior year.
(e) As soon as available, and in any event within ninety
(90) days after the end of each Fiscal Year, a business and financial
plan for Seller (in form reasonably satisfactory to Buyer), prepared by
a senior financial officer thereof, setting forth for the first year
thereof, quarterly financial projections and budgets for Seller, and
thereafter yearly financial projections and budgets for the following
three years.
SECTION 7.2. OTHER INFORMATION AND INSPECTIONS. Seller will furnish
to Buyer any information reasonably available to Seller and which can be
obtained by it without undue effort or expense which Buyer may from time to
time request in writing concerning any covenant, provision or condition
contained in this ARTICLE VII or ARTICLE VIII or any matter in connection
with Seller's businesses and operations. Seller will permit representatives
appointed by Buyer (including independent accountants, auditors, agents,
attorneys, appraisers and any other Persons), with reasonable notice, to
visit and inspect during normal business hours any of Seller's or any
Subsidiary's property, including its books of account, other books and
records, and any facilities or other business assets, and to make extra
copies therefrom and photocopies and photographs thereof, and to write down
and record any information such representatives obtain (provided, that the
number of such visits and inspections shall not exceed one per calendar
year), and Seller shall permit Buyer or its representatives to investigate
and verify the accuracy of the information furnished to Buyer in connection
with this Agreement and to discuss all such matters with its officers.
SECTION 7.3. NOTICE OF MATERIAL EVENTS AND CHANGE OF ADDRESS. Seller
will promptly notify Buyer in writing, stating that such notice is being
given pursuant to this Agreement, of:
(a) the occurrence of any Material Adverse Change after
the Closing Date;
(b) the occurrence of any material breach by Seller of
any of its covenants and agreements contained in ARTICLES VII and VIII;
16
<PAGE>
(c) the acceleration of the maturity of any indebtedness
owed by Seller or any Subsidiary thereof or of any default by Seller or
any Subsidiary under any indenture, mortgage, agreement, contract or
other instrument to which any of them is a party or by which any of
them or any of their properties is bound, if such acceleration or
default could cause a Material Adverse Change;
(d) the occurrence of any Termination Event;
(e) any claim of $100,000 or more, any notice of
potential liability under any Environmental Laws which might exceed
such amount, or any other material adverse claim asserted against
Seller or any Subsidiary or with respect to any of their properties;
and
(f) the filing of any suit or proceeding against Seller
or any Subsidiary in which an adverse decision could cause a Material
Adverse Change.
Upon the occurrence of any of the foregoing, Seller will take all necessary
or appropriate steps to remedy promptly any such Material Adverse Change,
Default, acceleration, default or Termination Event, to protect against any
such adverse claim, to defend any such suit or proceeding, and to resolve all
controversies on account of any of the foregoing. Seller will also notify
Buyer in writing at least twenty Business Days prior to the date that Seller
changes its name or the location of its chief executive office or principal
place of business.
SECTION 7.4. MAINTENANCE OF PROPERTIES. Seller and each Subsidiary
thereof will maintain, preserve, protect, and keep, and shall cause to be
maintained, preserved, protected and kept, all property used or useful in the
conduct of its business in condition reasonably adequate for normal
operations and in compliance with all applicable laws, and will from time to
time make all repairs, renewals and replacements needed to enable the
business and operations carried on in connection therewith to be promptly and
advantageously conducted at all times.
SECTION 7.5. MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. Seller and
each Subsidiary thereof will maintain and preserve its existence and its
rights and franchises in full force and effect and will qualify to do
business in all states or jurisdictions where required by applicable law,
except where the failure so to qualify will not cause a Material Adverse
Change.
SECTION 7.6. PAYMENT OF TAXES. Seller and each of its Subsidiaries
will (a) timely file all required Returns and (b) timely pay all Taxes.
Seller and any Subsidiary may, however, delay paying or discharging any of
the foregoing so long as it is in good faith contesting the validity thereof
by appropriate proceedings and has set aside on its books adequate reserves
therefor.
SECTION 7.7. INSURANCE. Seller and each Subsidiary thereof will keep
or cause to be kept insured by financially sound and reputable insurers its
property in such amounts
17
<PAGE>
and against such risks as are reasonably customary for Persons engaged in the
same or similar business of owning or operating similar properties.
SECTION 7.8. COMPLIANCE WITH AGREEMENTS AND LAW. Seller and each
Subsidiary thereof will perform all material obligations it is required to
perform under the terms of each indenture, mortgage, deed of trust, security
agreement, lease, franchise, agreement, contract or other instrument or
obligation to which it is a party or by which it or any of its properties is
bound. Seller and each Subsidiary thereof will conduct its business and
affairs in compliance with all laws applicable thereto.
ARTICLE VIII -- CERTAIN POST-CLOSING NEGATIVE COVENANTS OF SELLER
To induce Seller to enter into this Agreement and purchase the
Preferred Shares, Seller covenants and agrees that until Buyer holds less
than 25% of the Preferred Shares:
SECTION 8.1. INDEBTEDNESS. Neither Seller nor any Subsidiary thereof
will in any manner owe or be liable for Indebtedness except for any of the
following:
(a) Indebtedness under the Senior Credit Facility or the Debt
Restructure Agreement;
(b) Indebtedness outstanding as of the date hereof and
disclosed in the Disclosure Documents;
(c) Indebtedness approved by the board of directors of Seller;
(d) purchase money Indebtedness and Indebtedness under leases
of Seller or any Subsidiary thereof as lessee which are capitalized in
accordance with GAAP, provided such purchase money Indebtedness and
Indebtedness under capital leases required to be paid in any Fiscal Year do
not in the aggregate exceed $100,000;
(e) Indebtedness which is non-recourse to Seller and such
Subsidiary and which is subordinated to the Indebtedness under the junior note
under the Senior Credit Facility on terms and conditions satisfactory to Buyer
in its sole and absolute discretion;
(f) Indebtedness arising from endorsing negotiable instruments
for collection in the ordinary course of business;
(g) Indebtedness constituting deposits to secured the
performance of bids, trade contracts (other than for borrowed money), leases,
statutory obligations, surety and appeal bonds and performance bonds and
other obligations of a like nature that are incurred in the ordinary course
of business; and
(h) Indebtedness constituting indemnities under agreements
entered into by Seller or any Subsidiary thereof arising in the ordinary
course of business.
18
<PAGE>
SECTION 8.2. LIMITATION ON LIENS. Neither Seller nor any Subsidiary
thereof will create, assume or permit to exist any lien upon any of the
properties or assets which it now owns or hereafter acquires, except:
(a) liens which secure the Indebtedness permitted under SECTION
8.1; and
(b) statutory liens for taxes, statutory mechanics' and
materialmen's liens incurred in the ordinary course of business, and other
similar liens incurred in the ordinary course of business, provided such
liens do not secure Indebtedness and secure only Liabilities which are not
delinquent or which are being contested as provided in SECTION 7.6.
SECTION 8.3. LIMITATIONS ON INVESTMENTS AND NEW BUSINESSES. Neither
Seller nor any Subsidiary will engage directly or indirectly in any business
other than the oil and gas exploration and development business.
SECTION 8.4. TRANSACTIONS WITH AFFILIATES. Neither Seller nor any
Subsidiary thereof will engage in any material transaction with any of its
Affiliates on terms which are less favorable to it than those which would
have been obtainable at the time in arm's-length dealing with Persons other
than such Affiliates.
SECTION 8.5. LIMITATION ON DIVIDENDS AND REDEMPTIONS. Neither Seller
nor any of its Subsidiaries will declare or pay dividends on, or make any
other distribution in respect of, any class of its capital stock or any
partnership or other interest in it, nor will Seller or any Subsidiary
directly or indirectly make any capital contribution to or purchase, redeem,
acquire or retire any shares of the capital stock of or partnership interests
in Seller or any Subsidiary, or cause or permit any reduction or retirement
of the capital stock of Seller or any Subsidiary, except as otherwise
expressly provided in this Section. Such dividends, distributions,
contributions, purchases, redemptions, acquisitions, retirements or
reductions may be made by Seller: (a) without limitation to Seller; (ii) to
Subsidiaries of Seller, to the extent permitted under this SECTION 8.3; and
(iii) as required under the terms of Seller's Class A Series I Convertible
Preferred Stock, including the Preferred Shares, and Seller's Class A Series
II Convertible Preferred Stock. Seller or any Subsidiary thereof may declare
and pay to any Person dividends payable only in its common stock, so long as
Seller's interest in any of its Subsidiaries is not thereby reduced.
SECTION 8.6. CERTAIN CONTRACTS; AMENDMENTS; MULTIEMPLOYER ERISA
PLANS. Neither Seller nor any Subsidiary thereof will, directly or
indirectly, enter into, create, or otherwise allow to exist any contract or
other consensual restriction on the ability of any Subsidiary of Seller to:
(a) pay dividends or make other distributions to Seller; (b) to redeem equity
interests held in it by Seller; (c) to repay loans and other indebtedness
owing by it to Seller; or (d) to transfer any of its assets to Seller. No
ERISA Affiliate will incur any obligation to contribute to any "multiemployer
plan" as defined in Section 4001 of ERISA.
19
<PAGE>
SECTION 8.7. COVERAGE RATIO. The Coverage Ratio will never be less
than 1.4 to 1. As used in this Section, the term "COVERAGE RATIO" shall mean
Tangible Assets of Seller divided by Long Term Debt of Seller. As used in
this Section: (a) the term "TANGIBLE ASSETS" shall mean the sum of: (i) the
present value (utilizing a 10% discount rate) of the estimated proved
reserves; (ii) cash; (iii) securities; and (iv) net book value of unproved
properties and equipment as if Seller were following the full cost method of
property accounting beginning January 1, 1999, and (b) the term "LONG TERM
DEBT" shall mean long-term debt as the same is defined in Seller's audited
financial statements. For purposes hereof, the Coverage Ratio will be
calculated no later than April 15 of each year as of December 31 of the
previous year using Seller's audited fiscal year-end audited financial
statements and year end estimates of proved reserves by Seller's independent
engineers.
ARTICLE IX -- NOTICES
All notices and other communications required under this Agreement
shall (unless otherwise specifically provided herein) be in writing and be
delivered personally, by recognized commercial courier or delivery service
(which provides a receipt), by telecopier (with receipt acknowledged), or by
registered or certified mail (postage prepaid), at the following addresses:
IF TO SELLER: Benz Energy Inc.
1000 Louisiana, Suite 3950
Houston, Texas 77002
Attention: Robert S. Herlin
Fax No.: 713-739-8402
IF TO BUYER: EnCap Equity 1996 Limited Partnership
c/o EnCap Investments L.L.C.
1100 Louisiana, Suite 3150
Houston, Texas 77002
Attention: Robert L. Zorich
Fax No.: 713-659-6130
and shall be considered delivered on the date of receipt. Either Seller, on
the one hand, or Buyer, on the other hand, may specify as its proper address
any other post office address within the continental limits of the United
States by giving notice to the other, in the manner provided in this Article,
at least ten (10) Business Days prior to the effective date of such change of
address.
ARTICLE X -- MISCELLANEOUS MATTERS
SECTION 10.1. SURVIVAL OF PROVISIONS. All representations and
warranties made herein by Seller and Buyer shall be continuing and shall be
true and correct on and as of the date of Closing with the same force and
effect as if made at that time; further, except as hereinafter provided, all
of such representations and warranties shall survive the Closing and the
delivery of the Assignments. The provisions of, and the obligations of
20
<PAGE>
the parties under, ARTICLE VI (to the extent the same are, by mutual
agreement, not performed at Closing), and ARTICLES VII through X inclusive
shall survive the Closing and the delivery of the Preferred Shares.
SECTION 10.2. FURTHER ASSURANCES. From time to time after the
Closing, at the request of any party hereto and without further
consideration, Seller, on the one hand, and Buyer, on the other hand, shall
execute and deliver to the requesting party such instruments and documents
and take such other action (but without incurring any material financial
obligation) as such requesting party may reasonably request in order to
consummate more fully and effectively the transactions contemplated hereby.
SECTION 10.3. BINDING EFFECT; SUCCESSORS AND ASSIGNS. The Agreement
shall be binding on the parties hereto and their respective successors and
permitted assigns. No party hereto shall have the right to assign its rights
under this Agreement without the prior written consent of the other party.
SECTION 10.4. EXPENSES. Seller shall bear and pay all expenses
incurred by Buyer or Seller in connection with the transaction contemplated
by this Agreement.
SECTION 10.5. ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to subject matter hereof and
supersedes all prior agreements, understandings, negotiations, and
discussions among the parties with respect to such subject matter.
SECTION 10.6. PUBLIC STATEMENTS. Seller, on the one hand, and Buyer,
on the other hand, shall consult with each other with regard to all publicity
and other releases at or prior to Closing concerning this Agreement and the
transactions contemplated hereby and, except as required by applicable law or
the applicable rules or regulations of any governmental body or stock
exchange, neither Seller, on the one hand, nor Buyer, on the other hand,
shall issue any publicity or other release without the prior consent of the
other.
SECTION 10.7. WAIVER OF SPECIAL DAMAGES; WAIVER OF JURY TRIAL.
(A) EACH OF SELLER AND BUYER HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY WAIVES AND RELEASES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE
TO CLAIM OR RECOVER ANY "SPECIAL DAMAGES", AS DEFINED BELOW,
FROM THE OTHER IN RESPECT OF ANY LITIGATION (INCLUDING
ARBITRATION PROCEEDINGS) BASED ON, OR DIRECTLY OR INDIRECTLY
AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH, ANY
ACTIONS, FAILURES TO ACT, OR EVENTS AT ANY TIME OCCURRING
(WHETHER BEFORE, AT OR AFTER THE EFFECTIVE DATE HEREOF) WHICH
IN ANY WAY RELATE TO (I) THIS AGREEMENT OR ARE OTHERWISE BASED
HEREON, (II) ANY OTHER TRANSACTIONS OF ANY KIND AMONG SELLER
AND/OR ANY OF ITS AFFILIATES, ON THE ONE HAND, AND BUYER AND/OR
21
<PAGE>
ANY OF ITS AFFILIATES, ON THE OTHER HAND, OR (III) ANY ACTUAL OR
ALLEGED NEGOTIATIONS, DISCUSSIONS, REPRESENTATIONS,
WARRANTIES, PROMISES, OR OTHER UNDERTAKINGS BY ANY PARTY
HERETO IN CONNECTION WITH ANY OF THE FOREGOING. AS USED IN
THIS LETTER "SPECIAL DAMAGES" INCLUDES ALL SPECIAL,
CONSEQUENTIAL, EXEMPLARY, STATUTORY OR PUNITIVE DAMAGES
(REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS
OR FUNDS WHICH ANY PARTY HERETO HAS IN ANY DOCUMENT OR
INSTRUMENT EXPRESSLY PROMISED TO PAY OR DELIVER.
(B) EACH OF SELLER AND BUYER HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT
NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION BASED ON, OR DIRECTLY OR INDIRECTLY
AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
LETTER AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR
ASSOCIATED HEREWITH, AND CERTIFIES THAT NEITHER SELLER NOR
BUYER NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL THEREFOR
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THE WAIVERS IN THIS PARAGRAPH AND THE FOREGOING PARAGRAPH,
AND ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS
LETTER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS, AND
CERTIFICATIONS CONTAINED IN THIS SECTION 10.8.
SECTION 10.8. AMENDMENTS. This Agreement may be amended, modified,
supplemented, restated or discharged (and provisions hereof may be waived)
only by an instrument in writing signed by the parties hereto.
SECTION 10.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
SECTION 10.10. COUNTERPARTS. This Agreement may be executed in
counterparts, all of which are identical and all of which constitute one and
the same instrument. It shall not be necessary for Buyer and Seller to sign
the same counterpart.
SECTION 10.11. COMMISSIONS.
(a) Seller agrees to indemnify and hold harmless Buyer from and
against any and all claims, obligations, actions, liabilities, losses,
damages, costs or expenses (including court costs and attorneys fees) of any
kind or character arising out of or resulting from any agreement, arrangement
or understanding alleged to have been made by, or on behalf of, Seller with
any broker or finder in connection with this Agreement or the transactions
contemplated hereby.
22
<PAGE>
(b) Buyer agrees to indemnify and hold harmless Seller from and
against any and all claims, obligations, actions, liabilities, losses,
damages, costs or expenses (including court costs and attorneys fees) of any
kind or character arising out of or resulting from any agreement, arrangement
or understanding alleged to have been made by, or on behalf of, Buyer with
any broker or finder in connection with this Agreement or the transactions
contemplated hereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the parties hereto
on the date set forth above.
"SELLER":
BENZ ENERGY INC.
By:
-------------------------------------------------
Prentis B. Tomlinson, Jr., President
"BUYER":
ENCAP EQUITY 1996 LIMITED PARTNERSHIP
By: EnCap Investments L.L.C., General Partner
By:
-------------------------------------------------
Robert L. Zorich, Managing Director
ENERGY CAPITAL INVESTMENT COMPANY PLC
By:
-------------------------------------------------
Gary R. Petersen, Director
24
<PAGE>
EXHIBIT 5.1(d)
OPINION OF LANIER YEATES, A PROFESSIONAL CORPORATION,
COUNSEL FOR SELLER
[Attach form of Opinion]
<PAGE>
EXHIBIT 6.3
WIRING INSTRUCTIONS
<TABLE>
<CAPTION>
EnCap LP ECIC Total
-------- ---- -----
<S> <C> <C> <C> <C>
To: Benz Energy Inc. $2,863,207.96 $954,402.66 $3,817,610.62
Wiring Information:
Bank One, Texas, N.A.
ABA No.:111000614
Account No.:1824136160
Reference: Texstar Petroleum
To: Thompson & Knight, L.L.P. $118,792.04 $39,597.34 $158,389.38
Wiring Information:
Thompson & Knight Operating Account
Bank of America, N. A.
Dallas, Texas 75201
ABA: No.: 111000025
Account No.: 1254815513
Reference: EnCap/Benz 24090/09728 and 09733
To: McDavid, Noblin & West PLC $8,250 $2,750 $11,000
Wiring Information:
Trustmark National Bank
ABA No.:065300279
Account No.: 1009691390
Account Name: McDavid Noblin & West PLC
To: Wellspring Partners $9,750 $3,250 $13,000
Wiring Information:
Comerica Bank-Texas
Dallas, Texas
ABA No. 111000753
Account No. 7831065821
Account Name: Wellspring Partners
========== ========== ==========
TOTAL $3,000,000 $1,000,000 $4,000,000
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
CREDIT AGREEMENT
BETWEEN
TEXSTAR PETROLEUM, INC.
A TEXAS CORPORATION
AND
AQUILA ENERGY CAPITAL CORPORATION,
A DELAWARE CORPORATION
AUGUST 19, 1999
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1: Definitions and References.............................................................................1
Section 1.1 DEFINED TERMS...............................................................................1
Section 1.2 EXHIBITS AND SCHEDULES.....................................................................14
Section 1.3 AMENDMENT OF DEFINED INSTRUMENTS...........................................................14
Section 1.4 REFERENCES AND TITLES......................................................................14
Section 1.5 CALCULATIONS AND DETERMINATIONS............................................................14
ARTICLE 2: The Loans.............................................................................................14
Section 2.1 THE LOANS..................................................................................14
Section 2.2 USE OF PROCEEDS............................................................................17
Section 2.3 REPAYMENT OF THE LOANS AND THE ENCAP JUNIOR NOTE...........................................17
Section 2.4 PREPAYMENT OF THE LOANS....................................................................17
Section 2.5 COMMENCEMENT OF OVERRIDING ROYALTY INTEREST PAYMENTS.......................................17
Section 2.6 APPLICATION OF RECEIPTS....................................................................18
Section 2.7 BORROWER SUB-ACCOUNT.......................................................................19
Section 2.8 PURCHASERS OF PRODUCTION...................................................................20
Section 2.9 MANDATORY PREPAYMENT OF THE LOANS..........................................................20
Section 2.10 INITIAL SWAP AGREEMENT.....................................................................20
ARTICLE 3: Security..............................................................................................20
Section 3.1 SECURITY...................................................................................20
Section 3.2 PERFECTION AND PROTECTION OF SECURITY INTERESTS AND LIENS..................................20
Section 3.3 RELEASE OF COLLATERAL......................................................................20
Section 3.4 ACCOUNT DEBTORS............................................................................21
ARTICLE 4: Representations and Warranties........................................................................21
Section 4.1 REPRESENTATIONS AND WARRANTIES OF BORROWER.................................................21
ARTICLE 5: Notice of Certain Events..............................................................................25
Section 5.1 NOTICE OF CERTAIN MATTERS..................................................................25
Section 5.2 OTHER INFORMATION..........................................................................26
ARTICLE 6: Special Provisions Relating to Equipment..............................................................26
Section 6.1 LOCATION: RECORDS..........................................................................26
Section 6.2 MAINTENANCE................................................................................26
Section 6.3 DISPOSITIONS...............................................................................26
ARTICLE 7: Covenants of Borrower.................................................................................26
Section 7.1 AFFIRMATIVE COVENANTS......................................................................26
Section 7.2 NEGATIVE COVENANTS.........................................................................34
ARTICLE 8: Further Rights of Lender and Borrower.................................................................36
Section 8.1 MAINTENANCE OF SECURITY INTERESTS..........................................................36
Section 8.2 PERFORMANCE OF OBLIGATIONS.................................................................36
Section 8.3 OVERRIDING ROYALTY INTEREST................................................................37
Section 8.4 ORRI OPTION................................................................................37
Section 8.5 NON-RECOURSE...............................................................................38
Section 8.6 REMOVAL AND APPOINTMENT OF OPERATOR........................................................38
i
<PAGE>
Section 8.7 SET-OFF RIGHTS.............................................................................38
ARTICLE 9: Closing; Conditions to Closing........................................................................39
Section 9.1 CLOSING....................................................................................39
Section 9.2 CONDITIONS TO CLOSING......................................................................39
Section 9.3 CONDITIONS PRECEDENT TO FUNDING............................................................42
Section 9.4 CONDITION PRECEDENT TO FUNDING DEVELOPMENT LOAN............................................43
ARTICLE 10: Events of Default and Remedies.......................................................................43
Section 10.1 EVENTS OF DEFAULT..........................................................................43
Section 10.2 ACCELERATION...............................................................................47
Section 10.3 REMEDIES...................................................................................48
Section 10.4 INDEMNITY..................................................................................48
ARTICLE 11: Miscellaneous........................................................................................49
Section 11.1 WAIVERS AND AMENDMENTS; ACKNOWLEDGMENTS AND ADMISSIONS.....................................49
Section 11.2 SURVIVAL OF AGREEMENTS: CUMULATIVE NATURE..................................................50
Section 11.3 NOTICES....................................................................................50
Section 11.4 PARTIES IN INTEREST; TRANSFERS.............................................................51
Section 11.5 GOVERNING LAW; SUBMISSION TO PROCESS.......................................................52
Section 11.6 LIMITATION ON INTEREST.....................................................................52
Section 11.7 TERMINATION; LIMITED SURVIVAL..............................................................52
Section 11.8 SEVERABILITY...............................................................................53
Section 11.9 COUNTERPARTS...............................................................................53
Section 11.10 FURTHER ASSURANCES.........................................................................53
Section 11.11 WAIVER OF PUNITIVE DAMAGES, ETC...........................................................53
Section 11.12 REPRESENTATIONS AND WARRANTIES OF LENDER...................................................53
Section 11.13 IMI PROPERTY...............................................................................54
Section 11.14 PARTICIPATING CREDITOR DEDICATED RECEIVABLES...............................................54
ARTICLE 12: Arbitration..........................................................................................55
Section 12.1 ARBITRATION................................................................................55
</TABLE>
ii
<PAGE>
EXHIBITS
Exhibit A Properties
Exhibit B-1 Advancing Note
Exhibit B-2 EnCap Junior Note
Exhibit C Property Operating Statement
Exhibit D Request for Advance
Exhibit E Cost Certificate
Exhibit F-1 Assignment of Note and Liens (EnCap)
Exhibit F-2 Assignment of Note and Liens (BOCP)
Exhibit G Parent Guaranty
Exhibit H Debt Restructure Agreement
Exhibit I Overriding Royalty Interest Conveyance
Exhibit J Cash Collateral Account Agreement
Exhibit K EnCap Purchase and Sale Agreement
Exhibit L Coral Letter Agreement
Exhibit M Shell Letter Agreement
Exhibit N IMI Property
Exhibit O Participating Creditor Dedicated Receivables
Exhibit P Assignment of Note and Liens (EnCap Junior Note)
SCHEDULES
Schedule 1 Target Ending Balance
Schedule 2 Permitted Non-Participating Creditor Encumbrances
Schedule 2.1(a) Existing Debt
Schedule 2.1(b) Development Operations
Schedule 2.8 Purchasers of Production
Schedule 4.1(g) Material Transactions
Schedule 4.1(h) Other Obligations and Restrictions
Schedule 4.1(j) Litigation
Schedule 4.1(k) ERISA Plans
Schedule 4.1(l) Places of Business
Schedule 4.1(m) Unpaid Bills
Schedule 4.1(o) Affiliates; Debt to Affiliates
Schedule 4.1(s) Employment Contracts
Schedule 7.1(b) Existing Hydrocarbon Sales Agreements
Schedule 7.1(f)(i) Hydrocarbon Pricing Parameters
Schedule 7.1(s) Compliance with Environmental and Other Laws
Schedule 7.1(cc) Development Program
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made and entered into on August 19, 1999,
by and between TEXSTAR PETROLEUM, INC., a Texas corporation (the "BORROWER"),
and AQUILA ENERGY CAPITAL CORPORATION, a Delaware corporation (the "LENDER").
WHEREAS, the Borrower has requested that the Lender: (i) purchase
and modify the terms of certain Existing Debt (as defined herein); and (ii)
make available, and the Lender is willing to make available to the Borrower
on the terms and conditions hereinafter set forth, loans to finance certain
costs in connection with the development of certain oil and gas properties
located in Mississippi and Texas.
NOW, THEREFORE, the parties hereto in consideration of the foregoing
and the terms, covenants, provisions and conditions hereinafter set forth
hereby agree as follows:
ARTICLE 1: DEFINITIONS AND REFERENCES
Section 1.1 DEFINED TERMS. As used in this Agreement, each of the
following terms has the meaning given it in this SECTION 1.1 or in the
sections and subsections referred to below.
"AAA" means the American Arbitration Association.
"ADVANCING NOTE" has the meaning given to such term in SECTION
2.1(a).
"ADVANCING NOTE DEBT SERVICE" means the principal and interest due
on the Advancing Note for any Interest Period.
"ADVERSE EFFECT" means (i) any changes or effects that individually
or in the aggregate impact the business, operations, prospects or condition
(financial or other) of the Borrower adversely and in an amount exceeding
$500,000 or impact the Collateral adversely and in an amount exceeding
$300,000, (ii) the material impairment of the ability of the Borrower in any
respect to perform its obligations under any of the Loan Documents to which
it is a party, or (iii) any material impairment of the validity or
enforceability of any of the Loan Documents or the rights, powers and
privileges of the Lender under any of the Loan Documents.
"AFE" has the meaning given to such term in SECTION 7.1(v).
"AFFILIATE(S)" of a specified Person means:
(a) any other Person directly or indirectly owning,
controlling or holding with power to vote five percent (5%) or more of
the outstanding voting equity interests of the specified Person;
(b) any other Person five percent (5%) or more of whose
outstanding voting equity interests are directly or indirectly owned,
controlled or held with power to vote by the specified Person;
1
<PAGE>
(c) any other Person directly or indirectly controlling,
controlled by or under common control with such Person; or
(d) any officer, director, partner, trustee, sanguineous or
affined kin, or trust for the benefit of one or more Persons that
include sanguineous or affined kin of the specified Person or of any
other Person described in CLAUSE (c) above.
"AGREEMENT" means this Credit Agreement, as the same may be amended,
supplemented, restated or otherwise modified from time to time in compliance
with applicable provisions hereof.
"ARBITRATION NOTICE" has the meaning given to such term in SECTION
12.1(c).
"ASSIGNEES" has the meaning given to such term in SECTION 8.4.
"ASSIGNMENTS OF NOTE AND LIEN" means the Assignments of Note and
Liens from the Existing Debt Holders to the Lender in the forms attached as
EXHIBITS F-1 and F-2.
"ASSIGNMENT OF JUNIOR NOTE AND LIENS" means the Assignment of Note
and Liens (EnCap Junior Note) in the form attached as EXHIBIT P.
"BASE NET REVENUE" means, for a given Interest Period, the lesser
of: (i) the Net Revenue for such Interest Period; or (ii) the amount equal to
(x) the sum of (1) the outstanding balance of the Loans at the beginning of
such Interest Period, (2) accrued interest on the Loans for such Interest
Period, and (3) advances made on the Loans during such Interest Period, minus
(y) the Target Ending Balance for such Interest Period.
"BORROWER" has the meaning given such term in the first paragraph
of this Agreement, and its permitted successors and assigns.
"BORROWER SUB-ACCOUNT" has the meaning given such term in SECTION
2.7(a).
"BUSINESS DAY" means a day, other than a Saturday or Sunday, on
which commercial banks are open for business with the public in Houston,
Texas.
"CASH COLLATERAL ACCOUNT" has the meaning given to such term in the
Cash Collateral Account Agreement.
"CASH COLLATERAL ACCOUNT AGREEMENT" means the Cash Collateral
Account Agreement in the form attached hereto as EXHIBIT J.
"CHANGE OF CONTROL" means: (a) the acquisition, in any instance in
which the Borrower does not retain control of the resulting entity, by any
Person or two or more Persons acting in concert (other than the Person with
such beneficial ownership on the Closing Date) of beneficial ownership
(within the meaning of Rule 13d-3, promulgated by the Securities and Exchange
Commission and now in effect under the Securities Exchange Act of 1934, as
amended) of 50% or more of the outstanding capital stock or 50% or more of
any outstanding class of capital stock of the Borrower or Parent; or (b) the
sale, transfer, lease, conveyance or other disposition
2
<PAGE>
(including by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Borrower to
any Person.
"CLOSING" has the meaning given such term in SECTION 9.1.
"CLOSING DATE" has the meaning given such term in SECTION 9.1.
"COLLATERAL" means all property of any kind which, pursuant to any
Loan Document, is subject to a Lien in favor or for the benefit of the Lender
or is purported to be subject to such a Lien, including, without limitation,
the Equipment and the Properties.
"CORAL" means Coral Energy Resources, L.P.
"CORAL LETTER AGREEMENT" means that certain letter agreement from
the Parent to and agreed by Coral in the form attached hereto as EXHIBIT L.
"CORAL TRANSACTION" means the payment by the Parent to Coral of the
sums specified in, and the execution and delivery by Coral of, that certain
Termination of Contract Rights Agreement in accordance with the Coral Letter
Agreement.
"COST CERTIFICATE" has the meaning given such term in SECTION
2.1(b), each such certificate to be in the form attached hereto as EXHIBIT E.
"DEBT" means, as to the Borrower, all indebtedness, liabilities and
obligations of the Borrower, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent, and whether or not required to be considered debt pursuant to
GAAP, excluding contingent abandonment liabilities not yet accrued.
"DEBT RESTRUCTURE AGREEMENT" means that certain agreement by and
among the Parent, the Borrower, the Participating Creditor Collateral Agent,
the Participating Creditor Deposit Agent, the Participating Creditors and,
for the limited purposes stated therein, the Lender, a copy of which is
attached hereto as EXHIBIT H.
"DEBT TO AFFILIATES" means Debt with respect to which the payee or
obligee is an Affiliate of the Borrower.
"DEFENSIBLE TITLE" means, with respect to the Properties, such legal
record title (subject to only the Permitted Encumbrances) that, with respect
to each well or Unit located on the Leases: (A) entitles the Borrower to
receive, free and clear of all royalties, overriding royalties and net
profits interests (except the Overriding Royalty Interest), or other burdens
on or measured by production of Hydrocarbons, not less than the Net Revenue
Interests of the Borrower reflected in EXHIBIT A for such wells or Units for
the productive life of such well or Unit (subject only to the Permitted
Encumbrances); and (B) obligates the Borrower to bear costs and expenses
relating to the maintenance, development and operation of such well or Unit
in an amount not greater than the Working Interests of the Borrower reflected
in EXHIBIT A for the productive life of such well or Unit (subject only to
the Permitted Encumbrances); free and clear of any security interest, lien,
encumbrance, mortgage, claim, security agreement or other charge,
3
<PAGE>
other than the Permitted Encumbrances and any liens, mortgages, and security
interests in favor of the Lender and its Affiliates or which are expressly
permitted hereunder.
"DEVELOPMENT LOAN" means the loan or loans made or to be made, in
accordance with SECTION 2.1(b), by the Lender to the Borrower, as evidenced
by the Advancing Note, to finance certain costs of the Development Operations.
"DEVELOPMENT OPERATIONS" means those operations described on
SCHEDULE 2.1(b) attached hereto.
"DEVELOPMENT PROGRAM" means the schedule for conducting and
completing the Development Operations as set forth on SCHEDULE 7.1(cc).
"DIRECT TAXES" means (a) Property Taxes, (b) Severance Taxes, (c) ad
valorem taxes, (d) conservation taxes, and (e) any other taxes of any kind or
character, excluding only income taxes and franchise taxes, imposed on the
Borrower in connection with or as a result of its ownership of the Properties
or Hydrocarbon production allocable to the Properties.
"DRAWDOWN TERMINATION DATE" means the one-year anniversary of the
Closing Date.
"ENCAP BUYERS" means EnCap Equity 1996 Limited Partnership and
Energy Investment Company PLC.
"ENCAP INVESTMENT" means the purchase by the EnCap Buyers of
$4,400,000 principal amount of the Borrower's 10% Class A Preferred Stock
Series I for $4,000,000 in accordance with the EnCap Purchase and Sale
Agreement.
"ENCAP JUNIOR NOTE" has the meaning given such term in SECTION
2.1(a).
"ENCAP PURCHASE AND SALE AGREEMENT" means that certain Purchase and
Sale Agreement between Parent and EnCap Buyers in the form attached hereto as
EXHIBIT K.
"ENGINEERS" means, unless specifically provided otherwise, the
following petroleum engineering firms: R.A. Lenser & Associates, Inc.,
Netherland, Sewell & Assoc., Ryder Scott Company and such other petroleum
engineering firms as may be mutually agreeable to the Borrower and the Lender.
"ENVIRONMENTAL LAWS" means any and all federal, state or local
statutes, laws (including common law), regulations, ordinances, rules,
judgments, orders, decrees, permits, grants, franchises, licenses, agreements
or other governmental restrictions relating to the environment or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or
wastes into the environment, including ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or wastes. For purposes of this definition, "chemicals" includes
all substances referred to in the second sentence of the definition herein of
"Hazardous Materials."
4
<PAGE>
"EQUIPMENT" means the Borrower's undivided interest in all equipment
of every kind and nature used for or in the operation of the Properties,
equivalent to the undivided interest of the Borrower constituting the
Property on which such Equipment is used, including but not limited to,
pipelines, well and lease equipment and surface equipment, casing, tubing,
connections, rods, pipe, machines, compressors, gathering systems, meters,
motors, pumps, tankage, fixtures, storage and handling equipment and all
other equipment or movable property of any kind and nature and wherever
situated now or hereafter owned by the Borrower or in which the Borrower may
now or hereafter have any interest (to the extent of such interest), together
with all additions and accessions thereto, all replacements and all
accessories and parts therefor, all logs and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time, together with all rules and regulations
promulgated with respect thereto.
"ERISA PLAN" means any employee pension benefit plan which is
maintained by any Person subject to Title IV of ERISA.
"EPA" means the Environmental Protection Agency.
"EVENT OF DEFAULT" has the meaning given such term in SECTION 10.1.
"EXCESS NET REVENUE" means, for a given Interest Period, the amount
equal to (i) the Net Revenue for such Interest Period minus (ii) the Base Net
Revenue for such Interest Period.
"EXISTING DEBT" has the meaning given such term in SECTION 2.1(a).
"EXISTING DEBT HOLDERS" means BOCP Energy Partners, L.P. and EnCap
Energy Capital Fund III, L.P.
"EXISTING LIENS" has the meaning given such term in SECTION 2.1(a).
"FACILITY FEE" means the expenses owed by the Borrower to the Lender
as consideration, in part, for entering into the transactions contemplated
under this Agreement and the other Loan Documents.
"FISCAL QUARTER" means a three-month period ending on March 31, June
30, September 30 or December 31 of any calendar year.
"FISCAL YEAR" means a twelve-month period ending on December 31 of
any calendar year.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor).
5
<PAGE>
"GRABOIS NOTE" means that certain promissory note dated April 22,
1998, issued by the Borrower to Todd E. Grabois in the principal amount of
$70,000.
"GROSS RECEIPTS" means, for a given Interest Period, the sum of: (i)
all sums received by the Borrower during such Interest Period in connection
with the production of Hydrocarbons from or allocable to the Properties,
including any proceeds under gas purchase agreements, oil purchase
agreements, natural gas liquids purchase agreements and any other receipts
relating to or arising from the sale or other disposition of Hydrocarbons
from or allocable to the Properties; (ii) all Swap Settlement Proceeds
received during such Interest Period; and (iii) any other sums received by
the Borrower during such Interest Period constituting proceeds from the sale
or other disposition of Equipment; PROVIDED, HOWEVER, that Gross Receipts
shall not include sums received by the Borrower constituting proceeds from
the sale or other disposition of Equipment to the extent such sums are used
by Borrower, within 30 days of receipt thereof, to replace such Equipment in
accordance with the Loan Documents.
"HAZARDOUS MATERIALS" means any substances regulated under any
Environmental Law, whether as pollutants, contaminants or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise. "Hazardous
Materials" also includes (a) any petroleum, any fraction of petroleum,
natural gas, natural gas liquids, liquefied natural gas and synthetic gas
usable for fuel (including any mixtures of the foregoing) that has been or
may be emitted, discharged or released into the environment, and (b) any
drilling fluids, produced waters and other wastes associated with the
exploration, development or production of crude oil, natural gas or
geothermal reserves.
"HYDROCARBONS" means crude oil, condensate, natural gas, natural gas
liquids and other hydrocarbons.
"HYDROCARBON PURCHASE AND SALE AGREEMENT" means that certain Base
Agreement for Natural Gas Purchase Transactions of even date herewith between
the Borrower and Aquila Energy Marketing Corporation, and such agreement
governing oil purchase transactions, if any, as may be entered into between
the Borrower and the Lender or its designated Affiliate in accordance with
SECTION 7.1(b).
"IMI PROPERTY" means the property described on EXHIBIT N attached
hereto.
"INDEBTEDNESS" means and includes: (i) all obligations for borrowed
money of any kind or nature, including funded and unfunded debt or guarantees
thereof and contingent obligations in respect of any of the foregoing
including, without limitation, reimbursement obligations in respect of
letters of credit; and (ii) all obligations for the acquisition or use of any
fixed asset or improvements thereto, including capitalized leases but
excluding operating leases, which are payable over a period longer than one
year or guarantees thereof, regardless of the term thereof or the Person or
Persons (each as hereinafter defined) to whom the same is payable; provided,
however, that Indebtedness shall not include trade payables incurred in the
ordinary course of business so long as the same are being paid within thirty
(30) days after becoming due (or, with respect to any vendor, within such
longer period as is acceptable to such vendor) or are being contested in good
faith.
6
<PAGE>
"INITIAL LOAN" means the loan made by the Lender to the Borrower, as
evidenced by the Advancing Note, comprised of: (i) amounts of Existing Debt
purchased by the Lender; and (ii) amounts advanced by the Lender to the
Borrower to permit the Borrower to pay certain amounts due as described in
SECTION 2.1(a) and SECTION 2.2 of this Agreement.
"INITIAL RESERVE REPORT" means that certain reserve report dated
April 19, 1999, prepared by R.A. Lenser & Associates, Inc. with respect to
the Properties.
"INTEREST PERIOD" means each period beginning on (and including) the
Repayment Date in one calendar month and ending on (but not including) the
Repayment Date in the next following calendar month, provided that the first
Interest Period for the Advancing Note and Loans shall begin on the Closing
Date and end on the day before the first Repayment Date.
"LAW" means any law (including common law), statute, ordinance,
rule, regulation, license, permit, judgment, order or decree and the right of
any governmental, statutory or public authority to regulate any Collateral in
any manner.
"LEASE" or "LEASES" means, whether one or more: (i) those certain
oil and gas leases set forth in the description of each Property on EXHIBIT A
attached hereto, and any extension, renewal, correction, modification,
election or amendment (such as those relating to unitization) of any such
Lease; or (ii) other oil, gas and/or mineral leases or other interests
pertaining to the Properties which may now and hereafter be made subject to
the Lien of any of the Security Documents and any extension, renewal,
correction, modification, election or amendment (such as those relating to
unitization) of any such lease or leases.
"LENDER" has the meaning given to such term in the first paragraph
of this Agreement, and, subject to any limitations set forth in any
instrument (including the Assignment of Junior Note and Liens), its
successors and assigns as holders of any Note. For the avoidance of doubt,
the holder of the EnCap Junior Note is a "Lender" under the EnCap Junior Note
only, and shall have no obligation or commitment to make any Loans hereunder
or under the Advancing Note.
"LETTERS IN LIEU" means those certain letters in lieu of transfer
orders, duly executed by the Borrower, in form satisfactory to the Lender.
"LIEN" means, with respect to the Properties or other Collateral,
any right or interest therein of a creditor to secure Debt owed to it or any
other arrangement with such creditor which provides for the payment of such
Debt out of such property or assets or which allows it to have such Debt
satisfied out of such property or assets prior to the satisfaction of general
creditors of the owner of such property or assets, including any lien,
mortgage, security interest, pledge, deposit, production payment, rights of a
vendor under any title retention or conditional sale agreement or lease
substantially equivalent thereto, tax lien, mechanic's or materialman's lien,
or any other charge or encumbrance for security purposes, whether arising by
Law or agreement or otherwise, but excluding any right of offset which arises
without agreement in the ordinary course of business. "LIEN" also means any
filed financing statement, declaration or memorandum of operating agreement
or any such agreement filed to perfect liens or rights of security under such
agreements, any registration of a pledge (such as with an issuer of
unregistered securities), or any other arrangement or action which would
serve to perfect a Lien
7
<PAGE>
described in the preceding sentence, regardless of whether such financing
statement is filed, such registration is made, or such arrangement or action
is undertaken before or after such Lien exists.
"LOANS" means, collectively, the Initial Loan and the Development
Loans and "Loan" means, individually, the Initial Loan or any Development
Loan as described in SECTION 2.1. For the avoidance of doubt, the EnCap
Junior Note constitutes a Loan Document but amounts outstanding thereunder
are not part of the Loans.
"LOAN DOCUMENTS" means this Agreement, the Assignments of Note and
Liens, the Subordination Agreements, the Mortgages, the Security Agreement,
the Assignment of Junior Note and Liens, the Notes, the Overriding Royalty
Interest Conveyance, the Hydrocarbon Purchase and Sale Agreement, the Swap
Agreement, the Cash Collateral Account Agreement, any other Security
Documents, and all other agreements or instruments now, heretofore or
hereafter delivered by or on behalf of the Borrower or the Parent to the
Lender or any Affiliate of the Lender in connection with this Agreement or
any transaction contemplated hereby (exclusive of (i) the term sheets,
commitment letters, correspondence and similar documents used in the
negotiation hereof, except to the extent that same contain information about
the Borrower or its Affiliates or their properties, business or prospects and
such information is the subject of a written representation or certificate
upon which the Lender relied and (ii) the EnCap Purchase and Sale Agreement).
"LOAN TERMINATION DATE" means the earlier of (a) the fourth
anniversary of the Closing Date, (b) the date of payment and performance in
full of all the Obligations of the Borrower under the Loan Documents (other
than the Overriding Royalty Interest Conveyance), and (c) the date on which
the Lender notifies the Borrower, as provided in SECTION 10.2, of the
acceleration of payment of all Obligations because of the occurrence of an
Event of Default.
"MAXIMUM RATE" means the maximum non-usurious rate of interest that
the Lender is permitted under applicable law to contract for, take, charge,
or receive from the Borrower.
"MORTGAGES" has the meaning given such term in SECTION 3.1.
"NET REVENUE" means, for any Interest Period: (i) the Gross Receipts
received during such Interest Period; minus (ii) the sum of (a) Operating
Expenses, Direct Taxes, royalties, overriding royalty interests and other
interests payable out of or measured by the production of Hydrocarbons
allocable to the undivided Working Interests of the Borrower constituting
each Property and payable during such Interest Period and (b) Swap Settlement
Payables payable during such Interest Period.
"NET REVENUE INTEREST" or "NRI" has the meaning given such term in
Exhibit A of the Mortgage.
"NET REVENUE REIMBURSEMENT AMOUNT" means the amounts released to the
Borrower and/or its designee(s) pursuant to SECTION 2.7(b) hereof.
"NOTE" means the Advancing Note in the form attached hereto as
EXHIBIT B-1 and the EnCap Junior Note in the form attached hereto as EXHIBIT
B-2.
8
<PAGE>
"NOTEHOLDER" means the Lender and subsequent holders of a Note or
any part thereof or any interest therein.
"NOTICE OF ASSIGNMENT OF PROCEEDS" has the meaning given such term
in SECTION 3.4.
"NOVAK NOTE" means that certain promissory note dated April 22,
1998, issued by the Borrower to Robert Novak in the principal amount of
$30,000.
"OBLIGATIONS" means all Debt from time to time owing from the
Borrower to the Lender or any of the Lender's Affiliates under or pursuant to
any of the Loan Documents in connection with this Agreement or any
transaction contemplated hereby, including without limitation, all principal,
interest, fees, expenses, costs and indemnities.
"OPERATING AGREEMENTS" means operating agreements relating to the
Properties, including, without limitation, all those certain operating
agreements which relate to or arise from the Properties pursuant to which the
Borrower is or hereafter becomes the operator, whether entered into or
amended before or after the date of this Agreement.
"OPERATING EXPENSES" means: (i) direct lease operating, compression,
transportation and processing expenses and well maintenance expenses (such
well maintenance expenses shall be limited to $50,000 per event, net to the
Borrower's Working Interest constituting the relevant Property, without the
Lender's prior written consent), which arise from the Borrower's Working
Interests constituting the Properties in the wells that are subject to the
Mortgages and that are billed to the Borrower by the Operator or incurred by
the Borrower, as Operator, of the Properties; (ii) such Working Interests'
shares of expenses incurred in the repair, maintenance and replacement of
damaged or obsolete Equipment; and (iii) such Working Interests' shares of
overhead charges payable to a third party Operator pursuant to an applicable
Operating Agreement in effect on the Closing Date with respect to any of the
Properties (or such new Operating Agreements or amendments to existing
Operating Agreements that are approved in writing by the Lender), excluding
contract Operators employed by the Borrower who own no interest in the
Properties.
"OPERATING REPORT" has the meaning attributable to such term in
SECTION 7.1(dd).
"OPERATOR" means any operators, including contract operators, of the
Properties (as such terms are generally understood in the oil and gas
industry) on the later of date hereof or the date of acquisition thereof, as
applicable, and such other operators as may be approved by the Lender
pursuant to SECTION 8.6.
"OVERRIDING ROYALTY INTEREST" has the meaning attributable to such
term in the Overriding Royalty Interest Conveyance.
"ORRI OPTION" means the Borrower's option to purchase the Overriding
Royalty Interest from the Lender after such interest has been valued by
mutually agreeable Engineers.
"ORRI SALE DATE" has the meaning given such term in SECTION 8.4.
9
<PAGE>
"OVERRIDING ROYALTY INTEREST CONVEYANCE" means a conveyance, in the
form attached hereto as EXHIBIT I, whereby the Borrower assigns to the Lender
the Overriding Royalty Interest.
"PARENT" means Benz Energy Inc., a Delaware corporation.
"PARENT GUARANTY" means that certain performance guaranty issued by
Parent to the Lender in the form attached hereto as EXHIBIT G.
"PARTICIPATING CREDITORS" means the Persons party to the Debt
Restructure Agreement as Participating Creditors.
"PARTICIPATING CREDITOR COLLATERAL AGENT" means Stewart Peck in his
capacity as Collateral Agent under the Debt Restructure Agreement and any
successor to such Person.
"PARTICIPATING CREDITOR DEDICATED RECEIVABLES" means the receivables
identified as such on EXHIBIT O.
"PARTICIPATING CREDITOR DEPOSIT AGENT" means Stewart Peck in his
capacity as Deposit Agent under the Debt Restructure Agreement and any successor
to such Person.
"PERMITTED NON-PARTICIPATING CREDITOR ENCUMBRANCES" means, (i) for the
period from the Closing Date through December 31, 1999, Liens in favor of
Persons identified on Schedule 2 to secure the indebtedness identified on
Schedule 2, and (ii) thereafter, none.
"PERMITTED ENCUMBRANCES" means: (i) the liens, claims and encumbrances
described in the Debt Restructure Agreement and subordinated to the liens and
Encumbrances of the Security Documents thereunder; (ii) Liens of lessors,
vendors, mechanics, materialmen, laborers, operators, non-operators, joint
interest owners, taxing and other governmental authorities, and other similar
liens arising by Law, or otherwise arising in the ordinary course of business,
in each case, for sums not yet due; (iii) obligations under the Leases; (iv)
easements, rights-of-way, permits, surface leases and other rights in respect of
surface operations, pipelines, grazing, logging, canals, ditches, reservoirs and
the like, and easements of streets, alleys, highways, pipelines, telephone
lines, power lines, railways and other easements and rights-of-way on, over or
in respect of any interest; (v) non-consent provisions in operating agreements,
exploration agreements, and similar agreements affecting the Properties, but not
including any non consent penalties resulting from any election previously made
(or otherwise currently effective) not to participate in an operation, unless
the effect of such non consent penalties is reflected in the Net Revenue
Interest of Borrower set forth in the Exhibits to Mortgage; (vi) specific
exceptions and encumbrances affecting each of the Properties as described in the
exhibits to any Loan Document INSOFAR ONLY as said exceptions and encumbrances
are valid and subsisting and are enforceable against the particular Lease which
is made subject to said exceptions and encumbrances; (vii) minor irregularities
in title which do not (a) materially interfere with the occupation, use and
enjoyment by the Borrower of the subject Property or (b) materially impair the
value thereof; (viii) rights of third parties under gas balancing agreements
containing terms and conditions customary in the industry (provided that the
inclusion of such agreements in "Permitted Encumbrances" shall not and does not
effect any representation, warranty or covenant of the Borrower with respect to
the obligations of the Borrower under any such agreements); (ix) rights of third
parties under unit agreements and farmout agreements which do
10
<PAGE>
not and will not result in a decrease in the NRI or increase in the WI from
that represented and warranted in the relevant Mortgage; (x) rights of third
parties under purchase and sale agreements listed on SCHEDULE 2.8 as such
agreements are in effect on the Closing Date; (xi) farmout agreements, unit
agreements, operating agreements participation agreements, purchase and sale
agreements, hydrocarbon marketing agreements, stipulations of interest and
other agreements which are customary in the oil and gas exploration business,
to the extent that the same contain terms and provisions customary in the
industry, and do not and will not (a) reduce the Net Revenue Interest of
Borrower in the Asset affected thereby below, or increase the Working
Interest of Borrower above, that set forth in Exhibits to the mortgage, (b)
require the payment of more than $50,000 in any 12 month period, or (c)
otherwise materially and adversely affect the value of the Property affected
thereby; (xii) Permitted Non-Participating Creditor Encumbrances; and (xiii)
any Lien explicitly approved in writing by the Lender on or after the date of
this Agreement.
"PERSON" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture, court
or governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.
"PROPERTIES" means those certain properties described in EXHIBIT A
attached hereto and incorporated herein, to the extent of the specific undivided
interest of the Borrower in any such Property stated therein.
"PROPERTY OPERATING STATEMENT" means the monthly statement, in the form
attached hereto as EXHIBIT C, to be prepared and delivered by the Borrower to
the Lender, pursuant to SECTION 2.6 hereof.
"PROPERTY TAXES" means taxes imposed annually on the Borrower which are
based on or measured by the estimated value (at the time such taxes are
assessed) of any Hydrocarbons underlying the lands covered by or pooled with the
Leases attributable to the undivided interests of the Borrower in the various
Leases constituting the Properties.
"PROVED RESERVES" means the current estimated quantity of Hydrocarbons
which analysis of geologic and engineering data demonstrate with reasonable
certainty to be recoverable in the future from known oil and gas reservoirs
under existing economic and operating conditions based on either actual
production or conclusive formation tests.
"PURCHASERS OF HYDROCARBONS" shall mean the Persons listed on
SCHEDULE 2.8 attached hereto, and all other Persons who, now or in the future,
purchase Hydrocarbons attributable or allocable to the Borrower's Net Revenue
Interests constituting the Properties and are approved by the Lender in writing.
"PURCHASE PRICE" has the meaning given such term in SECTION 8.4.
"REPAYMENT DATE" means the date of payment in full of the Obligations
(other than the Overriding Royalty Interest Conveyance) and, prior to such date,
the later of: (i) the twenty-fifth (25th) day of each calendar month, or (ii)
the first Business Day after the twenty-fifth (25th) day of such month following
the deposit into the Cash Collateral Account of the Gross Proceeds for
11
<PAGE>
the Interest Period that ends in such month (but in no event later than the
last Business Day of the relevant calendar month); the first such Repayment
Date to occur during September, 1999.
"REQUEST FOR ADVANCE" means a written request from the Borrower to the
Lender for an advance of funds as a Development Loan, in the form attached
hereto as EXHIBIT D.
"RESERVE REPORT" means, unless specifically denoted otherwise, the
petroleum engineering report defined in SECTION 7.1(f) hereof.
"RULES" has the meaning given such term in SECTION 12.1(c).
"SECURITY AGREEMENT" means a security agreement (Accounts, Equipment,
General Intangibles and Inventory) executed by the Borrower as debtor in favor
of the Lender as secured party dated as of the date hereof, in form and
substance mutually satisfactory to the Lender and the Borrower, as the same may
be modified, amended or supplemented pursuant to the terms of this Agreement.
"SECURITY DOCUMENTS" means the Mortgages and all other security
agreements, deeds of trust, mortgages, chattel mortgages, pledges, guaranties,
financing statements, continuation statements, extension agreements and other
agreements or instruments now, heretofore, or hereafter delivered by the
Borrower to the Lender in connection with this Agreement or any transaction
contemplated hereby to secure or guarantee the payment of any part of the
Obligations.
"SEVERANCE TAXES" means taxes imposed on the Borrower or such
production at the time Hydrocarbons are produced from a well situated on any of
the Leases or on lands pooled therewith which are based on or measured by the
amount or value of such Hydrocarbon production allocable to the Properties.
"SHELL" means Shell Capital Inc.
"SHELL LETTER AGREEMENT" means that certain letter agreement from the
Borrower to and agreed by Shell in the form attached hereto as EXHIBIT M.
"SHELL PAYMENT" the payment by the Borrower to Shell of $8,142,127 in
accordance with the Shell Letter Agreement.
"SHELL TRANSACTION" means the payment by the Borrower to Shell of the
Shell Payment, the issuance by the Parent to Shell of the shares of the Parent's
Preferred Class A Series II, the execution and delivery by Shell, the Borrower,
and the Parent of that certain Conveyance of Overriding Royalty Interest and
Termination of Contract Rights, and the execution and delivery by Shell of that
certain Release of Liens and Security Interests, in each case in accordance with
the Shell Letter Agreement.
"STARBUCKS NOTE PAYABLE" means that certain promissory note dated April
22, 1998, issued by the Borrower to the Starbucks Trust in the principal amount
of $200,000.
12
<PAGE>
"STARBUCKS NOTE RECEIVABLE" means that certain promissory note dated
January 1, 1998, issued by the Starbucks Trust to the Borrower in the principal
amount of $2,500,000.
"SUBORDINATION AGREEMENTS" means the subordination agreements executed
by or on behalf of the holders of the Debt to Affiliates in favor of the Lender
dated as of the date hereof in form and substance acceptable to the Lender, as
the same may be modified, amended or supplemented in accordance therewith.
"SWAP AGREEMENT" means any swap agreement, cap, collar, floor, exchange
transaction, forward agreement or exchange or protection agreement related to
Hydrocarbons or any option with respect to such transaction, as more
specifically provided in those certain master swap agreements on International
Swap Dealers Association forms and the schedules thereto and any confirmations
thereunder which the Borrower enters into with or through the Lender of even
date herewith and any other confirmations which the Borrower may hereafter enter
into with or through the Lender.
"SWAP SETTLEMENT PAYABLES" means any settlement amounts payable by the
Borrower under the terms of any executed Swap Agreement.
"SWAP SETTLEMENT PROCEEDS" means any settlement amounts paid to the
Borrower under the terms of any executed Swap Agreement.
"TARGET ENDING BALANCE" means, for a given Interest Period, the amount
set forth on SCHEDULE 1 for the calendar month that includes the Repayment Date
for such Interest Period.
"TAX CLAIM" means, excluding claims for taxes by the State of
Mississippi disclosed in writing to the Lender by the Borrower that will be paid
at Closing, any claim by a taxing authority that the Borrower owes any amount of
taxes of any kind other than claims for Severance Taxes and Property Taxes.
"TITLE OPINIONS" means those certain title opinions (copies of which
shall be delivered to the Lender) addressed to the Borrower and Lender and dated
on or prior to the Closing Date, as the same may be or are required to be
utilized in conjunction with preparing a nothing further certificate under this
Agreement, covering all of the Properties.
"TOMLINSON NOTE" means that certain promissory note dated April 22,
1998, issued by the Borrower to Prentis B. Tomlinson, Jr. in the principal
amount of $1,700,000.
"UNIT" means a pooled unit or proration unit as designated by an
effective designation of unit, proration unit plan, or other instrument of
similar impact properly filed with the appropriate governmental authority.
"UNMATURED EVENT OF DEFAULT" means any event or condition which would,
with the giving of any requisite notices and/or the passage of any requisite
periods of time, constitute an Event of Default.
"WORKING INTEREST" or "WI" have the meaning given such terms in Exhibit
A of the Mortgage.
13
<PAGE>
Section 1.2 EXHIBITS AND SCHEDULES. All exhibits and schedules
attached to this Agreement are incorporated herein by reference and made a
part hereof for all purposes.
Section 1.3 AMENDMENT OF DEFINED INSTRUMENTS. Unless the context
otherwise requires or unless otherwise provided herein, the terms defined in
this Agreement which refer to a particular agreement, instrument or document
also refer to and include all renewals, extensions, modifications, amendments
and restatements of such agreement, instrument or document; provided, that
nothing contained in this section shall be construed to authorize any such
renewal, extension, modification, amendment or restatement.
Section 1.4 REFERENCES AND TITLES. Unless otherwise expressly
provided, all references in this Agreement to exhibits, schedules, articles,
sections, subsections and other subdivisions refer to the exhibits,
schedules, articles, sections, subsections and other subdivisions of this
Agreement. Section and subdivision headings are for convenience only, do not
constitute any part of such sections or subdivisions and shall be disregarded
in construing the language contained in such sections or subdivisions. The
words "this Agreement," "this instrument," "herein," "hereof," "hereby,"
"hereunder" and words of similar import refer to this Agreement as a whole
and not to any particular sections or subdivisions unless expressly so
limited. The phrases "this section" and "this subsection" and similar phrases
refer only to the sections or subsections hereof in which such phrases occur.
The word "or" is not exclusive, and the word "including" (in its various
forms) means "including, without limitation." Pronouns in masculine, feminine
and neuter genders shall be construed to include any other gender, and words
in the singular form shall be construed to include the plural and vice versa,
unless the context otherwise requires.
Section 1.5 CALCULATIONS AND DETERMINATIONS. All calculations
pursuant to the Loan Documents of fees and of interest shall be made on the
basis of actual days elapsed (including the first day but excluding the last)
and a year of 365 days. Unless otherwise expressly provided herein or the
Lender otherwise consents in writing, all financial statements and reports to
be furnished to the Lender under the Loan Documents shall be prepared and all
financial computations and determinations made pursuant to the Loan
Documents, and with respect to the financial statements, shall be made in
accordance with GAAP.
ARTICLE 2: THE LOANS
Section 2.1 THE LOANS.
(a) THE INITIAL LOAN. The Borrower desires to (i) refinance
certain existing debt (as set forth on SCHEDULE 2.1(a), the "EXISTING
DEBT") secured by Liens encumbering the Borrower's right, title and
interest in certain of the Properties and (ii) make the Shell Payment.
The Existing Debt is secured by Liens (the "EXISTING LIENS") under
those security instruments executed by the Borrower listed on
SCHEDULE I to each Assignment of Note and Liens. Subject to the
conditions precedent set forth in SECTIONS 9.2 and 9.3, the Lender
shall, contemporaneously with the Closing, purchase the entire Existing
Debt from the Existing Debt Holders in accordance with and subject to
the terms and conditions of the Assignments of Note and Liens. Upon
such purchase, the Borrower shall issue to the Lender (i) a promissory
note in the form of EXHIBIT B-1, appropriately
14
<PAGE>
completed (as amended, restated, supplemented or otherwise modified
from time to time, the "ADVANCING NOTE") in the face principal
amount of Thirty-Two Million, Six Hundred Twenty-Seven Thousand,
Seven Hundred Forty-Four and No/100 Dollars ($32,627,744.00) and
(ii) a promissory note in the form of EXHIBIT B-2, appropriately
completed (the "ENCAP JUNIOR NOTE") in the face principal amount of
Two Million Eight Hundred Eighty-Six Thousand Eight Hundred
Thirty-One and No/100 Dollars ($2,886,831.00) which Advancing Note
and EnCap Junior Note shall modify the terms (including the interest
rate) of, but not extinguish or novate, the Existing Debt and which
Advancing Note shall evidence both the Initial Loan (including
Existing Debt in the amount of $17,867,195) and the Development
Loans. Immediately following the issuance to it of the EnCap Junior
Note, the Lender shall sell the entire EnCap Junior Note, and
reconvey a portion of the Existing Liens, to EnCap Energy Capital
Fund III, L.P., in accordance with and subject to the terms and
conditions of the Assignment of Junior Note and Liens. Subject to
the conditions precedent set forth in SECTIONS 9.2 and 9.3, the
Lender shall, at the Closing, advance to the Borrower so that the
Borrower may make the Shell Payment and pay amounts payable by the
Borrower as provided in SECTION 7.1(y), the amount of Eight Million
One Hundred Ninety-Two Thousand One Hundred and Twenty-Seven and
No/100 Dollars ($8,192,127.00) such amount, together with the
portion of outstanding principal balance of the Existing Debt to be
evidenced by the Advancing Note, and the Six Hundred Thousand Five
Hundred Forty-Four Dollars ($600,544) payment made by the Lender
pursuant to the next sentence of amounts payable by the Borrower
under SECTION 7.1(z), shall constitute the Initial Loan. In lieu of
the Lender disbursing the amount necessary to pay the Facility Fee
to the Borrower and the Borrower remitting such sum to the Lender,
the Lender shall simply add such amount to the principal of the
Initial Loan. The interest rate on such Advancing Note shall be as
specified therein and the final maturity date of such Advancing Note
shall be the Loan Termination Date. The interest rate on and
maturity date of the EnCap Junior Note shall be as specified
therein. Both the Advancing Note and the EnCap Junior Note shall be
secured by the Mortgages and the other Security Documents.
(b) THE DEVELOPMENT LOANS. The Lender shall make additional
advances to the Borrower of Development Loan(s), up to an aggregate of
Three Million, Eight Hundred Twenty-Seven Thousand Two Hundred Dollars
($3,827,200) to be used exclusively to finance Development Operations
described on SCHEDULE 2.1(b), subject to the condition that either: (i)
no Unmatured Event of Default or Event of Default shall have occurred
and be continuing on the proposed funding date; or (ii) the Lender has
confirmed its obligation to advance funds in accordance with the
following paragraph pursuant to a properly prepared and submitted
Request for Advance covering a Development Operation that the Borrower
has commenced and has provided written notice to the Lender of such
commencement. With respect to any Development Operations, if any
non-operator, co-owner, or other participant of or with the Borrower
non-consents or otherwise elects not to participate in any such
operation, the Lender shall have the right, but not the obligation, to
increase the aggregate amount of the Development Loan(s) by an amount
that would include such non-consenting or non-participating party's
share of such costs and the amount of any such increase shall be added
to the Obligations and shall be payable under the terms of the
Advancing Note.
15
<PAGE>
The Development Loan(s) (together with the Initial Loan) shall
be evidenced by the Advancing Note and secured by the Mortgages and
other Security Documents. Subject to the condition precedent that no
Unmatured Default or Event of Default shall have occurred and be
continuing, within ten (10) days after the receipt from the Borrower,
on or before fifteen (15) days prior to the Drawdown Termination Date,
of a Request for Advance (and any applicable AFEs) listing all
applicable expenditures that the Borrower desires to make to conduct
Development Operations described on SCHEDULE 2.1(b), the Lender shall
confirm its obligation to advance the funds necessary to pay the
Borrower's share of the costs and expenses attributable to such
proposed operations (not to exceed the greatest of (i) the amount
requested in the Request for Advance, (ii) one hundred and thirty
percent (130%) of the Borrower's share of the estimated costs and
expenses attributable to such proposed operations as set forth on
SCHEDULE 2.1(b), and (iii) the amount by which $3,827,200 exceeds the
aggregate amount of Development Loans theretofore advanced or with
respect to which the Lender has confirmed that it is obligated to
advance funds in accordance with this SECTION 2.1(b)). Subject to the
other conditions of this SECTION 2.1(b), such advances shall be made by
the Lender within five (5) Business Days after receipt from the
Borrower of a certificate, duly executed by an officer of the Borrower,
certifying the amount of costs and expenses that either: (a) have been
paid or incurred by the Borrower and are payable in connection with
such proposed development operations, or (b) are required to be
incurred and paid by the Borrower on or before the last day of the
calendar month following the calendar month in which such certificate
is submitted to the Lender (each a "COST CERTIFICATE"), together with
the supporting documentation referred to in the form of Cost
Certificate attached hereto as EXHIBIT E.
Any Request for Advance shall be made by the Borrower and
submitted to Lee-Ken Choo of the Lender, as the designated contact for
such requests, for business opportunities, projects, and/or uses that
are described on SCHEDULE 2.1(b) or otherwise approved by the Lender
subject, without limitation, to the following:
(i) All statements of costs and estimates
provided to the Lender shall be rendered in sufficient detail
to give the Lender complete and accurate information as to the
purpose for and amount of all items included therein, and the
Lender shall be entitled to such additional information
regarding such expenditures as the Lender may reasonably
request. All such data shall be subject to audit by the
Lender's representatives at any time mutually agreeable to the
parties, provided, however, that the Lender's audit of such
data shall not be a basis to delay the funding addressed in
any Request for Advance unless the Request for Advance does
not apply to a Development Operation described on SCHEDULE
2.1(b), or the information presented in the Request for
Advance is patently inadequate with respect to the level of
detail required to be set forth therein pursuant to this
SECTION 2.1; and
(ii) The parties acknowledge that the amounts and
scope of the Development Loan(s) identified in this SECTION
2.1 are based upon estimated costs of the planned development
activities described on SCHEDULE 2.1(b) and may not accurately
reflect the ultimate cost of the contemplated activities.
16
<PAGE>
Notwithstanding the foregoing or anything else herein to the
contrary, in no event shall the Lender be obligated to make
any Development Loans pursuant to this SECTION 2.1 in excess
of $3,827,200.
Section 2.2 USE OF PROCEEDS. Initial Loan proceeds shall be used by the
Borrower for the purposes of: (a) refinancing the Existing Debt, (b) making the
Shell Payment, (c) paying costs and expenses pursuant to SECTION 7.1(y) and the
Facility Fee pursuant to SECTION 7.1(a), and (d) other corporate purposes
approved in writing by the Lender. Development Loan proceeds may be used by the
Borrower for the purposes of funding the Borrower's share of costs and expenses
relating to the conduct of the Development Operations described on
SCHEDULE 2.1(b) hereof, or such other development operations as may be
subsequently approved in writing by the Lender. The Borrower shall also be
allowed to pay with Development Loan proceeds to the extent permissible under
applicable law, any mortgage filing fees which may be required to properly file
any and all Security Documents.
Section 2.3 REPAYMENT OF THE LOANS AND THE ENCAP JUNIOR NOTE. The
Borrower shall repay the Loans plus all interest accrued thereon by the Loan
Termination Date. Provided that no Unmatured Event of Default or Event of
Default exists or would result therefrom, the Borrower shall repay the EnCap
Junior Note at the stated maturity thereof.
Section 2.4 PREPAYMENT OF THE LOANS. The Borrower, from time to time
after the Closing Date and without premium or penalty, may prepay the Advancing
Note, in whole or in part. Other than from the proceeds from the sale of, or
exercise of remedies with respect to, the "EnCap Properties" (as defined in the
Assignment of Junior Note and Liens) the Borrower may not prepay the EnCap
Junior Note without the prior written consent of the holder of the Advancing
Note, in which event the Borrower may prepay the EnCap Junior Note without
premium or penalty to the extent provided in such consent. Any principal prepaid
pursuant to this section shall be in addition to, and not in lieu of, all
payments otherwise required to be paid under the Loan Documents at the time of
such prepayment, including any Swap Settlement Payables associated with any Swap
Agreement that must be terminated as a result of such prepayment. If the
Borrower (i) prepays any principal pursuant to this SECTION 2.4 and (ii) elects
to maintain in effect any Swap Agreement not required to be terminated as a
result of such prepayment, the Security Documents securing the Borrower's
obligation to pay any Swap Settlement Payables associated with any such Swap
Agreement shall remain in force and effect (and shall be promptly amended by the
Borrower and the Lender to the extent necessary) so long as any Swap Agreements
remain outstanding. Similarly, in the event of any such prepayment after which
any Swap Agreement remains outstanding, the Borrower shall be entitled to
receive and retain any Swap Settlement Proceeds associated with the relevant
Swap Agreement, subject to the terms of any applicable Security Documents.
Section 2.5 COMMENCEMENT OF OVERRIDING ROYALTY INTEREST PAYMENTS. The
Overriding Royalty Interest will be applicable with respect to all oil, gas and
other minerals produced, saved and sold or used off the premises of the relevant
Lease or Unit from or attributable to the Properties from the first day of the
calendar month following the Loan Termination Date. The Borrower may purchase
the Overriding Royalty Interest from the Lender in accordance with SECTION 8.4.
17
<PAGE>
Section 2.6 APPLICATION OF RECEIPTS. Net Revenue shall be calculated by
the Lender based on each Property Operating Statement. The Borrower shall
prepare and deliver a Property Operating Statement to the Lender no later than
the 20th day of each calendar month. Such Property Operating Statement shall
detail: (i) the Borrower's actual (or estimated, to the extent that actual data
is not then available) crude oil, condensate, natural gas liquids and natural
gas revenue, and any other income with respect to each Property relating to
production and operations for the prior calendar month to the extent that such
production is sold to someone other than Aquila or an Affiliate of Aquila; and
(ii) all direct lease operating costs, transportation, processing and marketing
costs, ad valorem and severance taxes, royalties and overriding royalties with
respect to each Property, together with such other detailed information as is
prescribed in the form of Property Operating Statement attached hereto as
EXHIBIT C. The first Property Operating Statement shall be delivered on
September 20, 1999, and, excluding any payments made pursuant to the properties
acquired pursuant to the Shell Transaction, will detail Gross Receipts
attributable to the production of Hydrocarbons from the Properties during the
month of August, 1999, and Operating Expenses, Direct Taxes, royalties,
overriding royalty interests and other payments out of or measured by production
relating to production and operations for August, 1999. On each Repayment Date
Gross Receipts reflected in the relevant Property Operating Statement and Gross
Receipts relating to production sold to Aquila and its Affiliates shall be
applied as follows:
(a) First, to the Borrower, for payments of such sums, the
amount necessary to pay the Operating Expenses, Direct Taxes,
royalties, overriding royalties and other interests payable out of or
measured by production, if any, associated with the Properties, and
Swap Settlement Payables for the second prior calendar month as
reflected in the relevant Property Operating Statement;
(b) Second: (i) eighty-five percent (85%) of the Base Net
Revenue; and (ii) fifty percent (50%) of the Excess Net Revenue, as
reflected in the relevant Property Operating Statement and the records
of the Lender and its Affiliates (in the case of production sold to the
Lender and its Affiliates), to the Lender for payment of amounts which
are included within Advancing Note Debt Service and other Obligations
payable to the holder of the Advancing Note for the relevant Interest
Period. The percentage stated in clause (i) of the preceding sentence
shall be known as the "BASE DEDICATION RATES" and the percentage stated
in clause (ii) of the preceding sentence shall be known as the "EXCESS
DEDICATION RATE". Notwithstanding anything contained in the first
sentence of this subpart (b) to the contrary, upon the occurrence and
during the continuation of an Event of Default under SECTION 10.1(r),
the Base Dedication Rate shall be one hundred percent (100%) and upon
the occurrence and during the continuation of any other Event of
Default the Base Dedication Rate shall be ninety-five percent (95%).
The amount paid to the Lender pursuant to this subpart (b) shall be
applied first to any interest due on the Advancing Note until all
accrued interest is paid in full, and any remaining amounts paid to the
Lender pursuant to this subpart (b) shall be applied to remaining
principal of the Advancing Note; and
(c) Third, any remaining amount of Gross Receipts properly
reflected in the relevant Property Operating Statement shall be paid to
the Borrower in accordance with SECTION 2.7(b).
18
<PAGE>
Section 2.7 BORROWER SUB-ACCOUNT.
(a) Until the Loan Termination Date, the Borrower shall, and
shall cause each Operator to, direct and cause all Purchasers of
Hydrocarbons, to deposit all payments of any nature whatsoever due and
owing by such Persons with respect to the Properties or Hydrocarbons
produced therefrom to the Borrower directly into the Cash Collateral
Account; provided, however, that Purchasers of Hydrocarbons may make
distributions to royalty interest owners and third-party working
interest owners and may withhold severance taxes. The Cash Collateral
Account shall be administered in accordance with the terms of the Cash
Collateral Account Agreement. The Lender shall establish a sub-account
(the "BORROWER SUB-ACCOUNT") on its internal books and records and
shall credit to such the Borrower Sub-Account all collected funds which
constitute payments referred to in the preceding SECTION 2.6. The
Borrower authorizes the Lender to debit the Borrower Sub-Account for
the payment of all Obligations hereunder when due and payable,
including all amounts paid by the Lender pursuant to SECTION 8.2, and
including any such debit that would cause the Borrower Sub-Account to
be in a negative status.
(b) On each Repayment Date, and after satisfying all
distributions to the Lender pursuant to SECTION 2.6, the Lender will
release or cause to be released to the Borrower from the Cash
Collateral Account an amount of funds from amounts credited to the
Borrower Sub-Account in order to pay the expenses provided for in
SECTION 2.6(a) incurred for the preceding calendar month, plus an
amount equal to the difference between one hundred percent (100%) of
Net Revenue and the sum of: (i) the product of the Base Dedication Rate
and the Base Net Revenue; and (ii) the product of the Excess Dedication
Rate and the Excess Net Revenue, such sum to be applied to repayment of
the Advancing Note Debt Service pursuant to SECTION 2.6 hereof ("NET
REVENUE REIMBURSEMENT AMOUNT"). The Borrower will have one hundred
eighty (180) days after each receipt of such funds to contest the
amount of funds released, after which time the amount released will be
deemed conclusively correct.
Notwithstanding anything to the contrary contained herein and
regardless of whether any Event of Default exists hereunder, any
amounts deposited into the Cash Collateral Account owing to third party
working interest and royalty interest holders or to taxing authorities
for Severance Taxes and Property Taxes shall be released by the Lender
to the Borrower within five (5) Business Days after receipt of a
certificate from the Borrower or such other Person (which may, but need
not, be an Affiliate of the Borrower) as Borrower may designate on no
less than ten (10) Business Days prior written notice to the Lender,
which certificate details such amounts and the party to be paid so that
the Borrower may return such amounts to such third party working
interest and royalty interest holders and taxing authorities. The
Lender shall have the right to undertake audit procedures during normal
business hours and upon prior written notice to confirm periodically
that the Borrower or any such designee on behalf of the Borrower has
paid all obligations for which funds were released to the Borrower or
any such designee as Net Revenue Reimbursement Amounts. The Lender
shall have the right at its option, but not the obligation, to make
such payments directly from the Cash Collateral Account to the third
party working interest and royalty interest holders and taxing
authorities upon the occurrence of and during the continuance of an
Event of Default
19
<PAGE>
hereunder; provided that if the Lender elects not to make such
payments, The Lender shall release such funds to the Borrower to
make payments to third party working interest and royalty interest
holders and taxing authorities.
Section 2.8 PURCHASERS OF PRODUCTION. The Borrower shall notify the
Lender promptly of any changes to the list of Persons who purchase Hydrocarbons
produced from or allocated to the Properties, as set forth on SCHEDULE 2.8
attached hereto, if, as and when any change occurs in the Persons who purchase
such Hydrocarbons.
Section 2.9 MANDATORY PREPAYMENT OF THE LOANS. The Borrower shall pay
promptly to the Lender the product of the Base Dedication Rate multiplied by all
proceeds of sales of any assets of the Borrower (except to the extent proceeds
of sales of Equipment are utilized within 60 days of such sale to purchase
replacements of such Equipment) that comprise any part of the Collateral and not
otherwise constituting Gross Receipts and paid into the Cash Collateral Account
(provided, however, that this provision is subject to SECTION 7.2(a) and shall
not be deemed to be a consent by the Lender to any such sale). All proceeds of
any such sale shall be immediately applied to repayment of the Loans and accrued
interest thereon in accordance with SECTION 2.6(b) hereof.
Section 2.10 INITIAL SWAP AGREEMENT. At Closing, the Borrower and the
Lender shall enter into a Swap Agreement in form and substance mutually
satisfactory to the Lender and the Borrower.
ARTICLE 3: SECURITY
Section 3.1 SECURITY. The Obligations will be secured by the Collateral
as set forth in the various Security Documents concurrently or hereafter
delivered by the Borrower, including, without limitation, any and every Deed of
Trust, Assignment of Production, Security Agreement and/or Financing Statement
(the "MORTGAGES") executed by the Borrower in favor of the Lender covering the
Borrower's interest in the Properties in form and substance mutually
satisfactory to the Lender and the Borrower. Pursuant to certain of the Loan
Documents, the Borrower will grant to the Lender a first mortgage lien on and a
first priority perfected security interest in the Collateral, subject only to
Permitted Encumbrances.
Section 3.2 PERFECTION AND PROTECTION OF SECURITY INTERESTS AND LIENS.
The Borrower will from time to time deliver to the Lender any security
agreements, financing statements, continuation statements, extension agreements,
amendments, confirmations and other documents, properly completed and executed
(and acknowledged when required) by the Borrower and any relevant third parties
in form and substance reasonably satisfactory to the Lender, which the Lender
reasonably requests for the purpose of perfecting, confirming, protecting or
establishing the priority of any Liens or other rights in the Collateral
securing any Obligations.
Section 3.3 RELEASE OF COLLATERAL. Upon the payment and performance in
full by the Borrower of all Obligations under the Loan Documents, other than the
Overriding Royalty Interest Conveyance, the Lender shall deliver or cause to be
delivered to the Borrower, at the Borrower's expense, releases and satisfactions
of all financing statements, mortgages and other
20
<PAGE>
registrations of security with respect to the Collateral and the Borrower
shall deliver to the Lender a general release of all of the Lender's
liabilities and obligations under the Loan Documents, other than the
Overriding Royalty Interest Conveyance, and an acknowledgment that the same
have been terminated.
Section 3.4 ACCOUNT DEBTORS. All Purchasers of Hydrocarbons relating to
the Borrower's Net Revenue Interests in the Properties will receive notification
from the Lender (as assignee) and the Borrower, in form and substance reasonably
satisfactory to the Lender, of the assignment into the Cash Collateral Account
of all proceeds (the "NOTICE OF ASSIGNMENT OF PROCEEDS") from sales of all
production from or allocable to the Borrower's respective Net Revenue Interests
constituting the Properties. The Borrower shall use commercially reasonable
efforts to assist the Lender in obtaining, within sixty (60) days after the
Closing Date, from all Purchasers of Hydrocarbons, an executed Notice of
Assignment of Proceeds which will instruct the Purchasers of Hydrocarbons to
remit all proceeds from sales of all production from or allocable to the
Borrower's respective Net Revenue Interests constituting the respective
Properties to the Cash Collateral Account.
ARTICLE 4: REPRESENTATIONS AND WARRANTIES
Section 4.1 REPRESENTATIONS AND WARRANTIES OF BORROWER. To confirm the
Lender's understanding concerning the Borrower and the Borrower's businesses,
properties and obligations, and to induce the Lender to enter into this
Agreement and to make the Loans and otherwise perform this Agreement, the
Borrower represents and warrants to the Lender that:
(a) NO DEFAULT. No event has occurred and is continuing which
would constitute an Event of Default or an Unmatured Event of Default.
(b) ORGANIZATION AND GOOD STANDING. The Borrower is a
corporation duly organized, validly existing and in good standing under
the laws of Texas, having all powers necessary to carry on its
businesses and to enter into and consummate the transactions
contemplated by the Loan Documents. The Borrower is duly qualified, in
good standing, and authorized to do business in all other jurisdictions
wherein the character of the properties owned or held by it or the
nature of the business transacted by it makes such qualification
necessary or desirable and the failure to be so qualified could
reasonably be expected to have an Adverse Effect.
(c) CAPITALIZATION: COMPLIANCE WITH SECURITY LAWS. Parent is
the sole stockholder of the Borrower. The Borrower is not subject to
any agreement under which there may become outstanding, nor are there
currently outstanding, any rights to purchase, or securities
convertible into or exchangeable for, any stock of the Borrower
including, but not limited to, options, warrants or rights that are not
terminable at the Borrower's will, other than in favor of Parent. The
Borrower is under no obligation (contingent or otherwise) to purchase
or otherwise acquire or retire any of its stock. Except as contemplated
by this Agreement, no agreements, understandings, plans or arrangements
are in existence which require the Borrower to elect any person on its
board of directors or otherwise pertain to the distribution rights,
voting, sale or transfer of any stock of the Borrower. The Borrower has
complied with all applicable federal and state securities
21
<PAGE>
laws and has obtained enforceable releases from any Persons who may
have had federal or state securities law claims against the Borrower.
(d) AUTHORIZATION. The Borrower has taken all actions
necessary to authorize the execution and delivery of the Loan Documents
and to authorize the consummation of the transactions contemplated
thereby and the performance of its obligations thereunder. The Borrower
is duly authorized to borrow funds hereunder.
(e) NO CONFLICTS OR CONSENTS. The execution and delivery by
the Borrower of the Loan Documents, the performance of its obligations
under the Loan Documents, and the consummation of the transactions
contemplated by the various Loan Documents does not and will not: (i)
conflict with any provision of (A) any applicable domestic or foreign
law, statute, rule or regulation, (B) the Articles of Incorporation or
Bylaws of the Borrower, or (C) any agreement, judgment, license, order
or permit applicable to or binding upon the Borrower, (ii) result in
the acceleration of any Debt owed by the Borrower; or (iii) result in
or require the creation of any Lien upon any assets or properties of
the Borrower, except as expressly contemplated in the Loan Documents.
Except as expressly contemplated in the Loan Documents, no consent,
approval, authorization or order of, and no notice to or filing with
(other than routine filings of certain of the Security Documents), any
court or governmental authority or third party is required in
connection with the execution, delivery or performance by the Borrower
of any Loan Document or to consummate any transactions contemplated by
the Loan Documents.
(f) ENFORCEABLE OBLIGATIONS. This Agreement is, and the other
Loan Documents to which the Borrower is a party when executed and
delivered by the Borrower will be, legal, valid and binding obligations
of the Borrower, enforceable in accordance with their terms except as
such enforcement may be limited by bankruptcy, insolvency or similar
laws of general application relating to the enforcement of creditors'
rights or by principles of equity applicable to the enforcement of
creditors' rights generally.
(g) TRANSACTIONS SUBSEQUENT TO DATE OF FINANCIAL STATEMENTS.
Except as disclosed in SCHEDULE 4.1(g),The Borrower has engaged in no
material transactions other than in the ordinary course of business
since the effective date of the most recent financial statements of the
Parent and the Borrower provided to the Lender.
(h) OTHER OBLIGATIONS AND RESTRICTIONS. Except as reflected in
the Debt Restructure Agreement and financial statements of the Parent
and the Borrower most recently provided to the Lender or as disclosed
on SCHEDULE 4.1(h), the Borrower has no outstanding Debt of any kind
(including contingent obligations, tax assessments, and forward or
long-term commitments) which is material to the Borrower other than:
(i) Debt under the Loan Documents; (ii) Debt the repayment of which is
subordinated to the repayment of the Debt under the Loan Documents
pursuant to the Subordination Agreements; (iii) unaccrued plugging and
abandonment Obligations; and (iv) trade accounts payable incurred by
the Borrower in the ordinary course of business and no more than thirty
(30) days beyond the date due (or, with respect to a particular vendor,
such longer period that is acceptable to such vendor). Other than as
disclosed on
22
<PAGE>
SCHEDULE 4.1(h), no Tax Claim or other claim for past due Property
Taxes or Severance Taxes exists. The Borrower is not subject to or
restricted by any franchise, contract, deed, charter restriction or
other instrument or restriction which could reasonably be expected
to have an Adverse Effect.
(i) FULL DISCLOSURE. No certificate, statement or other
information delivered herewith or heretofore by the Borrower to the
Lender in connection with the negotiation of this Agreement or in
connection with any transaction contemplated hereby contains any untrue
statement of a material fact or omits to state any material fact known
to the Borrower necessary to make the statements contained herein or
therein not misleading as of the date made or deemed made. No facts are
known to the Borrower that have not been disclosed to the Lender in
writing which could reasonably be expected to have an Adverse Effect;
(j) LITIGATION. Except as set forth in SCHEDULE 4.1(j) and the
Debt Restructure Agreement, no actions, suits or legal, equitable,
arbitrative or administrative proceedings are pending, or to the
knowledge of the Borrower are threatened, against the Borrower or any
Affiliate of the Borrower before any federal, state, municipal or other
court, department, commission, body, board, bureau, agency or
instrumentality, domestic or foreign which could reasonably be expected
to have an Adverse Effect, and no outstanding judgments, injunctions,
writs, rulings or orders by any such governmental entity exist against
the Borrower which could reasonably be expected to have an Adverse
Effect;
(k) ERISA LIABILITIES. Except as disclosed in SCHEDULE 4.1(k),
there are no ERISA Plans with respect to which the Borrower has any
fixed or contingent liability, and the Borrower is in compliance with
ERISA in all material respects;
(l) NAMES AND PLACES OF BUSINESS. Except as disclosed on
SCHEDULE 4.1(l), the Borrower has not during the preceding three (3)
years had, been known by, or used any other corporate, trade or
fictitious name. The principal office and principal place of business
of the Borrower is set forth in SECTION 11.3 hereof. Except as
disclosed on SCHEDULE 4.1(l), the Borrower does not now have and has
not had during the preceding three (3) years any other office or place
of business. The Borrower is not and has not engaged in any business or
activity other than the identification, acquisition, ownership,
operation and development of oil and gas leases and interests therein;
(m) UNPAID BILLS. Except: (i) as disclosed to the Lender in
SCHEDULE 4.1(m); (ii) bills identified in and which will be paid in
accordance with the Debt Restructure Agreement; and (iii) for bills
incurred in the ordinary course of business which are not more than
thirty (30) days beyond the date due (or, with respect to a particular
vendor, such longer period that is acceptable to such vendor), the
Borrower has no knowledge of any unpaid bills with respect to
improvements to any of the Collateral which may give rise to
mechanic's, materialman's or other similar liens arising by operation
of applicable law should such bills remain unpaid;
23
<PAGE>
(n) TITLE. Subject only to Permitted Encumbrances: (i) except
as set forth in the Title Opinions, the Borrower has all beneficial
rights, titles and interests in and to all production from or allocable
to the Borrower's interest in the Properties and has the exclusive
right to sell the same subject to any right in the owners of royalty
interests, overriding royalty interests and other interests payable out
of or measured by production of Hydrocarbons to take their interests in
kind; and (ii) the Borrower has good and marketable title to the
Properties, the Equipment and to any other Collateral. The Collateral
is owned by the Borrower free and clear of any Lien other than
Permitted Encumbrances;
(o) AFFILIATES. Except as disclosed in SCHEDULE 4.1(o): (i)
the Borrower does not have any Affiliate or own any stock in any other
corporation or association; (ii) the Borrower is not a member or
partner of any joint venture or association of any type whatsoever; and
(iii) the Borrower has no Debt to Affiliates;
(p) OMISSIONS AND MISSTATEMENTS. To the Borrower's knowledge
after due inquiry, all written data, reports and information which the
Borrower has supplied to the Lender or caused to be supplied by a third
party on its behalf in connection with the obtaining of the credit
facility provided for in this Agreement or in connection with the
business transactions giving rise to the Borrower's seeking such credit
are, taken as a whole, complete and accurate in all material respects
and contain no material omission or misstatement. The Initial Reserve
Report furnished to the Lender prior to the execution of this
Agreement, to the best of the Borrower's knowledge, was prepared in
accordance with customary oil and gas engineering practices and in
accordance with the standards promulgated by the Society of Petroleum
Engineers. The Initial Reserve Report is based on historical
information which, to the best of the Borrower's knowledge, is complete
and accurate in all material respects and contains no material omission
or misstatement; provided, however, that the Borrower makes no
representation or warranty regarding the accuracy of the forecasts,
projections or quantity of reserves or producibility thereof reflected
by such Initial Reserve Report;
(q) HOLDING COMPANY. The Borrower is not a "holding company"
or a "subsidiary company" of a "holding company" or an "affiliate" of a
"holding company" or a "public utility" within the meaning of the
Public Utility Holding Company Act of 1935, as amended; and
(r) INVESTMENT COMPANY. The Borrower is not an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
(s) EMPLOYEES. Except as disclosed on SCHEDULE 4.1(s),
Borrower is not a party to any existing employment agreements, deferred
compensation, stock option, bonus, consulting or retirement agreements
or plans, or other employee benefit plans of any kind, including
without limitation any pension or welfare benefit plans with any
employee of Borrower whose employment is not terminable at-will. Except
as disclosed on SCHEDULE 4.1(k), Borrower does not maintain nor has it
ever maintained an Employee Pension Benefit Plan as defined in Section
3(a) of ERISA, or a multi employer plan as defined in Section 3(37) of
ERISA. No employees of Borrower are represented by any
24
<PAGE>
labor union or collective bargaining agreement, nor is any union
organization effort pending or threatened against Borrower.
ARTICLE 5: NOTICE OF CERTAIN EVENTS
So long as any Obligations are owing to the Lender under this Agreement
or any other Loan Documents, the Borrower shall deliver to the Lender, or notify
the Lender of, as the case may be, the following items:
Section 5.1 NOTICE OF CERTAIN MATTERS. The Borrower shall notify the
Lender as soon as practicable and in any event within five (5) Business Days
after becoming aware of the existence of any Unmatured Event of Default or
Event of Default under this Agreement or after becoming aware of any
developments or other information which may have an Adverse Effect,
including, without limitation, the following:
(a) any dispute (including tax liability disputes) that may
arise between the Borrower and any governmental regulatory body or law
enforcement authority;
(b) the commencement of any litigation or material proceeding
affecting the Borrower (whether by the filing of a complaint, service
of process or by attachment or arrest of any asset);
(c) any labor dispute or controversy resulting in or
threatening to result in a strike or work stoppage against the
Borrower;
(d) any proposal by any public authority to acquire any assets
or business of the Borrower;
(e) the location of Collateral other than at the places
indicated in or as permitted under the Loan Documents and not in
accordance with reasonable and ordinary practice of the Borrower;
(f) any proposed or actual change of the name, identity or
structure of the Borrower;
(g) any material loss or damage to any of the Borrower's
business or operations or to any of the Collateral;
(h) any environmental situation, circumstance or condition
that causes or may cause SECTION 7.1(s) to be false; or
(i) any other matter which has resulted or may result in an
Adverse Effect.
The Borrower shall provide the Lender with written notice specifying
and describing the nature of such Unmatured Event of Default, Event of Default,
development or information, and anticipated effect thereof, which notice shall
be given as soon as reasonably possible.
25
<PAGE>
Section 5.2 OTHER INFORMATION. The Borrower shall provide such other
information respecting the respective financial condition of the Borrower,
any Affiliate of the Borrower that is then a party to any Loan Document, or
any Property or other Collateral as the Lender reasonably may request in
writing from time to time.
ARTICLE 6: SPECIAL PROVISIONS RELATING TO EQUIPMENT
Section 6.1 LOCATION: RECORDS. Except in the ordinary course of
business or as otherwise permitted by this Agreement or another Loan Document or
by the prior written consent of the Lender, all Equipment owned by or on behalf
of the Borrower will be kept at the Properties, and except that, so long as no
Unmatured Event of Default or Event or Default shall have occurred and be
continuing, the Borrower may dispose of Equipment in accordance with the terms
of the applicable Operating Agreements and may dispose of obsolete, broken or
worn Equipment, in either case without the Lender's consent but upon prior
written notice to the Lender; provided that either (i) the proceeds of any such
disposition shall be used to purchase substantially similar Equipment or (ii)
the amount of the proceeds multiplied by the applicable Dedication Rate shall be
delivered to the Lender to be applied to the Obligations in accordance with
SECTION 2.6 on the next Repayment Date. Following the occurrence and during the
continuance of an Event of Default or an Unmatured Event of Default, the
Borrower may dispose of Equipment in accordance with the terms of the applicable
Operating Agreements only with the Lender's prior written consent upon ten (10)
days prior written notice to the Lender, which consent shall not be unreasonably
withheld. All of the records of the Borrower regarding the Equipment shall be
available during the Borrower's usual business hours to any officer, employee,
agent or representative of the Lender following reasonable advance written
notice from the Lender.
Section 6.2 MAINTENANCE. The Borrower, acting in accordance with the
prudent operator standard, will keep its Equipment in a good state of repair and
good operating condition, will make repairs and replacements when and where
necessary, will not waste or destroy it or any part thereof, and will not be
negligent in the care or use thereof. The Borrower shall repair and maintain its
Equipment in a manner sufficient to continue the operation of the Properties.
The Borrower shall use its Equipment in accordance with Law and the
manufacturer's instructions.
Section 6.3 DISPOSITIONS. Where the Borrower is permitted to dispose of
any Equipment under this Agreement or by prior written consent thereto hereafter
given by the Lender, the Borrower shall do so in an arm's length transaction, in
good faith and by obtaining the maximum amount of recovery practicable therefor
and without impairing the operating integrity of its remaining Equipment or the
Properties.
ARTICLE 7: COVENANTS OF BORROWER
Section 7.1 AFFIRMATIVE COVENANTS. The Borrower warrants, covenants and
agrees that until full and final repayment of the Obligations and the
termination of each of the Loan Documents, it will comply with the following
covenants:
(a) PAYMENT AND PERFORMANCE. The Borrower will pay all amounts
due to the Lender under the Loan Documents in accordance with the terms
thereof and will observe,
26
<PAGE>
perform and comply with every covenant, term and condition expressed
or implied in the Loan Documents.
(b) PREFERENTIAL RIGHT TO PURCHASE HYDROCARBONS. The Borrower
will enter into and perform the Hydrocarbon Purchase and Sale Agreement
in the form of the Base Agreement for Natural Gas Purchase Transactions
and will, upon the written request of the Lender, enter into and
perform a similar document (on terms reasonably acceptable to the
Borrower) with the Lender or such Affiliate of the Lender as the Lender
may designate. For the avoidance of doubt, the Borrower agrees that
prices based on the parameters set forth in SCHEDULE 7.1(f)(i) shall be
deemed reasonable for purposes of any agreement for the purchase and
sale of oil.
(c) COMPLIANCE WITH TAX LAWS. The Borrower shall comply with
all federal, state or local laws and regulations regarding the
collection, payment and deposit of employee' income, employment, and
social security and sales and use taxes and taxes related to royalty
payments.
(d) BOOKS, FINANCIAL STATEMENTS AND REPORTS. The Borrower will
at all times maintain full and accurate books of account and records
and a standard system of accounting and will furnish the following
statements and reports to the Lender at the Borrower's expense:
(i) As soon as available, and in any event within one
hundred twenty (120) days after the end of each Fiscal Year,
complete audited consolidated and consolidating financial
statements of the Parent and the Borrower, prepared in
reasonable detail in accordance with GAAP. These financial
statements shall contain a balance sheet as of the end of such
Fiscal Year and statements of earnings, of cash flows, and of
changes in the capital accounts for such Fiscal Year, each
setting forth in comparative form the corresponding figures
for the preceding Fiscal Year. The auditors shall be
independent certified public accountants acceptable to the
Lender in its reasonable discretion, provided that the
accountants that audited the Fiscal Year 1998 financial
statements of the Parent and the Borrower are deemed
acceptable to the Lender.
(ii) As soon as available, and in any event within
sixty (60) days after the end of each Fiscal Quarter, the
Parent and the Borrower's consolidated and consolidating
balance sheet as of the end of such Fiscal Quarter and
statements of the Borrower's earnings and cash flows for the
period from the beginning of the then current Fiscal Year to
the end of such Fiscal Quarter, all in reasonable detail and
prepared in accordance with GAAP, subject to changes resulting
from normal year-end adjustments.
(iii) As and when furnished, copies of all reports
and other information provided by any Person (other than the
Lender) to the Parent or the Borrower in connection with the
Loan Documents, except such as are subject to attorney-client
privilege, attorney work product privilege or any other
privilege. The Borrower
27
<PAGE>
may arrange for such reports and information to be provided
directly to the Lender by the Person providing the same to
the Parent and the Borrower.
(e) OTHER INFORMATION AND INSPECTIONS. The Borrower will
furnish to the Lender any information which the Lender may from time to
time reasonably request in writing concerning any covenant, provision
or condition of the Loan Documents or any matter in connection with the
Parent or the Borrower's assets, business and/or operations (other than
geological, geophysical and other technical data relating to assets
other than the Properties). The Borrower will (and will cause the
Parent to) permit representatives appointed by the Lender (including
independent accountants, agents, attorneys, appraisers and any other
Persons), at the risk and expense of the Lender or such
representatives, to visit and inspect, during reasonable business hours
and upon reasonable prior written notice, its books of account and
other books and records relating to the Properties and other
Collateral, and any facilities or other business assets relating to the
Collateral, and to make photocopies and/or photographs thereof, and to
write down and record any information such representatives obtain, and
the Borrower shall (and will cause the Parent to) permit the Lender or
its representatives to investigate and verify the accuracy of the
information furnished to the Lender in connection with the Loan
Documents and to discuss all such matters with its officers, employees
and representatives. In addition, the Borrower will (and will cause the
Parent to) permit any such representatives appointed by the Lender, at
the risk and expense of the Lender or such representatives, to visit
and inspect, during reasonable hours and upon similar advance written
notice, the Properties and other Collateral. The Lender agrees that it
will take all reasonable steps to keep confidential any proprietary
information given to it by the Borrower and the Parent; provided,
however, that this restriction shall not apply to information which (i)
is at the time in question publicly available, (ii) is required to be
disclosed by law or by any order, rule or regulation (whether valid or
invalid) of any court or governmental agency, or authority, (iii) is
disclosed to the Lender's Affiliates, auditors, attorneys, lenders or
agents, or (iv) is disclosed in the course of the defense or
enforcement of the Loan Documents or the defense or enforcement of the
Lender's exercise of its rights thereunder, provided that, with respect
to information furnished to Persons identified in clause (iii) (except
when furnished pursuant to clause (iv)), such Person shall be subject
to the foregoing confidentiality obligations applicable to the Lender.
Nothing in this SECTION 7.1(e) shall be construed to require (i) the
Borrower (or the Parent) to deliver to the Lender any data, records, or
other information in violation of confidentiality agreements or other
restrictions against disclosure or transfer under agreements between
the Borrower and any third person, (ii) such delivery in the absence of
compliance by the Lender with the conditions to such disclosure or
transfer under such agreements, or (iii) the Borrower (or the Parent)
to pay any licensing fee due in connection with any such disclosure or
transfer, all such licensing fees being for the account of the Lender
to the extent disclosed in writing to the Lender prior to such
disclosure or transfer.
(f) RESERVE REPORTS. On or before each March 30 after the
Closing Date until the Loan Termination Date, the Borrower shall cause
the preparation and delivery to the Lender of petroleum engineering
reports, in a form satisfactory to the Lender, relating to the
Properties and prepared as of the preceding December 31 (collectively,
the "RESERVE REPORTS" and individually, a "RESERVE REPORT"). The Lender
may request one additional
28
<PAGE>
Reserve Report per calendar year. Each annual Reserve Report
required hereby shall be prepared by Engineers and shall be prepared
at the Borrower's sole expense. Any additional Reserve Reports shall
be prepared by Engineers but at the expense of the requesting party.
Each Reserve Report shall set forth updated estimates of proved
developed producing reserves, proved developed non-producing
reserves, proved undeveloped reserves, projected production profiles
and overall economics of the Properties. Each Reserve Report will be
based on the following assumptions:
(i) Hydrocarbon pricing used will be determined by
the Lender using the parameters set forth on SCHEDULE
7.1(f)(i).
(ii) Average lease operating expenses and production
taxes will be derived by the Engineers who prepare such report
from the Operator's best estimate and historical operating
expenses.
(g) NOTICE OF INVESTIGATIONS OR PROCEEDINGS. The Borrower
shall give the Lender prompt written notice of any proceeding at law or
in equity against the Borrower, or any investigation or proceeding
before or by any administrative or governmental agency relating to the
Borrower or any of the Collateral if, in any case, such could
reasonably be expected to have an Adverse Effect.
(h) NOTICE OF DAMAGE TO COLLATERAL. The Borrower shall give
the Lender prompt written notice of any destruction or substantial
damage to any material portion of the Collateral and of the occurrence
of any condition or event which has caused, or may cause, material loss
or depreciation in the value of any property subject to the Lender's
Liens or the Mortgage.
(i) MAINTENANCE OF LICENSES. The Borrower shall maintain all
licenses, permits, charters and registrations which are required for
the conduct of its business and where the failure to have such could
reasonably be expected to have an Adverse Effect.
(j) MAINTENANCE OF RIGHTS; DEFENSE OF PRIORITY. The Borrower
will maintain, preserve, protect and keep all of its contractual and
property rights with respect to the Collateral, other than those
released to the Lender in connection with the Loan Documents, and will
not waive, amend or release any such rights, except when to do so could
not reasonably be expected to have an Adverse Effect. Notwithstanding
the fact that the liens, claims and encumbrances described in the Debt
Restructure Agreement are Permitted Encumbrances, if any Participating
Creditor asserts a lien, claim or encumbrance with respect to the
Collateral that purports to have priority over the claims or Liens
granted pursuant to the Loan Documents, then the Borrower will take all
necessary action to defend in good faith, at the Borrower's sole cost,
the priority of the claims of Lender and Lender's Affiliates granted
pursuant to the Loan Documents.
(k) MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. The Borrower
will maintain and preserve its corporate existence and its rights and
franchises in full force and effect and will qualify and/or remain
qualified to do business as a foreign corporation in all
29
<PAGE>
states or jurisdictions where required by applicable law and the
failure to do so could reasonably be expected to have an Adverse
Effect.
(l) PAYMENT OF TAXES AND TRADE DEBT. The Borrower will (i)
make all payments to the Participating Creditors required under Section
8.01 of the Debt Restructure Agreement on or before the earlier of the
fifteenth day after the Closing Date and the day by which such payments
are required to have been made under the Debt Restructure Agreement;
(ii) make all payments of Convenience Claims (as defined in the Debt
Restructure Agreement) on or before the forty-fifth day after the
Closing Date; and (iii) timely pay all other sums coming due under the
Debt Restructure Agreement. Except to the extent being contested in
good faith, the Borrower will (x) timely pay all taxes, assessments and
other governmental charges or levies imposed upon it or upon its
income, profits or property; (y) within thirty (30) days after the same
becomes due (or, with respect to a particular vendor, such longer
period that is acceptable to such vendor) pay all Debt (other than the
Obligations) owed by it. The Borrower will maintain appropriate
accruals and reserves for all of the foregoing Debt in accordance with
GAAP.
(m) CREDITORS. In addition to the matters disclosed in the
Debt Restructure Agreement, the Borrower shall notify the Lender
promptly if the Borrower fails to make any payment to lessors,
suppliers, vendors, owners of royalty interest, tax authorities or
other Persons, where such nonpayment could reasonably be expected to
result in any Lien, other than a Permitted Encumbrance, against any
item of Collateral or otherwise have an Adverse Effect. At any time
such notification is due, the Borrower shall also provide the Lender
with a statement showing the identity of such creditors, the amount due
to each and the date each payment was due.
(n) INTEREST. The Borrower hereby promises to pay interest to
the Lender pursuant to the terms and at the rate stated in each Note on
all Obligations that relate to such Note (including Obligations to pay
fees or to reimburse or indemnify the Lender) after such Obligations
become due. The Borrower further agrees that (i) any interest which has
accrued on the Advancing Note and is not paid when due shall be added
to and become part of the Loans and (ii) any interest which has accrued
on the EnCap Junior Note and is not paid when due shall be added to the
principal balance thereof.
(o) COMPLIANCE WITH AGREEMENTS AND LAW. The Borrower will
perform all material obligations it is required to perform under the
terms of the Loan Documents. The Borrower will conduct its business and
affairs in compliance with all laws, regulations and orders applicable
thereto, including Environmental Laws, except where the failure to do
so would not have an Adverse Effect.
(p) INSURANCE. The Borrower shall keep, or cause to be kept,
all of the Mortgaged Properties (as that term is defined in the
Mortgages) that are fixtures or personal property insured by insurance
companies having a rating no lower than AAA by A.M. Best Company or
otherwise acceptable to the Lender against loss or damage by fire or
other risk usually insured against by owners or users of similar
properties in similar businesses under extended coverage endorsement
and against theft, burglary and pilferage, in amounts in accordance
with industry standards. All such insurance shall contain
30
<PAGE>
endorsements in form satisfactory to the Lender showing the Lender
as an additional party insured as its interest may appear. In
furtherance of the foregoing, the following types of insurance
covering the Collateral and the interest and liabilities incident to
the ownership, possession and operation thereof shall be secured by
the Borrower:
(i) Worker's compensation insurance and employer's
liability insurance covering the employees of the Borrower
engaged in operations contemplated hereunder in compliance
with all applicable state and federal law and endorsed to
provide all states coverage and occupational disease coverage,
as follows:
Workers Compensation Statutory
Employers Liability $1,000,000 Each Accident
(ii) Commercial general liability insurance with
coverage as follows:
<TABLE>
<CAPTION>
<S> <C>
Each Occurrence $1,000,000
Fire Damage (any one fire) $ 50,000
Medical Expense (any one person) $ 5,000
Personal & ADV Injury $1,000,000
General Aggregate $2,000,000
Products - ( Comp/Op Aggregate) $1,000,000
</TABLE>
(iii) Excess umbrella liability insurance with a
combined single limit of not less than $4,000,000 per
occurrence and policy aggregate;
(iv) Automobile liability coverage with a combined
single limit for both hired and non-owned autos of $1,000,000;
(v) OEE coverage with a COC limit of $10,000,000 and
CCC limit of $10,000,000; and
(vi) Property insurance fully covering the personal
property and fixtures subject to this Agreement.
During the period of the drilling of wells and the
construction of any other improvements comprising a part of
the Collateral, the Borrower shall, or as applicable, shall
cause its contractors or subcontractors to, obtain and
maintain well control insurance (including coverage for costs
of redrilling) and builder's risk insurance, as applicable, in
such form and amounts as the Lender may from time to time
reasonably request in writing and worker's compensation
insurance covering all persons employed by the Borrower or its
agents or subcontractors of any tier in connection with any
construction affecting the Collateral, including, without
limitation, all agents and employees of the Borrower and the
Borrower's subcontractors with respect to whom death or bodily
injury claims could be asserted against the Borrower.
31
<PAGE>
(q) CERTIFICATES OF INSURANCE. The Borrower shall deliver to
the Lender valid certificates of all insurance policies and all
endorsements thereto which are required under SECTION 7.1(p) to be
obtained and maintained by the Borrower. The Borrower shall deliver to
the Lender such certificates of insurance at the time of execution
hereof, and on or before the renewal date of each such policy of
insurance. If and when the Lender so requests in writing, the Borrower
shall also deliver to the Lender copies of the policy or policies of
such insurance.
(r) PRUDENT OPERATIONS. The Borrower shall prudently develop
and operate, and cause the prudent operation and maintenance of, the
Properties in a good and workmanlike manner consistent with prudent
operator practices to maximize production from or allocable to the
Properties over the productive life thereof.
(s) ENVIRONMENTAL AND OTHER LAWS. Except as disclosed in
SCHEDULE 7.1(s) and except where non-compliance would not reasonably be
expected to have an Adverse Effect, (i) the Borrower is conducting its
business in compliance with all applicable federal, state or local
laws, including Environmental Laws, and has been and is in compliance
with any licenses and permits required under any such laws which affect
or relate to the Collateral; (ii) none of the operations or properties
of the Borrower is the subject of federal, state or local investigation
evaluating whether any remedial action is needed to respond to a
release of any Hazardous Materials into the environment or to the
improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (iii) the Borrower has not filed
or received any notice under any federal, state or local law indicating
that the Borrower is or may be responsible for the improper release
into the environment, or the improper storage or disposal, of any
Hazardous Materials or that any Hazardous Materials has been improperly
released, or is or has been improperly stored or disposed of, upon the
Properties; and (iv) the Borrower is not aware of contingent liability
under any Environmental Laws or in connection with the release into the
environment, or the storage or disposal, of any Hazardous Materials,
upon the Properties.
(t) DAILY FIELD ACTIVITY REPORTS. At the Lender's written
request, the Borrower shall provide the Lender, to the extent possible,
by telecopy or e-mail, a daily report detailing all drilling,
completions and workovers from the preceding day with respect to the
Properties in form and substance reasonably satisfactory to the Lender.
(u) REPORTS. The Borrower shall provide the Lender with weekly
(or daily, as appropriate) reports by telecopy or e-mail setting forth
the quantities, types and specifications of Hydrocarbons produced from
or allocable to each of the Properties, and any notable field
activities with respect to the Properties, in form and substance
satisfactory to the Lender.
(v) AFE'S. The Borrower will provide the Lender with all
material authorizations for expenditures ("AFES") with respect to the
Properties, representing an estimate of work to be done, prior to
commencing the activity contemplated by such AFE. For purposes of this
SECTION 7.1(v), an AFE shall be deemed to be material if the aggregate
amount to be expended thereunder is greater than or equal to $25,000.
If any such AFE
32
<PAGE>
is inconsistent with or relates to an operation not contemplated by
SCHEDULE 2.1(b), such AFE shall be supported by appropriate invoices,
bids, estimates, contracts and all other relevant, available supporting
information.
(w) COOPERATION. The Borrower will provide the Lender with
copies of any tax assessments of any personal property of the Borrower
in the State of Mississippi and will provide such other records and
cooperation as the Lender may reasonably request in connection with
determining and minimizing the tax liability, if any, of the Lender to
pay Mississippi Finance Company Privilege Tax. The Borrower will
cooperate with the reasonable requests of the Lender for purpose of
preparing any return with respect to any such tax liability.
(x) POST-CLOSING TITLE OPINIONS. The Borrower will, within
sixty (60) days following the Closing Date, deliver to the Lender
"bring down" or "nothing further" certificates covering the Properties
and showing Defensible Title in the Properties in the Borrower subject
only to: (i) first priority liens created by the Mortgages in favor of
the Lender and (ii) other Permitted Encumbrances and otherwise
reasonably satisfactory in form and substance to the Lender.
(y) LEGAL FEES. The Borrower will pay on or before the Closing
Date, all reasonable legal expenses incurred by the Lender in
connection with the Credit Agreement and the Loan Documents; provided,
however, the Borrower shall not be obligated to pay in excess of
$50,000 in the aggregate for legal, title, environmental and other due
diligence expenses incurred by the Lender, and, thereafter, will
reimburse the Lender for all reasonable legal expenses incurred in
connection with any subsequent amendment, mortgage, extension or
renewal of any Loan Document or the legal expenses attributable to the
enforcement of the same.
(z) FACILITY FEE. The Facility Fee in the amount of $600,544
shall be payable by the Borrower to the Lender on the Closing Date.
(aa) LIMITATION ON MANAGEMENT CHANGES. The Borrower will,
during the term of this Agreement, retain the officers elected to their
offices on the Closing Date.
(bb) MAINTENANCE OF COLLATERAL VALUE. The Borrower will use
its best efforts to, and will cause each Operator to use its best
efforts to, maintain the economic value (other than ordinary depletion)
during the term of this Agreement of the Hydrocarbon reserves
constituting Collateral.
(cc) DEVELOPMENT OPERATIONS; ENCAP JUNIOR NOTE. The Borrower
will complete the Development Operations as set forth on SCHEDULE
2.1(b) in accordance with the Development Program as set forth on
SCHEDULE 7.1(cc) and will pay the EnCap Junior Note in accordance with
the terms thereof. Notwithstanding anything to the contrary in this
Agreement or in any other Loan Document, the undertakings of the
Borrower in this SECTION 7.1(cc) shall be and are full recourse
obligations of the Borrower.
(dd) OPERATING REPORTS; QUARTERLY MEETINGS. Within thirty (30)
days of the Closing Date, and on a calendar quarterly basis thereafter
on or before the fifth Business
33
<PAGE>
Day of each calendar quarter, the Borrower shall provide the Lender
with a rolling revenue, lease operating expense and capital
expenditure forecast by month covering the Borrower's interest in
the Properties for the succeeding twelve (12) month period (each
such forecast, an "OPERATING REPORT"). Such Operating Reports shall
include a brief discussion by the Borrower of operating and
financial variances from the prior Operating Report delivered to the
Lender. On or before the tenth Business Day of each calendar quarter
the Borrower shall make available responsible management to discuss
the most recently delivered Operating Report with representatives of
the Lender.
Section 7.2 NEGATIVE COVENANTS. The Borrower warrants, covenants and
agrees that until the full and final repayment of the Obligations and the
termination of each of the Loan Documents:
(a) NET WORTH. The Borrower will not permit its stockholders'
equity (determined in accordance with GAAP) to be less than zero at the
end of any calendar month;
(b) LIMITATION ON SALES OF COLLATERAL. The Borrower will not
convey, sell, transfer, lease, assign, exchange, alienate or otherwise
dispose of any Collateral or any interest therein, except for the sale
of Hydrocarbons in the ordinary course of business and/or other sales
to the extent pursuant to or as expressly allowed under this Agreement
and the Security Documents encumbering such Collateral;
(c) COMPENSATION. The Borrower shall not, directly or
indirectly, enter into any employment agreement or other arrangement
with or for the benefit of an officer, director or employee of the
Borrower other than for reasonable compensation for services as an
officer, director or employee;
(d) LIMITATION ON CREDIT EXTENSIONS. Neither the Borrower nor
any of its Affiliates will extend credit, make advances or make loans
to any Person other than in the ordinary course of business; provided,
however, that amounts outstanding on the Starbucks Note Receivable on
the Closing Date may remain outstanding but no additional sums may be
advanced thereunder.
(e) CERTAIN CONTRACTS; AMENDMENTS. The Borrower shall not
amend or permit any amendment to any contract or lease with respect to
the Collateral which releases, qualifies, limits, makes contingent or
otherwise modifies in a manner reasonably expected to have an Adverse
Effect;
(f) INDEBTEDNESS; LIENS. Except for Permitted Encumbrances or
as otherwise expressly provided herein, the Borrower shall not create,
incur, assume or suffer to exist any Liens against the Collateral, nor
shall the Borrower create, incur, assume or suffer to exist any Debt
except Obligations to the Lender hereunder, trade payables incurred in
the ordinary course of the Borrower's business, the Grabois Note, the
Novak Note and Debt to Affiliates the repayment of which has been
subordinated to the repayment of the Obligations pursuant to the
Subordination Agreements. The Borrower shall not sell, discount or
factor its accounts, instruments, intangibles, leases or chattel paper
constituting a part of the Collateral;
34
<PAGE>
(g) LIABILITIES. Except as expressly provided herein, the
Borrower shall not assume, guaranty, or endorse or otherwise become
directly or contingently liable in connection with any other liability
of any other Person other than majority owned Affiliates, except for
the indemnification contained herein; provided, however, that the
foregoing shall not prohibit the endorsement of negotiable instruments
for deposit or collection or incurrence of obligations under operating
agreements and similar transactions in the ordinary course of business.
For the purposes hereof, "guaranty" shall include any agreement,
whether such agreement is on a contingency basis or otherwise, to
purchase, repurchase or otherwise acquire any obligation or liability
of any other Person, or to purchase, sell or lease, as lessee or
lessor, property or services in any such case primarily for the purpose
of enabling another Person to make payment of any such debt or
liability, or to make any payment (whether as a capital contribution,
purchase of any equity interest or otherwise) to assure a minimum
equity, asset base, working capital or other balance sheet or financial
condition, in connection with Debt or liability of another Person, or
to supply funds to or in any manner invest in another Person in
connection with such Person's Debt or liability;
(h) CANCELLATION OF CLAIMS. The Borrower shall not cancel any
claim of or debt owed the Borrower relating to the Properties in excess
of a total of $50,000 during the term of the Loans, except for
reasonable consideration and in the ordinary course of its business;
(i) DEFAULTS. Except as previously disclosed to the Lender,
the Borrower shall not cause a default under any lease, mortgage, deed
of trust or lien with respect to the Properties;
(j) SECURITY INTERESTS AND LIENS. Subject to the Borrower's
right to contest in good faith or cure within thirty (30) days of the
filing of any Lien, and except as provided in the Debt Restructure
Agreement, the Borrower shall not suffer to exist any valid Lien
against the Properties or consent to the filing of any financing
statements on any of the Collateral, other than the Liens created by
the Security Documents and other Permitted Encumbrances;
(k) LIMITATION ON FUNDAMENTAL CHANGES. The Borrower will not
enter into any merger, consolidation or amalgamation, or liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution),
or make any material change in its present method or conducting
business;
(l) LIMITATION ON LOCATION CHANGES. The Borrower shall not
transfer its principal office or its registered offices outside of the
State of Texas or keep Collateral at any location(s) other than those
at which the same are presently kept in accordance with SECTION 6.1
without prior written notice to the Lender and the execution and
delivery to the Lender of such additional Security Documents as may be
reasonably required by the Lender in connection therewith; and
(m) AFFILIATE TRANSACTIONS. The Borrower shall not sell or
transfer any property or assets to, or purchase or acquire any property
or assets from, or otherwise engage in any
35
<PAGE>
transactions with any of its Affiliates except in the ordinary
course of business and on terms no less favorable to the Borrower
than could be obtained on an arm's length basis from unrelated third
parties.
ARTICLE 8: FURTHER RIGHTS OF LENDER AND BORROWER
Section 8.1 MAINTENANCE OF SECURITY INTERESTS. Until the Obligations
are repaid in full, the Borrower, at its own expense, shall do all things
reasonably requested by the Lender in writing and shall deliver all instruments
reasonably requested by the Lender in writing to protect or perfect any security
interest, mortgage or lien given hereunder or under any Security Documents,
including, without limitation, financing statements under the Uniform Commercial
Code. The Borrower hereby authorizes the Lender, during the continuance of any
Event of Default, to appoint such Person or Persons as the Lender may designate
as its attorney-in-fact to endorse the name of the Borrower on any checks,
notes, drafts or other forms of payment or security that may rightfully come
into the possession of either the Lender or any Affiliate of the Lender, to sign
the Borrower's name on invoices or bills of lading, drafts against customers,
notices of assignment, verifications and schedules that relate exclusively to
the Collateral and, generally, to do all things reasonably necessary to carry
out this Agreement and the Security Documents to the extent required of the
Borrower pursuant to this SECTION 8.1 and SECTION 11.10. The powers granted
herein, being coupled with an interest, are irrevocable so long as any
Obligations are outstanding. Neither the Lender nor its attorney-in-fact shall
be liable for any act or omission, error in judgment or mistake of law so long
as the same is not the result of a malicious act, willful misconduct, or gross
negligence of the Lender or its attorney-in-fact. Upon payment and performance
of all Obligations of the Borrower to the Lender, such power of attorney will
become null and void, and, upon request by the Borrower, the Lender or any
Noteholder will provide an instrument in recordable form that terminates such
procuration.
Section 8.2 PERFORMANCE OF OBLIGATIONS. In the event that the Borrower
fails to purchase or maintain insurance in accordance with the requirements of
this Agreement, or to pay any tax, assessment, government charge or levy, except
as the same may be otherwise permitted hereunder, or in the event that any Lien
prohibited hereby shall not be paid in full or discharged, or in the event that
the Borrower shall fail to perform or comply with any other covenant, promise or
Obligation to the Lender hereunder or under any Loan Document, which failure may
reasonably be expected to cause an Adverse Effect, the Lender may, following
written notice to the Borrower affording the Borrower ten (10) days after the
date of such notice to cure the relevant circumstance, but shall not be required
to, perform, pay, satisfy, discharge or bond the same for the account of the
Borrower, and all monies so paid by the Lender, including, without limitation,
reasonable attorneys' fees and disbursements, shall, at the Lender's option,
either be treated as an additional Obligation of the Borrower to the Lender
hereunder and under the other Loan Documents, or be treated as a debit to the
Borrower Sub-Account in accordance with SECTION 2.7(a). If the Lender has
attempted to send the notice required hereby but, as the result of inadvertence
not constituting gross negligence or willful misconduct, such notice is
improperly addressed or is not timely delivered, the failure of the Borrower to
have timely received such notice shall not in any way prohibit or otherwise
limit the exercise by the Lender of its rights under this Section.
36
<PAGE>
Section 8.3 OVERRIDING ROYALTY INTEREST. At Closing, the Borrower shall
assign the Overriding Royalty Interest to the Lender by executing, and
delivering to the Lender, the Overriding Royalty Interest Conveyance.
Section 8.4 ORRI OPTION. Pursuant to the terms of the Overriding
Royalty Interest Conveyance, the Borrower shall have an option to repurchase the
Overriding Royalty Interest after the Closing Date at a price (the "PURCHASE
PRICE") to be determined by a Reserve Report that incorporates, without
limitation, forward pricing determined by the Engineers pursuant to the
parameters set forth on SCHEDULE 7.1(f)(i), historical operating expenses
verified by the Engineers and proven reserves attributable to the Overriding
Royalty Interest that is prepared by Engineers, such as Ryder Scott, Netherland
Sewell or the Engineers that prepared the Reserve Report most recently delivered
hereunder, using a ten percent (10%) discount rate; provided, however, that the
ORRI Option is a non-assignable option granted by the Lender solely to the
Borrower and, notwithstanding any right that may be granted to the Borrower in
the Overriding Royalty Interest Conveyance to assign, sell, transfer or
otherwise convey any of the Properties, the exercise of the ORRI Option shall be
solely by the Borrower and shall be with relation to the entire Overriding
Royalty Interest as granted in the Overriding Royalty Interest Conveyance.
Furthermore, any notice to the Borrower hereunder shall be deemed as actual
notice to its assignees of the Properties ("ASSIGNEES"), if any. The Borrower
may exercise its option by sending written notice of such exercise to the Lender
specifying an effective date for the determination of the Purchase Price that is
the first day of the month preceding the month in which the notice is delivered
to the Lender ("ORRI SALE DATE"), accompanied by the Reserve Report that
establishes the Purchase Price, and stating that the Borrower is ready, willing
and able to close such purchase and pay the Purchase Price within thirty (30)
days from the date of the notice, without any conditions with respect to
obtaining financing, or otherwise. If the Purchase Price established in the
Reserve Report was appropriately determined based on the parameters set forth in
SCHEDULE 7.1(f)(i), then the parties shall proceed to close such purchase and
sale transaction within thirty (30) days from the Lender's receipt of the
Borrower's option exercise notice. At the closing, the Borrower shall pay the
Purchase Price to the Lender in cash or by wire transfer to an account
designated by the Lender, and the Lender shall assign the Overriding Royalty
Interest to the Borrower by recordable form of assignment with a special
warranty of title by, through or under the Lender, but not otherwise. The
Purchase Price shall be adjusted downward by the amount of any net revenues
received by the Lender prior to the closing for production attributable to the
Overriding Royalty Interest subsequent to the ORRI Sale Date, and shall be
adjusted upward for any revenues that have accrued with respect to the
Overriding Royalty Interest for production prior to the ORRI Sale Date, that
have not yet been paid to the Lender. After the closing, any revenues received
by the Lender that are attributable to the Overriding Royalty Interest shall be
promptly remitted to the Borrower. If the Lender does not agree with the
Purchase Price proposed by the Borrower in the option exercise notice, it shall
notify the Borrower promptly and in any event within ten (10) days after the
receipt of such notice, and the parties shall endeavor to reach agreement on the
Purchase Price within thirty (30) days thereafter. If they are able to do so,
closing, as provided above, shall occur within ten (10) days after they have
reached agreement on the Purchase Price. If they are unable to reach agreement
on the Purchase Price, either party may elect to have the Purchase Price
determined through arbitration in accordance with ARTICLE 12 hereof, and the
closing shall then occur within ten (10) days after the arbitrator(s) have
notified the Lender and the Borrower of the Purchase Price that has been so
determined. After the Borrower has notified the Lender of the Borrower's
37
<PAGE>
election to exercise its option to purchase the Overriding Royalty Interest,
such election shall not be revocable, and the Lender shall have the right to
enforce specific performance of the Borrower's resulting obligation to purchase,
so long as the Lender can deliver title to the Overriding Royalty Interest to
the Borrower without being in violation of its special warranty of title.
Section 8.5 NON-RECOURSE. It is expressly understood and agreed that,
except as set forth in SECTION 7.1(cc), the undertaking of the Borrower to pay
any indebtedness or perform any obligation under the Loan Documents is included
herein for the sole purpose of establishing the continuing existence of the debt
and the maturity of such debt. Except as set forth in SECTION 7.1(cc), and
notwithstanding anything else in the Loan Documents to the contrary, including,
but not limited to, this Agreement and any certificate, opinion, or documents of
any nature whatsoever, neither the Lender nor its successors or assigns, nor any
Noteholder, nor any other holder or holders of the indebtedness will have any
claim, remedy, or right to proceed against the Borrower for the payment of any
deficiency or any other sum or performance of any obligation of any nature
whatsoever under the Loan Documents from any source other than the Collateral,
for the payment of such indebtedness or the satisfaction of such liability or
for the satisfaction of any obligation by the Borrower to the Lender, whether
sounding in contract, tort or otherwise; provided, however, that nothing
contained herein will limit, restrict, or impair the rights of the holders of
the debt: (i) to accelerate the maturity of the debt during the continuance of
an Event of Default, to bring suit and obtain a judgment against the Borrower on
the debt for purposes of enforcement of any Security Document, provided that the
satisfaction of such judgment is limited solely to the Collateral, and the
exercise of all of the Lender's rights and remedies to foreclose or otherwise
realize upon the Collateral, including rights to collect sums due or to become
due under the Collateral; or (ii) in the event of fraud or misapplication of
funds on the part of the Borrower.
Section 8.6 REMOVAL AND APPOINTMENT OF OPERATOR. Subject to the terms
of operating agreements affecting the Properties, the Lender shall, in its
reasonable discretion, have the right to approve or disapprove any action taken
by the Borrower to appoint, remove or replace the Operator of any of the
Properties. The Borrower shall not directly or indirectly modify or amend
(including, without limitation, by waiver of any term thereof) any Operating
Agreement, or appoint, remove or replace any Operator, without the prior written
consent of the Lender.
Section 8.7 SET-OFF RIGHTS. Upon the occurrence and during the
continuance of an Event of Default, the Lender shall have the right to set-off
and apply against the Obligations in such manner as the Lender may determine,
upon written notice at any time to the Borrower, any and all deposits (general
or special, time or demand, provisional or final) or other sums at any time
credited by or owing from the Lender or any depositary to the Borrower whether
or not the Obligations are then due, except there shall not be such right
against any amounts owing to third-party working interest and royalty interest
holders of which the Lender shall have been notified. The Lender shall provide
notice to the Borrower not later than five (5) days following any application of
such funds.
38
<PAGE>
ARTICLE 9: CLOSING; CONDITIONS TO CLOSING
Section 9.1 CLOSING. Subject to the conditions set forth in this
Agreement, the closing of the transactions contemplated by this Agreement (the
"CLOSING") shall occur at a mutually agreeable time on or before August 20,
1999. The date the Closing actually occurs is hereby called the "CLOSING DATE."
The Closing shall be held at the offices of Akin, Gump, Strauss, Hauer & Feld,
L.L.P. in Houston, Texas, or at such other place as the Borrower and the Lender
may agree in writing.
Section 9.2 CONDITIONS TO CLOSING. As conditions precedent to the
making of the Initial Loan hereunder and to the making of any Development
Loans:
(a) the Borrower shall deliver to the Lender (except as
otherwise provided below) the following documents duly executed and in
form and substance satisfactory to the Lender:
i. the Advancing Note and the Encap Junior
Note, multiple counterparts of this
Agreement;
ii. a certificate of the secretary or assistant
secretary of the Borrower dated the Closing
Date, certifying the incumbency of its
officers executing this Agreement and any
other documents required hereby and
certifying resolutions adopted by the board
of directors of the Borrower authorizing
the Borrower's execution and delivery of
this Agreement, the Notes, the Mortgage and
all other documents and instruments
contemplated by this Agreement;
iii. a certificate of the president or a vice
president of the Borrower dated the Closing
Date, certifying the truth and accuracy of
the representations and warranties of the
Borrower set forth in this Agreement and
the Borrower's performance and compliance
with all agreements and covenants required
by this Agreement to be performed or
complied with prior to the making of the
Loans;
iv. a copy of the Articles of Incorporation of
the Borrower certified by the Secretary of
State of the State of Texas and a copy of
its bylaws certified by the secretary or an
assistant secretary of the Borrower;
v. certificates, as of the most recent dates
practicable, of the Secretary of State of
the State of Texas attesting to the
Borrower's existence, and from the
appropriate governmental authority of each
state in which the Borrower is qualified to
do business as a foreign corporation
attesting to such qualification, and from
the office of the comptroller
39
<PAGE>
of public accounts, department of revenue
or taxation, or other appropriate
governmental authority of each of the
foregoing states, attesting to the good
standing of the Borrower;
vi. a certificate of the president or chief
financial officer of the Borrower,
certifying: (A) a consolidated and
consolidating balance sheet of the Parent
and the Borrower which is complete and
correct in all respects and fairly presents
the Parent's and the Borrower's financial
condition in accordance with GAAP; (B) that
the Borrower has no contingent liabilities,
liabilities for taxes, unusual forward or
long term commitments, or unrealized or
unanticipated losses from any unfavorable
commitments which are not disclosed in such
balance sheet, which either individually or
in the aggregate would be material;
(C) that no action or proceeding is pending
or is threatened against the Borrower at
law, in equity or otherwise, before any
court, board, commission, agency or
instrumentality of the federal or state
government or of any municipal government
or any agency, or before any arbitrator,
and no investigation has been commenced
before any such entity other than disclosed
in writing to the Lender; (D) that as of
Closing and other than has been disclosed
in writing to the Lender, no unpaid bills
for improvements to any of the Properties
exist which may give rise to mechanics',
materialmen's or other similar liens or
privileges arising by operation of law,
except for unpaid bills not yet due and
payable; and (E) that no suit or other
proceeding by any third party is pending or
threatened before any court or governmental
agency seeking to restrain, enjoin or
prohibit or declare illegal, or seeking
damages from the Borrower or any Operator,
in connection with the transactions
contemplated herein;
vii. [intentionally omitted];
viii. the Mortgages dated as of the Closing Date
and in as many counterparts as the Lender
may require;
ix. U.C.C.-1 financing statements to be filed
under the Uniform Commercial Code;
x. the written opinion of the Borrower's Texas
and Mississippi counsel, as applicable,
dated the Closing Date and addressed to the
Lender in form and substance satisfactory
to the Lender, stating that: (A) the
Borrower is duly incorporated and validly
existing; (B) the Loan
40
<PAGE>
Documents executed at Closing are validly
authorized and executed, and are
enforceable in accordance with their terms;
(C) the Loans do not violate any applicable
state or federal laws; (D) the Lender, its
Affiliates, the Lender's counsel and the
Lender's lenders and their respective
counsels may rely on the opinion; and
(E) such other matters as the Lender or its
counsel may require;
xi. evidence that the Borrower has obtained
insurance in accordance with SECTIONS
7.1(p) and (q) hereof;
xii. a Reserve Report satisfactory to the
Lender's staff petroleum engineer from an
engineer attesting to the quantity of
reserves underlying the Properties and
their classification (e.g., proved
undeveloped), as calculated in accordance
with the Society of Petroleum Engineers
standards;
xiii. Title Opinions satisfactory to the Lender
establishing that the Borrower has acquired
Defensible Title to the Properties, subject
only to Permitted Encumbrances and the
Existing Liens;
xiv. the Swap Agreement;
xv. the results of Uniform Commercial Code
searches showing all financing statements
and other documents or instruments on file
against the Borrower, in the Offices of the
Secretaries of State of the State of Texas
and Mississippi and in the counties or
parishes in which Properties are deemed to
be located for recording purposes;
xvi. evidence that any and all fees required
under this Agreement as of the date of the
making of the relevant Loan are paid in
full;
xvii. the Security Agreement;
xviii. the Overriding Royalty Interest Conveyance;
xix. the Hydrocarbon Purchase and Sale
Agreement;
xx. the Cash Collateral Agreement;
xxi. [intentionally omitted]; and
xxii. such other documents and instruments as the
Lender may reasonably request.
41
<PAGE>
None of the foregoing instruments will be required to be redelivered at the
time of the advance of any Development Loans subsequent to the date of the
making of the Initial Loan, with the exception of those identified in
paragraph (a)(iii), paragraph (a)(ix) (if the operations to be funded by such
Development Loan involve the installation of additional major items of
Equipment for which the Lender desires to file a new UCC-1 or UCC-3), and
paragraphs (a)(xv) and (a)(xxii) (only if requested by the Lender).
(b) the Lender shall have entered into the Assignments of Note
and Liens with the Existing Debt Holders and consummated the
transactions thereunder;
(c) the Lender shall have entered into the Subordination
Agreements with the holders of all Debt to Affiliates other than Todd
E. Grabois;
(d) the Parent shall have executed and delivered the Parent
Guaranty and delivered certificates and instruments similar to those
contemplated in clauses (a)(ii) through (a)(v) above;
(e) the Borrower and the EnCap Buyers shall have executed and
delivered the EnCap Purchase and Sale Agreement;
(f) the Parent and Coral shall have executed and delivered
the Coral Letter Agreement and consummated the Coral Transaction;
(g) the Borrower and Shell shall have executed and delivered
the Shell Letter Agreement and consummated the Shell Transaction; and
(h) The Parent, the Borrower, the Participating Creditor
Collateral Agent, the Participating Creditor Deposit Agent, and
Participating Creditors holding no less than eighty-five percent (85%)
by dollar amount of the Eligible Claims (as such term is defined in
the Debt Restructure Agreement), and the Lender (for the limited
purpose stated therein) shall have executed and delivered the Debt
Restructure Agreement.
Section 9.3 CONDITIONS PRECEDENT TO FUNDING. The Lender shall not be
obligated to make any loan available (other than advances under a Development
Loan for which: (i) a conforming Request for Advance has been submitted to the
Lender; (ii) the amount is within the limitations set forth in SECTION 2.1(b);
and (iii) the Lender has confirmed its obligation to advance in accordance with
SECTION 2.1(b)) unless the following conditions precedent have been satisfied:
(a) There is no Event of Default, Unmatured Event of Default
or Tax Claim under this Agreement, the Mortgage or any other Loan
Document;
(b) all of the Borrower's representations and warranties made
in any Loan Document shall be true and correct as if made on the date
of such advance (except to the extent that the facts upon which such
representation are based have been changed by the extension of credit
hereunder);
42
<PAGE>
(c) the Borrower shall have performed and complied with all
agreements and conditions in the Loan Documents which are required to
be performed or complied with by it on or prior to the date of such
Loans;
(d) no law, regulation, order, judgment or decree of any
governmental authority is in effect or pending which shall enjoin,
prohibit or restrain such loan or impose, or result in the imposition
of, any adverse condition upon the Lender;
(e) the Lender shall have received all documents and
instruments which the Lender has then reasonably requested as to: (i)
the accuracy and validity of or compliance with all representations,
warranties and covenants made by the Borrower in any Loan Document;
(ii) the satisfaction of all conditions contained herein or therein;
and (iii) all other matters pertaining hereto and thereto. All such
additional documents and instruments shall be satisfactory to the
Lender (in reasonable exercise of its discretion) in form, substance,
and date;
(f) the Lender shall have received satisfactory due diligence
analysis including, but not limited to, financial and operational
data, title and environmental review, all such data to be provided by
the Borrower;
(g) the Lender shall have received satisfactory information
regarding existing gas sales and oil sales with respect to production
of Hydrocarbons from or allocable to the Properties, which will
include, for gas sales on a well-by-well basis, where applicable,
transportation costs, gathering costs, processing costs, gas stream
heating content, then-current market prices for gas of similar quality
and copies of existing sales contracts and for oil sales, individual
well specific gravity of produced oil, transportation costs, sulfur
content, purchase bonuses, then-current market prices for oil of
similar quality, and copies of existing sales contracts; and
(h) no material adverse change has occurred in the financial
condition or operations of the Borrower or any Operator, or with
respect to the Properties.
Section 9.4 CONDITION PRECEDENT TO FUNDING DEVELOPMENT LOAN.
Notwithstanding anything contained in this Agreement or any other Loan
Document to the contrary, the Lender shall not in any event be obligated to
make any loan under the Development Loan until such time, if any, as the
Lender has received certified copies of resolutions of the board of directors
of the Borrower and any required shareholder consents authorizing the
Development Program.
ARTICLE 10: EVENTS OF DEFAULT AND REMEDIES
Section 10.1 EVENTS OF DEFAULT. Each of the following events
constitutes an Event of Default under this Agreement:
(a) The Lender fails to receive its portion of Net Revenue
(Base Net Revenue and Excess Net Revenue multiplied by the applicable
Dedication Rates) in accordance with SECTION 2.7(b) when the same is
due and payable;
43
<PAGE>
(b) projected Net Revenue attributable to Proved Reserves,
based on the most recent Reserve Report delivered to the Lender after
the Closing Date, is insufficient to fully amortize the Loans by their
stated maturity or Borrower's share of projected Net Revenues
attributable to Proved Reserves, based on such Reserve Report, is
insufficient to fully pay the EnCap Junior Note at maturity;
(c) any Loan Document or the Debt Restructure Agreement at any
time ceases to be valid, binding and enforceable against the Borrower
or any other Person party thereto other than the Lender for any reason
other than its release or subordination made with the prior written
consent of the Lender, and such cessation is not remedied in full
within fifteen (15) days after the Borrower receives written notice
thereof;
(d) any "Event of Default", as defined in the Mortgage (other
than an event which is referred to in subsection (a) through (c) of
this SECTION 10.1), occurs under the Mortgage, and the same is not
remedied within the applicable period of grace (if any) provided in
the Mortgage, or any event of default occurs under any Security
Document or commodity price risk management agreement with respect to
the Properties;
(e) the Borrower fails to duly observe, perform or comply
with: (i) SECTION 7.1(l); (ii) any covenant, agreement, condition or
provision set forth in SECTION 7.2; or (iii) any other covenant,
agreement, condition or provision of any Loan Document, and, in the
case of matters referred to in this clause (iii) only, if such failure
is not remedied within thirty (30) days of the time at which the
Borrower receives written notice from the Lender or otherwise knows or
should have known of such failure;
(f) any representation or warranty previously, presently or
hereafter made in writing by or on behalf of the Borrower in
connection with any Loan Document shall prove to have been false or
incorrect in any material respect on any date on or as of which made;
(g) any Lien against any of the Properties resulting from a
Tax Claim for $50,000 or more is asserted against the Borrower and
such Tax Claim is not withdrawn, formally disputed in good faith, or
otherwise disposed of within thirty days (30) thereafter;
(h) any Lien for more than $250,000 is filed of record against
the Properties and is not bonded or discharged within 60 days;
(i) the Borrower or any Operator materially violates any
Environmental Law with respect to the Properties;
(j) the Borrower or any Operator fails to comply in all
material respects with all pertinent federal, state and other laws,
rules and regulations pertaining in any way to the Borrower or the
Properties;
(k) the Borrower withdraws or is removed as operator of the
Properties, and the replacement operator is unacceptable to the
Lender;
44
<PAGE>
(l) Subject to Permitted Encumbrances, and except for such
resulting from any failure by the Lender to duly file applicable
Security Documents executed and delivered by the Borrower or
applicable UCC-3 continuation filings not required to be executed by
the Borrower, the Lender shall at any time not have a perfected first
priority security interest and/or Lien on all or any part of the
Collateral;
(m) the Borrower's Working Interest and/or Net Revenue
Interest constituting any Property is decreased, other than by virtue
of the Overriding Royalty Interest Conveyance, from those set forth in
Exhibit A to the Mortgage other than pursuant to a Permitted
Encumbrance or with the prior written consent of the Lender;
(n) the Borrower:
i. has entered against it a judgment,
decree or order for relief by a
court of competent jurisdiction in
an involuntary proceeding commenced
under any applicable bankruptcy,
insolvency or other similar law of
any jurisdiction now or hereafter
in effect, including the federal
Bankruptcy Code, as from time to
time amended, or has any such
proceeding commenced against it
which remains undismissed for a
period of ninety (90) days; or
ii. commences a voluntary case under
any applicable bankruptcy,
insolvency or similar law now or
hereafter in effect, including the
federal Bankruptcy Code, as from
time to time amended; or applies
for or consents to the entry of an
order for relief in an involuntary
case under any such law; or makes a
general assignment for the benefit
of creditors; or fails generally to
pay (or admits in writing its
inability to pay) debts as such
debts become due; or takes
corporate or other action to
authorize any of the foregoing; or
iii. suffers the appointment of or
taking possession by a receiver,
liquidator, assignee, custodian,
trustee, sequestrator or similar
official of all or a substantial
part of its assets or of any part
of the Collateral in a proceeding
brought against or initiated by it,
and such appointment or taking
possession is neither made
ineffective nor discharged within
sixty (60) days after the making
thereof, or such appointment or
taking possession is at any time
consented to, requested by or
acquiesced to by it; or
iv. suffers the entry against it of a
final judgment for the payment of
money in excess of $250,000, unless
the same is covered by insurance or
is discharged within sixty (60)
days after the date of entry
thereof or an appeal or
45
<PAGE>
appropriate proceeding for review
thereof is taken within such period
and a stay of execution pending such
appeal is obtained; or
v. suffers a writ or warrant of
attachment or any similar process
to be issued by any court against
all or any substantial part of its
assets or any part of the
Collateral, and such writ or
warrant of attachment or any
similar process is not stayed or
released within sixty (60) days
after the entry or levy thereof or
after any stay is vacated or set
aside; or
vi. fails to pay any one or more items
of Indebtedness (other than
Indebtedness hereunder) in excess
of $250,000.00 in the aggregate or
any interest or premium thereon
when due (whether at scheduled
maturity or by acceleration, demand
or otherwise) and such failure
shall continue after any applicable
grace period specified in the
agreement or instrument relating to
such Indebtedness or any other
event shall occur and continue
after any applicable grace period
specified in such agreement or
instrument, if the effect of such
default or event is to accelerate
or permit the acceleration of, the
maturity of such Indebtedness, or
if, as the result of such a
default, any such Indebtedness
shall be declared to be due and
payable, or is required to be
prepaid, prior to the stated
maturity thereof;
(o) any "Event of Default" as defined in the Debt
Restructure Agreement, whether on the part of the Borrower, the
Participating Creditors, or otherwise, occurs;
(p) any Change of Control occurs;
(q) the approval by the board of directors of the Borrower
and the obtaining of any required shareholder consent with respect
to the Development Program shall not have occurred on or prior to
September 30, 1999;
(r) the completion of the Development Program shall not
have occurred on or prior to the eighteen month anniversary of the
Closing Date;
(s) the EnCap Investment shall not have been consummated
on or before the close of business on the Business Day after the
Closing date;
(t) the Borrower shall not have made all payments required
under Section 8.01 of the Debt Restructure Agreement on or before
the earlier of (i) the fifteenth day after the Closing Date and
(ii) the day by which such payments are required to have been made
under the Debt Restructure Agreement;
46
<PAGE>
(u) the Lender shall not have received on or before the
seventh day after the Closing Date written confirmation from the
Parent, the Borrower and the Collateral Agent that all of the
conditions to the obligations of the Parent, the Borrower, the
Participating Creditors or the Collateral Agent under the Debt
Restructure Agreement have been satisfied; or
(v) the Borrower shall not have (i) paid in full the
indebtedness identified on Schedule 2 and (ii) obtained the release of
any Liens filed of record in respect thereof on or before December 31,
1999.
Section 10.2 ACCELERATION.
(a) AUTOMATIC ACCELERATION. Upon the occurrence of an Event of
Default described in SUBSECTION (j)(i), (j)(ii) or (j)(iii) of SECTION
10.1, all of the Obligations shall thereupon be immediately due and
payable, without demand, presentment, notice of demand or of dishonor
and nonpayment, protest, notice of protest, notice of intention to
accelerate, declaration or notice of acceleration, or any other notice
or declaration of any kind, all of which are hereby expressly waived by
the Borrower and each obligor who at any time ratifies or approves this
Agreement. After any acceleration under this subsection, any obligation
of the Lender to make any further Loans or advances of any kind under
any Loan Document shall at the option of the Lender be permanently
terminated.
(b) PARTIAL ACCELERATION. Upon the occurrence and during the
continuance of any Event of Default described in SUBSECTION (a), (c),
(d) or (e) of SECTION 10.1 with respect to any Obligation owing or Loan
Document executed in connection therewith, the Lender at any time and
from time to time may declare any and all such Obligations immediately
due and payable, without demand, presentment, notice of demand or of
dishonor and nonpayment, protest, notice of protest, notice of
intention to accelerate, declaration or notice of acceleration, or any
other notice or declaration of any kind, all of which are hereby
expressly waived by the Borrower. Upon the Lender's acceleration of any
or all of the Obligations, it shall use commercially reasonable efforts
to give the Borrower reasonably contemporaneous written notice thereof,
but any inadvertent error in the timing or manner of giving such notice
shall not affect, in any way, the otherwise proper acceleration under
the terms of this Agreement of such Obligations.
(c) TAX CLAIMS. Upon the occurrence and during the continuance
of an Event of Default described in SUBSECTION (g) of SECTION 10.1, the
Lender may at any time and from time to time and without notice to the
Borrower, except as may otherwise be required hereunder, declare any or
all of the Obligations associated with such Tax Claim (or which the
Lender in its reasonable discretion believes will be likely to become
associated with such Tax Claim or any similar future Tax Claim)
immediately due and payable, and all such Obligations shall thereupon
be immediately due and payable, without demand, presentment, notice of
demand or of dishonor and nonpayment, protest, notice of protest,
notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of
which are hereby expressly waived by the Borrower. Upon the Lender's
acceleration of any or all of the Obligations, it shall use
commercially
47
<PAGE>
reasonable efforts to give the Borrower reasonably contemporaneous
written notice thereof, but any inadvertent error in the timing or
manner of giving such notice shall not affect, in any way, the+
otherwise proper acceleration under the terms of this Agreement of
such Obligations.
(d) OTHER ACCELERATION. Upon the occurrence and during the
continuance of any Event of Default not described in the preceding
SUBSECTIONS (a), (b) or (c) of this SECTION 10.2, the Lender may at any
time and from time to time and without notice to the Borrower, except
as may otherwise be required hereunder, declare any or all of the
Obligations immediately due and payable, and all such Obligations shall
thereupon be immediately due and payable, without demand, presentment,
notice of demand or of dishonor and nonpayment, protest, notice of
protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of
which are hereby expressly waived by the Borrower. Upon the Lender's
acceleration of any or all of the Obligations, it shall use
commercially reasonable efforts to give the Borrower reasonably
contemporaneous written notice thereof, but any inadvertent error in
the timing or manner of giving such notice shall not affect, in any
way, the otherwise proper acceleration under the terms of this
Agreement of such Obligations.
Section 10.3 REMEDIES. If any Event of Default shall occur and be
continuing, the Lender's obligation to make any Development Loans shall be
suspended, except as expressly provided to the contrary herein, and the
Lender may protect and enforce its rights under the Loan Documents by any
appropriate proceedings, including proceedings for specific performance of
any covenant or agreement contained in any Loan Document, and the Lender may
enforce the payment of any Obligations due or enforce any other legal or
equitable right. All rights, remedies and powers conferred upon the Lender
under the Loan Documents shall be deemed cumulative and not exclusive of any
other rights, remedies or powers available under the Loan Documents or at law
or in equity. Notwithstanding the foregoing, the payment of the Obligations
of the Borrower shall be made solely from the cash flows from the Collateral,
or in the Event of Default by the Borrower, from any amounts derived from the
exercise by the Lender of its rights hereunder, or under any other Loan
Document, with regard to the Collateral including proceeds of foreclosure;
but without recourse by the Lender to any of the cash flows, properties or
other assets of the Borrower not included in or derived from the Collateral.
If any Unmatured Event of Default shall occur and be continuing, the Lender's
obligation to make any Development Loans shall be suspended, except as
expressly provided to the contrary herein, so long as any such Unmatured
Events of Default or resulting Event of Default is continuing.
Section 10.4 INDEMNITY. Except to the extent expressly provided
otherwise in another Loan Document, the Borrower agrees to indemnify the
Lender, upon written demand, from and against any and all liabilities,
obligations, claims, losses, damages, penalties, fines, actions, judgments,
suits, settlements, costs, expenses or disbursements (including reasonable
fees of attorneys, experts and advisors) of any kind or nature whatsoever (in
this section collectively called "liabilities and costs") which to any extent
(in whole or in part) may be imposed on, incurred by or asserted against the
Lender growing out of, resulting from or in any other way associated with any
of the Collateral, the Loan Documents or the transactions and events
including the enforcement or defense thereof at any time associated therewith
or contemplated therein (including any violation or noncompliance with any
Environmental Laws by any Person
48
<PAGE>
or any liabilities or duties of any Person with respect to Hazardous
Materials found in or released into the environment). THE FOREGOING
INDEMNIFICATION SHALL APPLY WHETHER SUCH LIABILITIES AND COSTS ARE IN ANY WAY
OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR
OMISSION OF ANY KIND BY THE LENDER; PROVIDED, HOWEVER, THAT, UNDER THIS
SECTION, NO PERSON SHALL BE ENTITLED TO RECEIVE INDEMNIFICATION FOR THAT
PORTION, IF ANY, OF ANY LIABILITIES AND COSTS WHICH IS CAUSED BY SUCH
PERSON'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. As used in this section the
term "Lender" shall refer not only to the Person designated as such in
Section 1.1, but also to its lender(s) and shareholders and, with respect to
each of the foregoing, each director, officer, agent, attorney, employee,
representative and Affiliate of such Person.
ARTICLE 11: MISCELLANEOUS
Section 11.1 WAIVERS AND AMENDMENTS; ACKNOWLEDGMENTS AND ADMISSIONS.
(a) WAIVERS AND AMENDMENTS. No failure or delay (whether by
course of conduct or otherwise) by the Lender in exercising any right,
power or remedy which the Lender may have under any of the Loan
Documents shall operate as a waiver thereof or of any other right,
power or remedy, nor shall any single or partial exercise by the Lender
of any such right, power or remedy preclude any other or further
exercise thereof or of any other right, power or remedy. No waiver of
any provision of any Loan Document and no consent to any departure
therefrom shall ever be effective unless it is in writing and signed by
the Lender, and then such waiver or consent shall be effective only in
the specific instances and for the purposes for which given and to the
extent specified in such writing. No notice to or demand on the
Borrower shall in any case of itself entitle the Borrower to any other
or further notice or demand in similar or other circumstances. This
Agreement and the other Loan Documents set forth the entire
understanding and agreement of the parties hereto and thereto with
respect to the transactions contemplated herein and therein and
supersede all prior discussions and understandings with respect to the
subject matter hereof and thereof, and no modification or amendment of
or supplement to this Agreement or the other Loan Documents shall be
valid or effective unless the same is in writing and signed by the
party against whom it is sought to be enforced.
(b) ACKNOWLEDGMENTS AND ADMISSIONS. The Borrower hereby
represents, warrants and acknowledges that (i) it has been advised by
counsel in the negotiation, execution and delivery of the Loan
Documents to which it is a party, (ii) it has made independent
decisions to enter into this Agreement and the other Loan Documents to
which it is a party, without reliance on any representation, warranty,
covenant or undertaking by the Lender, whether written, oral or
implicit, other than as expressly set out in this Agreement or in
another Loan Document delivered on or after the date hereof, (iii)
there are no representations, warranties, covenants, undertakings or
agreements by the Lender to the Borrower as to the Loan Documents
except as expressly set out in this Agreement or in another Loan
Document delivered on or after the date hereof, (iv) the Lender owes no
fiduciary duty to the Borrower with respect to any Loan Document or the
49
<PAGE>
transactions contemplated thereby, (v) the relationship pursuant to the
Loan Documents between the Borrower, on one hand, and the Lender, on
the other hand, is and shall be solely that of debtor and creditor,
respectively, (vi) no partnership or joint venture exists with respect
to the Loan Documents between the Borrower and the Lender, (vii) should
an Event of Default or Unmatured Event of Default occur or exist the
Lender will determine in its sole discretion and for its own reasons
what remedies and actions it will or will not exercise or take at that
time, (viii) without limiting any of the foregoing, the Borrower is not
relying upon any representation or covenant by the Lender, or any
representative thereof, and no such representation or covenant has been
made, that the Lender will, at the time of an Event of Default or
Unmatured Event of Default, or at any other time, waive, negotiate,
discuss or take or refrain from taking any action permitted under the
Loan Documents with respect to any such Event of Default or Unmatured
Event of Default or any other provision of the Loan Documents, and (ix)
the Lender has relied upon the truthfulness of the acknowledgments in
this section in deciding to execute and deliver this Agreement and to
make the Loans.
THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 11.2 SURVIVAL OF AGREEMENTS: CUMULATIVE NATURE. The Lender
may assign and/or transfer its rights and privileges under the Loan Documents
at any time and from time to time; provided that the Lender shall remain
liable to perform, or cause to be performed, its obligations to the Borrower
under the terms of the Loan Documents. All of the various representations,
warranties, covenants and agreements of the Borrower in the Loan Documents
shall survive the execution and delivery of this Agreement and the other Loan
Documents and the performance hereof and thereof, including the making or
granting of the Loans and the delivery of the Notes and the other Loan
Documents, and shall further survive until all of the Obligations are paid in
full to the Lender and all of the Lender's obligations to the Borrower are
terminated. The representations, warranties and covenants made by the
Borrower in the Loan Documents, and the rights, powers and privileges granted
to the Lender in the Loan Documents, are cumulative, and, except for
expressly specified waivers and consents, no Loan Document shall be construed
in the context of another to diminish, nullify or otherwise reduce the
benefit to the Lender of any such representation, warranty, covenant, right,
power or privilege. In particular and without limitation, no exception set
out in this Agreement to any representation, warranty or covenant herein
contained shall apply to any similar representation, warranty or covenant
contained in any other Loan Document, and each such similar representation,
warranty or covenant shall be subject only to those exceptions which are
expressly made applicable to it by the terms of the various Loan Documents.
Section 11.3 NOTICES. All notices, requests, consents, demands and
other communications required or permitted under any Loan Document shall be
in writing, unless otherwise specifically provided in such Loan Document, and
shall be deemed sufficiently given or furnished if delivered by personal
delivery, by telecopy, by delivery service with proof of
50
<PAGE>
delivery or by registered or certified United States mail, postage prepaid,
(unless changed by similar notice in writing given by the particular Person
whose address is to be changed). Any such notice or communication shall be
deemed to have been given (a) in the case of personal delivery or delivery
service, as of the date of delivery at the address and in the manner provided
herein, (b) in the case of telecopy, upon receipt, or (c) in the case of
registered or certified United States mail three (3) business days after
deposit in the mail.
For mail delivery to:
Mr. Robert S. Herlin, Senior Vice President and CFO
Texstar Petroleum, Inc.
1000 Louisiana, Suite 1500
Houston, Texas 77002
with copies to:
Mr. J. Lanier Yeates
Lanier Yeates, a Professional Corporation
1100 Louisiana, Suite 2925
Houston, Texas 77002
For mail delivery to:
Aquila Energy Capital Corporation
909 Fannin, Suite 1850
Two Houston Center
Houston, Texas 77010-1007
with copies to:
Mr. William D. Morris
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1900 Pennzoil Place, South Tower
711 Louisiana
Houston, Texas 77002
Section 11.4 PARTIES IN INTEREST; TRANSFERS. All grants, covenants
and agreements contained in the Loan Documents shall bind and inure to the
benefit of solely the parties thereto and their respective successors and
assigns; provided, however, that the Borrower shall not assign or transfer
any of its rights or delegate any of its duties or obligations under any Loan
Document without the prior written consent of the Lender, which consent shall
not be unreasonably withheld or delayed. Nothing expressed or referred to in
this Agreement shall be construed to give any Person other than the parties
to this Agreement any legal or equitable right, remedy, or claim or any claim
or right under any doctrines or theories of intended or third-party
beneficiaries under or with respect to this Agreement or any provision of
this Agreement. This Agreement and all of its provisions and conditions are
for the sole and exclusive benefit of the parties to this Agreement and their
permitted successors and assigns.
51
<PAGE>
Section 11.5 GOVERNING LAW; SUBMISSION TO PROCESS. EXCEPT TO THE
EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY STIPULATED IN A LOAN
DOCUMENT OR MANDATORILY GOVERNS A LOAN DOCUMENT, THE LOAN DOCUMENTS SHALL BE
DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF TEXAS
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
THIS AGREEMENT HAS BEEN ENTERED INTO IN HOUSTON, TEXAS AND SHALL BE
PERFORMABLE FOR ALL PURPOSES IN HARRIS COUNTY, TEXAS. SUBJECT TO THE
PROVISIONS OF ARTICLE 12, COURTS WITHIN THE STATE OF TEXAS SHALL HAVE
JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN THE BORROWER AND THE LENDER,
WHETHER IN LAW OR EQUITY, INCLUDING, BUT NOT LIMITED TO, ANY AND ALL DISPUTES
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT; AND
VENUE IN ANY SUCH DISPUTE WHETHER IN FEDERAL OR STATE COURT SHALL BE LAID IN
HARRIS COUNTY, TEXAS.
Section 11.6 LIMITATION ON INTEREST. The Lender, the Borrower and
any other parties to any Loan Documents intend to contract in strict
compliance with applicable usury law from time to time in effect. In
furtherance thereof, the parties stipulate and agree that none of the terms
and provisions contained in the Loan Documents shall ever be construed to
create a contract to pay, for the use, forbearance or detention of money,
interest in excess of the maximum amount of interest permitted to be charged
by applicable law from time to time in effect. Neither the Borrower nor any
present or future guarantors, endorsers or other Persons hereafter becoming
liable for payment of any Obligation shall ever be liable for unearned
interest thereon or shall ever be required to pay interest thereon in excess
of the maximum amount that may be lawfully charged under applicable law from
time to time in effect, and the provisions of this section shall control over
all other provisions of the Loan Documents which may be in conflict or
apparent conflict herewith. The Lender expressly disavows any intention to
charge or collect excessive unearned interest or finance charges in the event
the maturity of any Obligation is accelerated. If (a) the maturity of any
Obligation is accelerated for any reason, (b) any Obligation is prepaid and
as a result any amounts held to constitute interest are determined to be in
excess of the legal maximum, or (c) the Lender or any other holder of any or
all of the Obligations shall otherwise collect moneys which are determined to
constitute interest which would otherwise increase the interest on any or all
of the Obligations to an amount in excess of that permitted to be charged by
applicable law then in effect, then all such sums determined to constitute
interest in excess of such legal limit shall, without penalty, be promptly
applied to reduce the then outstanding principal of the related Obligations
or, at the Lender's or such holder's option, promptly returned to the
Borrower or the other payor thereof upon such determination. In determining
whether or not the interest paid or payable under any specific circumstance
exceeds the maximum amount permitted under applicable law, the Lender and the
Borrower (and any other payors thereof) shall to the greatest extent
permitted under applicable law, (x) characterize any non-principal payment as
an expense, fee or premium rather than as interest, (y) exclude voluntary
prepayments and the effects thereof, and (z) amortize, prorate, allocate and
spread the total amount of interest throughout the entire contemplated term
of the instruments evidencing the Obligations in accordance with the amounts
outstanding from time to time thereunder and the maximum legal rate of
interest from time to time in effect under applicable law in order to
lawfully charge the maximum amount of interest permitted under applicable law.
Section 11.7 TERMINATION; LIMITED SURVIVAL. In their sole and
absolute discretion, the Borrower and the Lender may each, at any time that
no Obligations are owing, elect in a notice
52
<PAGE>
delivered to the other to terminate this Agreement; provided that prior to
the Drawdown Termination Date the Lender shall not, without the written
consent of the Borrower, be entitled to terminate its commitment to make
additional Development Loans. Upon receipt of such a notice, if no
Obligations are then owing, this Agreement and all other Loan Documents shall
thereupon be terminated and the parties thereto released from any prospective
obligations thereunder. Notwithstanding the foregoing or anything herein to
the contrary, any waivers or admissions made by the Borrower or the Lender in
any Loan Documents, and any obligations which any Person may have to
indemnify or compensate the Lender shall survive any termination of this
Agreement or any other Loan Document. At the request and expense of the
Borrower, the Lender shall prepare and execute all necessary instruments to
release and effect such termination of the Loan Documents; provided however,
that nothing in this SECTION 11.7 shall affect any and all continuing rights,
validity and enforceability of the Overriding Royalty Interest.
Section 11.8 SEVERABILITY. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable, all other terms
and provisions of the Loan Documents shall nevertheless remain effective and
shall be enforced to the fullest extent permitted by applicable law.
Section 11.9 COUNTERPARTS. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute
one and the same Agreement.
Section 11.10 FURTHER ASSURANCES. The parties agree (a) to furnish
upon written request to each other such information, (b) to execute and
deliver to each other such documents, and (c) to do such other acts and
things, all as the other party may reasonably request for the purpose of
carrying out the intent of this Agreement and the Loan Documents.
Section 11.11 WAIVER OF PUNITIVE DAMAGES, ETC. THE BORROWER AND THE
LENDER HEREBY (a) IRREVOCABLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LAW
ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY ARBITRATION ANY SPECIAL,
EXEMPLARY, PUNITIVE, STATUTORY OR CONSEQUENTIAL DAMAGES OR DAMAGES OTHER
THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (b) CERTIFY THAT NO PARTY HERETO NOR
ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF
ARBITRATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (c) ACKNOWLEDGE THAT
EACH HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS
AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER
INDUCEMENTS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
Section 11.12 REPRESENTATIONS AND WARRANTIES OF LENDER. To confirm
the Borrower's understanding concerning Lender and Lender's business and
obligations, and to induce the Borrower to enter into this Agreement and to
make the Loans, Lender represents and warrants to the Borrower that:
53
<PAGE>
(a) ORGANIZATION AND GOOD STANDING. Lender is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware, having all powers necessary to carry on its business and to
enter into and consummate the transactions contemplated by the Loan
Documents.
(b) AUTHORIZATION. Lender has taken all actions necessary to
authorize the execution and delivery of the Loan Documents and to
authorize the consummation of the transactions contemplated thereby and
the performance of its obligations thereunder, subject to satisfaction
of the terms and conditions of the Loan Documents. Lender is duly
authorized to lend funds hereunder, subject to satisfaction of the
terms and conditions of the Loan Documents.
(c) NO CONFLICTS OR CONSENTS. Except as expressly contemplated
in the Loan Documents, no consent, approval, authorization or order of,
and no notice to or filing with, any court or governmental authority or
third-party is required in connection with the execution, delivery or
performance by Lender of any Loan Document or to consummate any
transaction contemplated by the Loan Documents.
(d) ENFORCEABLE OBLIGATIONS. This Agreement is, and the other
Loan Documents when executed and delivered by Lender will be, legal,
valid and binding obligations of Lender, enforceable in accordance with
their terms except as such enforcement may be limited by bankruptcy,
insolvency or similar laws of general application relating to the
enforcement of debtor's rights or by principles of equity applicable to
the enforcement of debtor's rights generally.
(e) COMPLIANCE WITH AGREEMENT AND LAW. The Lender will perform
all material obligations it is required to perform under the terms of
the Loan documents. Lender will conduct its business and affairs in
material compliance with laws, regulations and orders applicable
thereto.
Section 11.13 IMI PROPERTY. The Lender has no obligation to fund any
advance in connection with the exploration or development of the IMI
Property. In the event that the Borrower requests the Lender to fund an
advance in connection with the exploration or development of the IMI Property
and the Lender does not elect to fund such advance, the Lender will, upon the
Borrower's written request and at the cost and expense of the Borrower,
execute such documents and take such actions as may be reasonably requested
and necessary to release any Lien of the Lender over the IMI Property.
Section 11.14 PARTICIPATING CREDITOR DEDICATED RECEIVABLES. The
Lender acknowledges that neither this Agreement nor any other Loan Document
is intended to give the Lender any interest in the Participating Creditor
Dedicated Receivables and agrees that it will, upon the Borrower's written
request and at the cost and expense of the Borrower execute such documents
and take such actions as may be reasonably requested and necessary to release
any Lien of the Lender over the Participating Creditor Dedicated Receivables.
54
<PAGE>
ARTICLE 12: ARBITRATION
Section 12.1 ARBITRATION.
(a) The Borrower and Lender and any other obligor party (the
"PARTIES") will attempt in good faith to resolve any controversy or
dispute arising out of or relating to this Agreement promptly by
negotiations between themselves. The negotiation process may be started
by the giving of written notice by any party to the other parties in
accordance with the terms of SECTION 11.3 hereof, and the parties agree
to negotiate in good faith, and select an independent mediator to
facilitate the negotiations and conduct up to eight consecutive hours
of mediated negotiations in Houston, Texas within thirty (30) days
after the notice is first sent. If, within ten (10) days after the
initial notice, the parties are not able to agree upon a mediator, the
parties shall immediately proceed to arbitration. Fees and expenses of
the mediator shall be borne equally by the Borrower and Lender.
(b) No litigation or other proceeding may ever be instituted
at any time in any court for any purpose, except as may be set forth in
SECTION 12.1(h) hereof.
(c) If a controversy or dispute is not resolved after
completion of the negotiation process described in SUBSECTION (a)
above, then, upon notice by any party to the other parties (an
"ARBITRATION NOTICE") and to AAA, the controversy or dispute shall be
submitted to an arbitration panel for binding arbitration in Houston,
Texas, in accordance with AAA's Commercial Arbitration Rules (the
"RULES"). The parties agree that they will faithfully observe this
Agreement and the Rules and that they will abide by and perform any
award rendered by the arbitration panel. The arbitration shall be
governed by the Federal Arbitration Act, 9 U.S.C. Section 1-16. The
award or judgment of the arbitration panel shall be final and binding
on all parties and judgment upon the award or judgment of the
arbitration panel may be entered and enforced by any court having
jurisdiction. If any party becomes the subject of a bankruptcy,
receivership or other similar proceeding under the laws of the United
States of America, any state or commonwealth or any other nation or
political subdivision thereof, then, to the extent permitted or not
prohibited by applicable law, any factual or substantive legal issues
arising in or during the pendency of any such proceeding shall be
subject to all of the foregoing mandatory mediation and arbitration
provisions and shall be resolved in accordance therewith. The
agreements contained herein have been given for valuable consideration,
are coupled with an interest and are not intended to be executory
contracts. The fees and expenses of the arbitration panel will be
shared by all parties engaged in the dispute or controversy on a basis
determined to be fair and equitable by the arbitrators, taking into
account the relative fault of each party, the relative credibility and
merit of all claims and defenses made by each party and the
cooperation, speed and efficiency of each party in conducting the
arbitration proceeding and complying with the Rules and with orders and
requests of the arbitrators.
(d) Promptly after the Arbitration Notice is given, each party
will select an arbitrator and the arbitrators so selected will in turn
select an independent and impartial third arbitrator. If the
arbitrators selected by the parties are unable to agree on a third
55
<PAGE>
arbitrator, then one of the parties shall notify AAA and AAA shall
select the third arbitrator. Such third arbitrator selected in such
manner shall not be entitled to compensation in excess of compensation
paid to either of the other two arbitrators. The decision of AAA with
respect to the selection of the third arbitrator will be final and
binding in such case. Such three arbitrators will constitute the
arbitration panel. Any arbitration regarding the Purchase Price for the
Overriding Royalty Interest shall be conducted by arbitrators who are
petroleum engineers employed by one or more of the firms designated in
SECTION 7.1(f) hereof.
(e) Within 10 days after the selection of the arbitration
panel, the parties and their counsel will appear before the arbitration
panel at a place and time in Houston, Texas, as may be designated by
the arbitration panel for the purpose of each party making a one hour
or less presentation and summary of the case. Thereafter, the
arbitration panel will set dates and times for additional hearings
until the proceeding is concluded. The desire and goal of the parties
is, and the arbitration panel will be advised that its goal should be,
to conduct and conclude the arbitration proceeding as expeditiously as
possible.
(f) Any arbitral award may be enforced in a District Court of
the State of Texas sitting in Houston, Texas or in the United States
District for the Southern District of Texas, Houston Division, and, by
execution and delivery of this Agreement, the parties hereby accept for
themselves and in respect of their property, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts
for said purpose and the parties hereby irrevocably waive to the
fullest extent permitted by law any objection, including without
limitation, any objection to the laying of venue or based on the
grounds of forum non conveniens, which they may now or hereafter have
to the bringing of any such action or proceeding in such respective
jurisdictions.
(g) The arbitration panel will have no authority to award
punitive or other damages not measured by the prevailing party's actual
damages and may not, in any event, make any ruling, finding, or award
that does not conform to the terms and conditions of this Agreement.
(h) The provisions of this SECTION 12.1 relating to
arbitration of disputes shall not apply to litigation or any other
submission to judicial or administrative process that is instituted for
the sole purpose of: (i) compelling a party to submit to arbitration in
accordance with the provisions of this SECTION 12.1, (ii) obtaining
enforcement of any award or judgment of the arbitrator(s) issued
pursuant to this SECTION 12.1, (iii) accelerating the maturity of any
debt of the Borrower during the continuance of an Event of Default,
(iv) bringing suit and obtaining a judgment against the Borrower on its
debt for purposes of enforcement of any Security Document (provided
that the satisfaction of such judgment is limited solely to the
Collateral), or (v) exercising all of the Lender's rights and remedies
to foreclose or otherwise realize upon the Collateral, including rights
to collect sums due or to become due under the Collateral.
(i) The provisions of this ARTICLE 12 shall terminate
immediately if, as and when the party originally identified herein as
"Lender" no longer owns any rights or interests under this Agreement
and the Obligations of the Borrower arising pursuant hereto;
56
<PAGE>
provided that if any arbitration under the provisions of this Article
has been initiated prior to the time that such Lender no longer owns
any such rights or interests under this Agreement and the Obligations,
the provisions of this Article shall continue to be applicable to any
such arbitration that has been commenced.
[The remainder of this page is intentionally left blank.]
57
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
BORROWER:
TEXSTAR PETROLEUM, INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
LENDER:
AQUILA ENERGY CAPITAL CORPORATION
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
[Credit Agreement signature page]
<PAGE>
NOTICE TO BORROWER
THIS WRITTEN CREDIT AGREEMENT IS THE FINAL EXPRESSION OF THE CREDIT AGREEMENT
BETWEEN THE BORROWER AND THE LENDER. THIS WRITTEN CREDIT AGREEMENT MAY NOT BE
CONTRADICTED BY EVIDENCE OF ANY PRIOR ORAL CREDIT AGREEMENT OR OF A
CONTEMPORANEOUS ORAL CREDIT AGREEMENT BETWEEN THE BORROWER AND THE LENDER.
AFFIRMATION OF NO UNWRITTEN ORAL CREDIT AGREEMENTS. The Borrower and
the Lender affirm by the initials below of their authorized officers or
representatives that no unwritten, oral credit agreement exists between them.
Borrower's Lender's
Representative's Representative's
Initials Initials
<PAGE>
[MERDINGER, FRUCHTER, ROSEN & CORSO, P.C. LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of Benz Energy
Inc. on Form SB-2 of our report dated April 2, 1999 (except for Notes 9 and
18 as to which the date is July 20, 1999 and Note 22, as to which the date
is September 9, 1999), appearing in the Prospectus, which is a part of such
Registration Statement, relating to the consolidated financial statements of
Benz Energy Inc., and to the reference to our Firm under the caption
"Experts" in such Prospectus.
/s/ MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
September 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR 4-MOS 10-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997 AUG-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 SEP-01-1997 NOV-01-1996
<PERIOD-END> JUN-30-1999 DEC-31-1998 DEC-31-1997 AUG-31-1997
<CASH> 29,068 2,319,302 3,162,320 694,306
<SECURITIES> 0 195,671 1,312,653 1,896,772
<RECEIVABLES> 4,870,169 6,327,220 4,552,053 4,522,174
<ALLOWANCES> 257,009 197,008 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 5,935,353 9,008,333 9,113,170 9,193,024
<PP&E> 95,531,675 83,730,343 26,485,368 12,448,563
<DEPRECIATION> 5,818,016 4,318,102 1,165,597 531,746
<TOTAL-ASSETS> 102,413,544 95,240,247 36,216,129 21,520,880
<CURRENT-LIABILITIES> 47,113,187 36,499,279 24,403,576 7,408,949
<BONDS> 42,933,474 42,262,000 6,057 21,983
9,488,140 9,488,140 0 0
0 0 0 0
<COMMON> 20,742,246 20,424,996 16,222,198 7,924,329
<OTHER-SE> (17,863,503) (13,434,168) (4,415,702) 6,165,619
<TOTAL-LIABILITY-AND-EQUITY> 102,413,544 95,240,247 36,216,129 21,520,880
<SALES> 3,338,830 4,947,457 707,987 444,203
<TOTAL-REVENUES> 3,338,830 4,947,457 707,987 444,203
<CGS> 2,649,376 4,115,238 684,255 308,914
<TOTAL-COSTS> 4,313,644 9,880,975 2,771,342 2,335,313
<OTHER-EXPENSES> 167,107 401,845 27,082 (23,283)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 2,915,383 5,802,328 648,885 49,314
<INCOME-PRETAX> (2,665,782) (11,137,691) (2,739,322) (1,917,141)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (2,665,782) (11,137,691) (2,739,322) (1,917,141)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,665,782) (11,915,191) (2,739,322) (1,917,141)
<EPS-BASIC> (0.08) (0.37) (0.10) (0.09)
<EPS-DILUTED> (0.08) (0.37) (0.10) (0.09)
</TABLE>
