<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1999
REGISTRATION NO. 333-83651
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
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.
Our common stock is traded on the Vancouver Stock Exchange under the symbol
"BZG".
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 30, 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............................................................... 10
Selected Consolidated Financial Information................................................................ 11
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 12
Business and Properties.................................................................................... 23
Management................................................................................................. 41
Certain Transactions....................................................................................... 45
Principal Stockholders..................................................................................... 49
Selling Securityholders.................................................................................... 51
Plan of Distribution....................................................................................... 53
Description of Capital Stock............................................................................... 55
Legal Matters.............................................................................................. 58
Experts.................................................................................................... 58
Available Information...................................................................................... 58
Index to Financial Statements.............................................................................. F-1
</TABLE>
2
<PAGE>
SUMMARY
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).. $(41,238,336) $ (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 half 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.
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 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.
6
<PAGE>
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 net of $1.1
million in advances received from prospective investors prior to closing;
- 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;
- 2,984,530 shares of our common stock issued for fees and commissions to
the agent in the exchange offering;
- 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
- issuance of a Junior Note with EnCap in the principal amount of $2.9
million due December 31, 2000;
- retirement of the BOCP Credit Facility ($6.0 million), the EnCap Credit
Facility ($12.0 million) and the Shell Production Financing ($5.6
million);
- estimated extraordinary loss on the early extinguishment of debt of $2.1
million
- the application of the proceeds from these financings.
8
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------
HISTORICAL PRO FORMA
-------------- --------------
<S> <C> <C>
Long-term debt, including current maturities, net of unamortized discount of
$875,000 and $-0- pro forma..................................................... $ 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 and 37,769,754 shares pro forma........................ 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.............................. (139,505) (139,505)
-------------- --------------
Total stockholders' equity.................................................... 2,832,347 23,476,050
-------------- --------------
Total capitalization...................................................... $ 75,453,961 $ 98,818,416
-------------- --------------
-------------- --------------
</TABLE>
The increase in accumulated deficit results from early repayment of the
Shell financing recorded as an extraordinary loss.
9
<PAGE>
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 27, 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.
10
<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) $ (27,490,946) $ (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>
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.
11
<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.
12
<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
13
<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.
14
<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.
15
<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
16
<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.
17
<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.
18
<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
19
<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;
20
<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.
21
<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.
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<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 computer aided
exploration technologies, commonly referred to as CAEX technology. The 3-D
seismic data, when completed, will cover over 820 square miles. CAEX technology
is the use of powerful computer workstations and software to collect, organize,
analyze and interpret geological and geophysical data obtained from seismic
surveys and petrophysical and downhole log data obtained from previously drilled
wells. 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
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<PAGE>
$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 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.
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<PAGE>
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 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
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<PAGE>
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 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.
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<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
Old Ocean(8,9,10,11,12)................. 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................................... 7,062 3,441 N/A N/A 50
----------- ----------- ----------- ----------- ---
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.
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<PAGE>
(5) Represents 3-D seismic data acquired, being acquired or expected to be
acquired.
(6) Drilling.
(7) Completing.
(8) Soliciting industry participant.
(9) Shooting 3-D seismic survey.
(10) Affiliates of EnCap own an overriding royalty interest that is convertible
into a participating net profit interest.
(11) 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.
(12) 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 drilling a test well in May
1998 and completed the well in November 1998 as a Cotton Valley discovery.
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<PAGE>
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.
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.
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<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 our independent engineering consultant, Lenser & Associates, as of
January 1, 1999.
<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(4).......................................... 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:(3)
Louisiana(4).......................................... 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 reserves" are the estimated quantities of crude oil, natural gas,
and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, I.E., prices
and costs as of the date the estimate is made. Prices include consideration
of changes in existing prices provided only by contractual arrangements, but
not on escalations based upon future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a
reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on
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<PAGE>
the basis of available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural occurrence of
hydrocarbons controls the lower proved limit of the reservoir.
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation
of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods, including oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery after
testing by a pilot project or after the operation of an installed program
has confirmed through production response that increased recovery will be
achieved.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where
a relatively major expenditure is required for recompletion. Proved
undeveloped reserves on undrilled acreage are limited to those drilling
units offsetting productive units that are reasonably certain of production
when drilled. Proved undeveloped reserves for other undrilled units are
included only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation.
(4) In May 1999, we sold our interest in the Lisbon Field, which accounted for
all of the proved developed and undeveloped reserves in Louisiana.
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.
31
<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.
32
<PAGE>
DRILLING ACTIVITY
The following table sets forth the number of gross exploratory and gross
development wells drilled in the last three fiscal years in which we
participated. The number of wells drilled refers to the number of wells
commenced at any time during the respective fiscal year. "Productive" wells are
either producing wells or wells capable of commercial production.
<TABLE>
<CAPTION>
EXPLORATORY(1) DEVELOPMENTAL(2)
----------------------------------------- ---------------
DRY
PRODUCTIVE HOLE TOTAL PRODUCTIVE
--------------- ----- ----- ---------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1999............................... 1 -- 1 1
Year ended December 31, 1998................................. 3 1 4 3
Four months ended December 31, 1997.......................... 1 2 3 3
Ten months ended August 31, 1997............................. 1 1 2 --
<CAPTION>
DRY
HOLE TOTAL
----- -----
<S> <C> <C>
Six months ended June 30, 1999............................... 1 2
Year ended December 31, 1998................................. -- 3
Four months ended December 31, 1997.......................... -- 3
Ten months ended August 31, 1997............................. -- --
</TABLE>
The following table sets forth, for each of the last three fiscal years, the
number of net exploratory and net developmental wells we drilled.
<TABLE>
<CAPTION>
EXPLORATORY(1) DEVELOPMENTAL(2)
---------------------------------- ----------------------------------
DRY DRY
PRODUCTIVE HOLE TOTAL PRODUCTIVE HOLE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1999..................... 0.140000 -- 0.140000 0.556248 0.157500 0.713748
Year ended December 31, 1998....................... 1.838300 0.140000 1.978300 0.259536 -- 0.259536
Four months ended December 31, 1997................ 0.485000 1.357500 1.842500 0.342202 -- 0.342202
Ten months ended August 31, 1997................... 0.147250 0.201100 0.348350 -- -- --
</TABLE>
- ------------------------
(1) An "exploratory well" is a well drilled to find and produce oil or gas in an
unproven area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known
reservoir.
(2) A "development well" is a well drilled within the proved area of an oil or
gas reservior to the depth of a stratograph horizon known to be productive.
On June 30, 1999, we were drilling one gross (0.704075 net) development well
and one gross (0.140000 net) exploratory well.
33
<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
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.
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.
34
<PAGE>
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 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
35
<PAGE>
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 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.
36
<PAGE>
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 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-
37
<PAGE>
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;
- 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.
38
<PAGE>
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.
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.
39
<PAGE>
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 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.
40
<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.
41
<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.
42
<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.
During the fourth quarter of 1998, we notified Mr. LaFlure of our intent to
terminate his employment. The principal terms of his termination were agreed
upon in 1998. Discussions included a settlement based on the terms of his
employment agreement. Final details were agreed upon in early 1999 and we
terminated Mr. LaFlure's employment without cause effective January 15, 1999.
Mr. LaFlure was requested 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.
43
<PAGE>
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 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.
44
<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
45
<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
46
<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.
COSTS OF THE LASCO, CALIBRE AND STARBUCKS ACQUISITIONS. The values of the
Lasco, Calibre and Starbucks properties, using the future pretax cash flows
discounted at 10% of the properties, were estimated at $10.8 million, after
adjustment, $16.7 million and $4.7 million, respectively. The assets acquired in
these transactions were acquired by the sellers during the two years before the
acquisition by the Company. The Starbucks and Calibre acquisitions were reveiwed
and approved by an independent committee of the Board of Directors. The Calibre
assets had a cost basis of $4.1 million. The Starbucks assets had a cost basis
of $.8 million. The Lasco assets had a cost basis of $12.8 million.
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
47
<PAGE>
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 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.
48
<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
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<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.
50
<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>
51
<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.
52
<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.
53
<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.
54
<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
55
<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.
56
<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.
57
<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.
The Statement of Revenues and Direct Operating Expenses of the Oak Hill and
Lisbon Properties for the period from acquisition by Lasco Energy Partners, L.P.
(August 14, 1996) to December 31, 1996 and for the year ended December 31, 1997
acquired by Benz Energy, Ltd. included in this Prospectus has been so included
in reliance on the report of PricewaterhouseCoopers LLP, Independent
Accountants, given on the authority of said firm as experts in auditing and
accounting.
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.
58
<PAGE>
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.
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.
59
<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
OAKHILL AND LISBON PROPERTIES
Independent Accountants Report............................................................................. F-50
Statement of Revenues and Direct Operating Expenses........................................................ F-51
Notes to Financial Statements.............................................................................. F-52
</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. This
facility also provides for the lender to fund additional drilling in the
Oakvale Dome field to a maximum of $3.8 million and the option to fund
$1.1 million for the drilling of one additional well. 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>
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-40
<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 5,994,094
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-41
<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........................................................................ (4,103,701) (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-42
<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-43
<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.......................................... 182,311 --
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....................... 3,980,410 (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................................................. (11,868) (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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Lasco Energy Partners, L.P., and
The Board of Directors and Stockholders of Benz Energy Ltd.
We have audited the accompanying Statement of Revenues and Direct Operating
Expenses of the Oak Hill and Lisbon Properties for the period from acquisition
by Lasco Energy Partners, L.P. (August 14, 1996) to December 31, 1996 and for
the year ended December 31, 1997. This statement is the responsibility of the
management of the owners of the properties. Our responsibility is to express an
opinion on the statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statement as described in Notes 1 and 2 was prepared for
the purpose of complying with certain rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form SB-2
to be issued in connection with an offering by Benz Energy Ltd. under the
Securities Act of 1933. It is not intended to be a complete presentation of the
financial condition, operations and cash flows of the properties.
In our opinion, the statement audited by us presents fairly, in all material
respects, the revenues and direct operating expenses of the Oak Hill and Lisbon
Properties as described in Notes 1 and 2 for the period from inception to
December 31, 1996 and for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
July 31, 1998
F-50
<PAGE>
OAKHILL AND LISBON PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION
(AUGUST 14, 1996)
YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ------------------
<S> <C> <C>
Revenues:
Oil and gas revenues.................................................... $ 2,728,390 $ 971,107
----------------- --------
Direct operating expenses:
Lease operating expenses................................................ 742,962 170,095
Severance taxes......................................................... 93,805 42,396
----------------- --------
Total direct operating expenses....................................... 836,767 212,491
----------------- --------
Excess of revenues over direct operating expenses......................... $ 1,891,623 $ 758,616
----------------- --------
----------------- --------
</TABLE>
The accompanying notes are an integral part of this statement
F-51
<PAGE>
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE OAKHILL AND LISBON PROPERTIES
NOTE 1--THE PROPERTIES
On January 23, 1998, and effective December 1, 1997, Benz Energy Ltd.
("Benz") purchased interests in Oakhill and Lisbon oil and gas properties
located in Texas and Louisiana, respectively (the Properties) from Lasco Energy
Partners, L.P. (Lasco or the Partnership). Only the Partnership's net interests
in these properties are presented herein and are referred to as the Properties.
NOTE 2--BASIS OF PRESENTATION
During the periods presented, the Properties were not accounted for as a
separate entity. Certain costs were not allocated to the Properties by Lasco.
Accordingly, full separate financial statements prepared in accordance with
generally accepted accounting principles do not exist and are not practicable to
obtain in these circumstances.
The Statement of Revenues and Direct Operating Expenses (the "Statement")
was derived from the historical accounting records of the Partnership and
represents only the net interests in the Properties acquired by Benz.
Depreciation, depletion and amortization, general and administrative expenses
and other non-operating expenses are not included. Accordingly, the Statement is
not intended to present financial position and results of operations in
accordance with generally accepted accounting principles.
Revenues in the Statement are recognized on the entitlement method.
The accompanying Statement has been prepared on the accrual basis in
accordance with generally accepted accounting principles. Preparation of the
Statement in conformity with generally accepted accounting principles and
estimation of oil and gas reserves require management to make estimates and
assumptions that affect the amounts reported in the Statement and accompanying
notes. Actual results could differ from those estimates.
NOTE 3--RELATED PARTY TRANSACTIONS
Willow Springs Production Services, L.L.C. ("WSPS") had been the general
partner and operator of the Partnership from acquisition (August 14, 1996) to
August 31, 1997 when it was removed from this capacity. From September 1, 1997
to December 31, 1997, Riverhill Energy Corporation has been the general partner
and Coastal Management Corporation ("Coastal"), an affiliate of Riverhill Energy
Corporation, has been the operator. In their capacity as the operators for the
related periods, as stated above, WSPS and Coastal receive certain revenues and
pay expenses associated with the Lasco's properties and then allocate such
activity as appropriate to the respective working interest and royalty owners.
The two limited partners in the Partnership were EnCap Equity 1996 Limited
Partnership and Energy Capital Investment Company PLC. EnCap Investments L.C.
("EnCap") is the general partner of EnCap Equity 1996 Limited Partnership.
NOTE 4--COMMITMENT AND CONTINGENCIES
In the course of their operations, the properties are subject to possible
contingencies arising from federal, state and local environmental, health and
safety laws and regulations. Additionally, the Properties were subject to
possible title issues which could affect the legal title of Benz to the
Properties. There are no such matters which, in the opinion of Encap management,
will have a material adverse impact on the revenues and direct operating
expenses in the Statement.
F-52
<PAGE>
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE OAKHILL AND LISBON PROPERTIES (CONTINUED)
NOTE 4--COMMITMENT AND CONTINGENCIES (CONTINUED)
While there are certain claims related to the Properties and operations of
the Partnership, none of these matters, in the opinion of EnCap management,
could have a material adverse effect on the revenues and direct operating
expenses in the Statement.
NOTE 5--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
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"). There
are numerous uncertainties inherent in estimating quantities of proved reserves
and projecting future rates of production and timing of development
expenditures. The following reserve data represent estimates only and should not
be construed as being exact.
<TABLE>
<CAPTION>
CRUDE OIL,
CONDENSATE NATURAL GAS
AND NATURAL (MILLIONS
GAS LIQUIDS OF CUBIC
(BARRELS) FEET)
----------- -----------
<S> <C> <C>
Total proved reserves:
Balance August 14, 1996.................................................... 46,881 11,157
Production............................................................... (2,552) (250)
----------- -----------
Balance December 31, 1996.................................................. 44,329 10,907
Production............................................................... (5,550) (767)
----------- -----------
Balance December 31, 1997.................................................. 38,779 10,140
----------- -----------
----------- -----------
Proved developed reserves:
August 14, 1996............................................................ 46,881 11,157
December 31, 1996.......................................................... 44,329 10,907
December 31, 1997.......................................................... 38,779 10,140
</TABLE>
FUTURE NET CASH FLOWS--Future cash inflows are based on period-end prices.
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. This information does not purport to
present fair market value of the Company's oil and gas
F-53
<PAGE>
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE OAKHILL AND LISBON PROPERTIES (CONTINUED)
NOTE 5--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
assets, but does present a standardized disclosure concerning possible future
net cash flows that would result under the assumptions used.
<TABLE>
<CAPTION>
TOTAL
-----------
(UNAUDITED)
<S> <C>
December 31, 1997
Cash inflows............................................................................. $ 30,159
Production and development costs......................................................... (14,543)
-----------
Net cash flows........................................................................... 15,616
10 percent annual discount rate.......................................................... (7,474)
-----------
Discounted future net cash flows......................................................... $ 8,142
-----------
-----------
December 31, 1996
Cash inflows............................................................................. $ 33,129
Production and development costs......................................................... (16,389)
-----------
Net cash flows........................................................................... 16,740
10 percent annual discount rate.......................................................... (7,434)
-----------
Discounted future net cash flows......................................................... $ 9,006
-----------
-----------
August 14, 1996
Cash inflows............................................................................. $ 28,299
Production and development............................................................... (16,098)
-----------
Net cash flows........................................................................... 12,201
10 percent annual discount rate.......................................................... (5,907)
-----------
Discounted future net cash flows......................................................... $ 6,294
-----------
-----------
</TABLE>
The following table sets forth the principal sources of change in the
discounted future net cash flows:
<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION
FOR THE YEAR (AUGUST 14,
ENDED 1996) TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Sales, net of production costs............................................. $ (1,892) $ (759)
Net change in prices and production costs.................................. 390 2,949
Change in future development costs......................................... (25) -0-
Accretion of discount...................................................... 941 629
Other...................................................................... (278) (107)
------------ ------
$ (864) $ 2,712
------------ ------
------------ ------
</TABLE>
F-54
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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 1,097,781 Private Placement
March 1997 Class B Special Warrants *302,219 Private Placement
April 1997 Class C Special Warrants 351,546 Private Placement
April 1997 Class C Special Warrants *41,454 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
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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF
DATE OF SECURITIES DESCRIPTION OF
TRANSACTION TYPE OF SECURITIES SOLD THE TRANSACTION
- ------------------ ---------------------------- -------------- ----------------------------------------------
<S> <C> <C> <C>
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 Special Notes Series B $ 2,640,000 Canadian Private Placement
March 1998 Special Notes Series C *$ 7,360,000 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 *1,738,764 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 80,000 Employee
October 1996 Common Stock 20,485,858 Assets
October 1996 Class A Special Warrants 556,000 Private Placement
March 1998 SARs 2,109,974 Commissions
March 1998 SARs 737,903 Commissions
December 1997 Warrants *1,500,000 Financing Fee
December 1997 Warrants 575,000 Private Placement
December 1997 Warrants *50,000 Private Placement
December 1997 Warrants *142,900 Property Purchase
</TABLE>
- ------------------------
* The securities were sold in the United States pursuant to the exemption
afforded under Section 4(2) of the Securities Act to individuals the Company
believes has the knowledge and experience in financial and business matters
to make them capable of evaluating the merits and risks of the investment
and pursuant to privately negotiated transactions that did not involve any
public distributions.
II-2
<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 Amended and Restated Certificate of Designations, Preferences, Rights and Limitations of Class A
Preferred Stock, Series I 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-3
<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
10.24 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-4
<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 PricewaterhouseCoopers LLP
*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
II-5
<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. 2
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 29, 1999.
<TABLE>
<S> <C> <C>
BENZ ENERGY INC.
By: /s/ PRENTIS B. TOMLINSON, JR.
-----------------------------------------
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. 2 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>
/s/ PRENTIS B. TOMLINSON,
JR. Chairman of the board,
- ------------------------------ president and chief September 29, 1999
Prentis B. Tomlinson, Jr. executive officer
/s/ ROBERT S. HERLIN Director, senior vice
- ------------------------------ president and chief September 29, 1999
Robert S. Herlin financial officer
*
- ------------------------------ Controller (principal September 29, 1999
Kirsten A. Hink financial officer)
*
- ------------------------------ Director September 29, 1999
Robert L. Zorich
- ------------------------------ Director September 29, 1999
Yale Fisher
- ------------------------------ Director September 29, 1999
David P. Quint
/s/ GARY PETERSEN
- ------------------------------ Director September 29, 1999
Gary Petersen
/s/ RUSSELL CLEVELAND
- ------------------------------ Director September 29, 1999
Russell Cleveland
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROBERT S. HERLIN
-------------------------
Robert S. Herlin September 29, 1999
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<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 Amended and Restated Certificate of Designations, Preferences, Rights and Limitations of Class A
Preferred Stock, Series I 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-7
<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
10.24 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-8
<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 PricewaterhouseCoopers LLP
*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
II-9
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION, PREFERENCES
RIGHTS AND LIMITATIONS OF
CLASS A PREFERRED STOCK, SERIES I
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
Corporations Act (Yukon) (the "Yukon Act") and operating as Benz Energy Ltd.;
WHEREAS, on the date hereof, 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, Benz Energy Ltd. previously had 9,488,140 shares of Class A
Preferred Stock, Series I outstanding under the Yukon Act;
WHEREAS, upon domestication in Delaware, the Corporation had 100,000,000
shares of Class A Preferred Stock authorized;
WHEREAS, the Board of Directors of Benz Energy Ltd., at a meeting duly held
on June 2, 1999, duly ratified resolutions providing for the designation and
issuance of 9,488,140 shares of Class A Preferred Stock, Series I, par value
$1.00 per share, upon domestication in the state of Delaware which resolution is
and reads as follows:
RESOLVED, that upon domestication, and pursuant to the powers granted
the board of directors by the provisions of the Certificate of
Incorporation, as amended, a series of the Preferred Stock, par value $1.00
per share, be, and it hereby is, established;
RESOLVED FURTHER, that the said series of Preferred Stock of the
Corporation be, and it hereby is, given the distinctive designation of
"Preferred Stock, Series I;" and
RESOLVED FURTHER, that the Class A Preferred Stock, Series I shall
consist of 9,488,140 shares.
WHEREAS, the Board of Directors of Benz Energy Ltd. by unanimous written
consent dated June 18, 1999, which was filed with the minutes of the Board of
Directors, duly adopted resolutions providing for the amendment and restatement
of the Certificate of Designation, Preferences, Rights and Limitations of Class
A Preferred Stock, par value $1.00 per share, which resolutions are and read as
set forth below; and
<PAGE>
WHEREAS, the holders of the common stock of the Corporation and the holders
of the Class A Preferred Stock, Series I of the Corporation, both by written
consent of the necessary number of shares as required by statute, dated
September 21, 1999, approved the resolutions providing for the amendment and
restatement of the Certificate of Designation, Preferences, Rights and
Limitations of Class A Preferred Stock, which resolutions are and read as
follows:
WHEREAS, the Corporation's directors have recommended amending and
changing the Certificate of Designation, Preferences, Rights and
Limitations of the Class A Preferred Stock, substantially in the form
attached hereto as EXHIBIT A.
NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Designation,
Preferences, Rights and Limitations of the Class A Preferred Stock be
changed and amended, substantially in the form attached hereto as EXHIBIT A
and the appropriate documents be executed, certified and filed with the
Secretary of the State of Delaware.
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, 242, 141 and 228 of the
DGCL, that the Class A Preferred Stock, Series I shall have the powers and
preferences, and the relative, participating, optional and other rights, and the
qualifications, limitations and restrictions thereon set forth below:
"CLASS A PREFERRED SHARES
Section 1.1 Directors' Authority to Issue in One or More Series
The board of directors of the Corporation may issue the Class A Preferred
shares at any time and from time to time in one or more series. Before the
first shares of a particular series are issued, the board of directors of the
Corporation shall fix the number of shares in such series and shall determine,
subject to the limitations set out in the articles, the designation, rights,
privileges, restrictions and conditions to be attached to the shares of such
series including, without limitation, the rate of rates, amount or method or
methods of calculation of dividends thereon, the time and place of payment of
dividends, whether cumulative or non-cumulative or partially cumulative and
whether such rate, amount or method of calculation shall be subject to change or
adjustment in the future, the currency or currencies of payment of dividends,
the consideration and the terms and conditions of any purchase for cancellation,
retraction or redemption (if any), the conversion, exchange or reclassification
rights attached thereto (if any), the voting rights attached thereto (if any),
the terms and conditions of any share purchase plan or sinking fund with respect
thereto, and any other terms not inconsistent with these provisions. Before the
issue of the first shares of a series, the board of directors of the Corporation
shall execute, acknowledge, file and cause to become effective, in accordance
with Section 103 of DGCL, a certificate of designation setting forth a copy of
such resolution or resolutions adopted by the Board of Directors and the number
of shares of stock of such series as to which the resolution or resolutions
apply containing a description of such series including the designation, rights,
privileges, restrictions and conditions determined by the Board of Directors of
the Corporation.
2
<PAGE>
Section 1.2 RANKING OF CLASS A PREFERRED SHARES
No rights, privileges, restrictions or conditions attached to a series of
Class A Preferred shares shall confer upon a series a priority in respect of
dividends or return of capital over any other series of Class A Preferred shares
then outstanding. The Class A Preferred shares shall be entitled to priority
over the common shares of the Corporation and over any other shares of the
Corporation 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 Corporation, whether
voluntary or involuntary, or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding-up its affairs.
If any cumulative dividends or amounts payable on a return of capital in respect
of a series of Class A Preferred shares are not paid in full, the Class A
Preferred shares of all series shall participate rateably in respect of such
dividends, including accumulations, if any, in accordance with the sums that
would be payable on such shares if all such dividends were declared and paid in
full, and in respect of any repayment of capital in accordance with the sums
that would be payable on such repayment of capital if all sums so payable were
paid in full; provided however, that in the event of there being insufficient
assets to satisfy in full all such claims to dividends and return of capital,
the claims of the holders of the Class A Preferred shares with respect to
repayment of capital shall first be paid and satisfied and any assets remaining
thereafter shall be applied towards the payment and satisfaction of claims in
respect of dividends. The Class A Preferred shares of any series may also be
given each other preferences, not inconsistent with sections 1.1 to 1.4 hereof,
over the common shares and over any other shares ranking junior to the Class A
Preferred shares as may be determined in the case of such series of Class A
Preferred shares.
Section 1.3 VOTING RIGHTS
Except as hereinafter referred to or as otherwise required by law or in
accordance with any voting rights which may from time to time be attached to any
series of Class A Preferred shares, the holders of the Class A Preferred shares
as a class shall not be entitled as such to receive notice of, to attend or to
vote at any meeting of the shareholders of the Corporation.
Section 1.4 APPROVAL OF HOLDERS OF CLASS A PREFERRED SHARES
The rights, privileges, restrictions and conditions attaching to the Class
A Preferred shares as a class may be added to, changed or removed but only with
the approval of the holders of the Class A Preferred shares given as hereinafter
specified.
The approval of the holders of Class A Preferred shares to add to, change
or remove any right, privilege, restriction or condition attaching to the Class
A Preferred shares as a class or to any other matter requiring the consent of
the holders of the Class A Preferred shares as a class may be given in such
manner as may then be required by law, subject to a minimum requirement that
such approval shall be given by resolution passed by the affirmative voice of at
least two-thirds of the votes cast at a meeting of the holders of Class A
Preferred shares duly called for that purpose. The formalities to be observed
in respect of the giving of notice of any such meeting or any adjourned meeting
and the conduct thereof shall be these from time to time required by the DGCL
and prescribed in the by-laws of the Corporation with respect to meetings of
shareholders. On every poll taken at a meeting of holders of Class A Preferred
shares as a class, each holder entitled to vote thereat shall have one vote
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in respect of each $1.00 of stated capital added to the appropriate stated
capital account of the Corporation in respect of the issue of each such share
held by the holder.
CLASS A PREFERRED SHARES, SERIES I
The Class A Preferred shares, Series, I, as a series, shall have attached
thereto the following rights, privileges, restrictions and conditions:
Section 2.1 Dividends
The holders of the Class A Preferred Shares, Series I will be entitled to
receive dividends at the Designated Rate (as defined below) of the aggregate
price paid or deemed to be paid for the outstanding Class A Preferred shares,
Series I (the "Purchase Price"). Such dividends will be prior and in preference
to any declaration or payment of any dividends paid on the Junior Stock.
Dividends on the Class A Preferred shares, Series I will be cumulative and will
accrue whether or not declared and whether or not there will be funds legally
available for the payment thereof. Except as provided below, the dividends will
be payable in cash. The dividends shall be payable quarterly on March 31, June
30, September 30 and December 31 of each year commencing January 23, 1998 (the
"Quarterly Dividend Date"), except that if any such date is not a Business Day
(as defined below), then such dividend shall be payable on the first Business
Day immediately thereafter to holders of record as they appear on the stock
register of the Corporation on the applicable record date, which shall not be
more than 50 nor less than 10 days preceding the payment date for such
dividends, as fixed by the Board of Directors of the Corporation. As used
above, "Business Day" shall mean a day, other than a Saturday or a Sunday, on
which commercial banks are open for business with the public in Houston, Texas.
The dividend shall be payable in cash, except as otherwise provided in the next
paragraph. Dividends payable on the Class A Preferred Shares, Series I for each
full quarterly dividends period shall be computed by dividing the annual rate by
four. Dividends payable on the Class A Preferred Shares, Series I for any
period that is shorter or longer than a full quarterly dividend period shall be
computed on the basis of a 360-day year of four 90-day quarters. All dividends
payable on the Class A Preferred Shares, Series I shall be net of withholding
taxes, if any, under applicable Delaware and federal law (including applicable
income tax treaties). As used above, the term "Designated Rate" shall mean 10%
per annum; provided, that upon the occurrence and during the continuance of a
Voting Event, Designated Rate shall mean 14% per annum.
With respect to the first eight quarterly dividends payable hereunder
commencing with the first Quarterly Dividend Date (but subject to the last
sentence of this paragraph), the Board of Directors of the Corporation may, at
least 30 days prior to the subject Quarterly Dividend Date, elect to pay the
cash dividend in common shares (if paid prior to May 20, 1999) or in the
Corporation's common stock, U.S. $.01 par value ("Common Stock") (if paid after
May 20, 1999) (a "Payment in Kind"). If such an election is made, the
Corporation shall promptly notify the holders of record of the Class A Preferred
Shares, Series I entitled to such quarterly dividend of the election to make a
Payment in Kind in lieu of a payment in cash for the subject Quarterly Dividend
Date. An election for any particular Quarterly Dividend Date shall operate only
for such Quarterly Dividend Date. Each Payment in Kind shall be payable as of
the Quarterly Dividend Date for which the election to make such Payment in Kind
was made, except that if such Quarterly Dividend Date is not a Business Day,
then such Payment in Kind shall be on the first Business Day immediately
thereafter to holders of
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record as they appear on the stock register on the applicable record date.
Each Payment in Kind shall be equal to that number of common shares or Common
Stock (as applicable) that is equal in number to the aggregate cash dividend
payable on the subject Quarterly Dividend Date (net of withholding taxes, if
any, under applicable Canadian laws (including applicable income tax
treaties) divided by the Average Closing Price and shall be allocated on a
pro rata basis to each holder entitled to receive such dividend. Certificates
representing the common shares issuable on payment of any Payment in Kind
shall be delivered to each holder entitled to such Payment in Kind on or
before 30 days following the Quarterly Dividend Date for which such Payment
in Kind is elected to be made hereunder. The "Average Closing Price" shall
be equal to the average of the last reported sales price for the common
shares or Common Stock (as applicable) for the 30 consecutive Trading Days
immediately preceding the subject Quarterly Dividend Date (converted to U.S.
Dollars). The last reported sales price for each day shall be the last
reported sales price for the common shares or Common Stock (as applicable) on
such date on the exchange on which the common shares or Common Stock (as
applicable) are primarily traded. "Trading Days" shall mean, with respect to
the exchange on which the common shares or Common Stock (as applicable) are
primarily traded, the days on which such securities exchange is open for
business.
With respect to all quarterly dividends subsequent to the eighth
quarterly dividend payable hereunder, a holder of Class A Preferred Shares,
Series I may, at least 30 days prior to the subject Quarterly Dividend Date
by notice in writing to the Corporation, elect, only if offered by the
Corporation, to receive a Payment in Kind in lieu of payment in cash for the
subject Quarterly Dividend Date; provided, a holder of Class A Preferred
Shares, Series I may elect to receive a Payment in Kind in lieu of payment in
cash for the subject Quarterly Dividend Date if the Corporation is in default
with respect to such payment and such default has continued for more than ten
days. An election for any particular Quarterly Dividend Date shall operate
only for such Quarterly Dividend Date. Each Payment in Kind shall be payable
as of the Quarterly Dividend Date for which the election to make such Payment
in Kind was made, except that if such Quarterly Dividend 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. A Payment in Kind under this
paragraph shall be equal to that number of shares of Common Stock that is
equal to the aggregate cash dividend payable to such electing holder on the
subject Quarterly Dividend Date (net of withholding taxes, if any, under
applicable Canadian laws (including applicable income tax treaties)) divided
by the Average Closing Price. Certificates representing the Common Stock
issuable on payment of any Payment in Kind under this paragraph shall be
delivered to each electing holder entitled to such Payment in Kind on or
before 30 days following the Quarterly Dividend Date for which such Payment
in Kind is elected to be made under this paragraph.
Section 2.2 LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the
Corporation, voluntary or involuntary, the holders of the Class A Preferred
Shares, Series I will be entitled to receive in preference to the holders of the
Junior Stock a cash amount equal to the Purchase Price plus any dividends
cumulated on the Class A Preferred Shares, Series I but not paid (the
"Liquidation Amount"). A consolidation or merger other than an Exempted Merger,
as defined below, of the Corporation with or into 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 shall be deemed to be
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a liquidation for purposes hereof. For the purposes hereof, an "Exempted
Merger" shall mean a merger by the Corporation with a U.S. corporation that
is effected for the primary purpose of enabling the Corporation to list its
common shares on the NASDAQ or similar system or American Stock Exchange,
provided that the holders of a majority of the Class A Preferred Shares,
Series I then outstanding give their prior written approval to such a merger,
which approval will not be unreasonably withheld.
Section 2.3 OPTIONAL REDEMPTION
The Corporation shall have the option to redeem any or all of the Class
A Preferred Shares, Series I at any time at a cash redemption price per share
equal to the Liquidation Amount divided by the number of Class A Preferred
Shares, Series I originally issued. If the Corporation so elects to effect
such a redemption, it shall give notice of same to the holders of the Class A
Preferred Shares, Series I not less than five Business Days prior to the date
on which such redemption is to be made (the "Optional Redemption Date"). A
redemption under this paragraph shall be herein called an "Optional
Redemption".
Section 2.4 PUT REDEMPTION
If a Qualified Public Offering of the Corporation's common shares is not
consummated within the three-year period commencing on January 23, 1998, the
holders of a majority of the Class A Preferred Shares, Series I then
outstanding may, upon notice to the Corporation no later than 90-days after
the expiration of such three-year period, elect to cause the Corporation to
redeem all of the Class A Preferred Shares, Series I at a cash redemption
price per share equal to the Liquidation Amount divided by the number of
Class A Preferred Shares, Series I originally issued. The Corporation shall
effect the redemption of the Class A Preferred Shares, Series I on the date
which is fifteen days after receipt of the above notice, or if such date is
not a Business Day, on the Next Business Day immediately thereafter (the "Put
Redemption Date"). As used above, the term "Qualified Public Offering" shall
mean one or more public offerings of the Corporation's Common Stock in which
the Corporation receives aggregate sales proceeds, net of commissions and
underwriting discounts, of not less than $25,000,000. A redemption under
this paragraph shall be herein called a "Put Redemption."
Section 2.5 MANDATORY REDEMPTION
On the fifth anniversary date of the Closing Date (the "Mandatory
Redemption Date") and provided the Class A Preferred Shares. Series I have not
been previously redeemed as set forth above, the Corporation shall be required
to redeem all of the Class A Preferred Shares, Series I at a cash redemption
price per share equal to the Liquidation Amount divided by the number of Class A
Preferred Shares, Series I originally issued. A redemption under this paragraph
shall be herein called the "Mandatory Redemption."
To the extent that the Corporation may not at any of the dates set forth
above legally redeem the Class A Preferred Shares, Series I, such redemption
will take place as soon as legally permitted.
Section 2.6 VOTING RIGHTS
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Except with respect to such matters with respect to which the Class A
Preferred Shares, Series I are entitled vote under the Delaware General
Corporation Law or other applicable law, and except as provided below, holders
of Class A Preferred Shares, Series I will have no voting rights.
Upon the occurrence of a Voting Event, the holders of the Class A Preferred
Shares, Series I, voting as a single Class A Preferred Shares, Series I, shall
be entitled to elect (i) two directors to the Board of Directors of the
Corporation, if at the time of the Voting Event such holders hold Class A
Preferred Shares, Series I in excess of 1,200,000 Class A Preferred Shares,
Series I or (ii) one director to the Board of Directors of the Corporation, if
at the time of the Voting Event such holders hold 1,200,000 or less Class A
Preferred Shares, Series I. The director(s) which the holders of Class A
Preferred Shares, Series I shall be entitled to elect to the Board of Directors
of the Corporation shall be called the "Preferred Share Directors," whether one
or two. In the event that the holders of the Class A Preferred Shares, Series I
shall become so entitled to elect the Preferred Share Directors, a special
meeting of the holders of the Class A Preferred Shares, Series I shall be called
in the manner provided below, and the holders of the Class A Preferred Shares,
Series I, voting as a single Class A Preferred Shares, Series I, shall elect
such Preferred Share Directors. Thereafter, at each annual meeting of the
stockholders of the Corporation, until divested as hereinafter provided of their
right to elect the Preferred Share Directors, the holders of the Class A
Preferred Shares, Series I, voting as a single series, shall elect the Preferred
Share Directors. At any special meeting of the holders of the Class A Preferred
Shares, Series I or at any annual meeting of the stockholders at which the
holders of the Class A Preferred Shares, Series I, voting as a single series,
shall be entitled to elect the Preferred Share Directors, such members shall be
elected by the affirmative vote of the holder or holders of a majority of the
Class A Preferred Shares, Series I then outstanding.
In no event shall the number of persons serving on the Board of Directors
of the Corporation exceed eight. If, as a result of the election of the
Preferred Share Directors, the number of persons serving on the Board of
Directors of the Corporation would exceed eight, the Corporation shall take all
actions available to it to permit the Preferred Share Directors to serve on the
Board of Directors, including (without limitation) effecting the removal of a
director or directors then serving on the Board of Directors of the Corporation.
The Preferred Share Directors will serve until all Voting Events have
ceased to be continuing, at which time the term of office of the Preferred Share
Directors will terminate.
At any time when such special voting power shall have vested in the holders
of the Class A Preferred Shares, Series I as provided above, the holders of at
least five percent (5%) of the Class A Preferred Shares, Series I then
outstanding may, by written notice personally delivered or mailed to all holders
of the Class A Preferred Shares, Series I at their last known address and to the
president and the secretary of the Corporation at the last known address of the
Corporation, call a special meeting of the holders of the Class A Preferred
Shares, Series I for the election of the Preferred Share Directors as herein
above provided. Such election shall be held not less than twenty-one nor more
than thirty days after the giving of the notice thereof in and at any time and
place within the State of Texas as may be specified in such notice. In lieu of
a special meeting, the holders of the Class A Preferred Shares, Series I may
elect the Preferred Share Directors as herein provided, without a vote, if a
consent or consents in writing, setting forth the election of the Preferred
Share Directors, shall be signed by all of the holders of the Class A Preferred
Shares, Series I and shall be delivered to the
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Corporation by delivery to the Corporation's registered office in the State
of Texas or the Corporation's principal place of business. Delivery shall be
made by hand or by certified registered mail return receipt requested.
Any Preferred Share Director, whether elected by the holders of the Class A
Preferred Shares, Series I as provided above or replaced as provided below, may
be removed from office only by vote of the holders of a majority of the Class A
Preferred Shares, Series I then outstanding, which removal may be with or
without cause. A special meeting of the holders of the Class A Preferred
Shares, Series I may be called, by written notice personally delivered or mailed
to all holders of the Class A Preferred Shares, Series I at their last known
addresses and to the president and the secretary of the Corporation at the last
known address of the Corporation, by any holder or holders of at least 15% or
more of the Class A Preferred Shares, Series I then outstanding for the purpose
of removing any of such directors. Such meeting shall be held not less than
twenty-one nor more than thirty days after the giving of the notice thereof in
and at any time and place within the State of Texas as may be specified in such
notice. In lieu of a special meeting, the holders of the Class A Preferred
Shares, Series I may remove a Preferred Share Director as herein provided,
without a vote, if a consent or consents in writing, setting forth the removal
of the Preferred Share Director, shall be signed by all of the holders of the
Class A Preferred Shares, Series I, and shall be delivered to the Corporation by
delivery to the Corporation's registered office in the State of Texas or the
Corporation's principal place of business. Delivery shall be made by hand or by
certified registered mail return receipt requested.
If during the continuation of any Voting Event, a vacancy shall occur in
the number of Preferred Share Directors by reason of death, resignation, removal
or otherwise, then such vacancy in the Preferred Share Director may be filled by
the vote of the holders of a majority of the Class A Preferred Shares, Series I
the outstanding at any special meeting of the holders of the Class A Preferred
Shares, Series I A Preferred Shares, Series I called for in the manner provided
in the immediately preceding paragraph.
A. "Voting Event" shall include:
(i) the failure of the Corporation to pay at least two
dividends on the Class A Preferred Shares, Series I as they become due and
payable:
(ii) in the event of a Put Redemption, the failure of the
Corporation to redeem the Class A Preferred Shares, Series I on the Put
Redemption Date:
(iii) in the event of a Mandatory Redemption, the failure
of the Corporation to redeem the Class A Preferred Shares, Series I on the
Mandatory Redemption Date; or
(iv) the Corporation or any Material Subsidiary thereof;
(A) 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
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undismissed for a period of thirty days; (B) 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; (C) 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 in a proceeding brought against or
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 acquired to by it; (D) suffers the entry against it of a
final judgment for the payment of money in excess of $500,000 (not covered
by insurance satisfactory to the holders of a majority of the Class A
Preferred Shares, Series I then outstanding in their 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
(E) 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,
and such writ or warranty 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.
As used above in the definition of "Voting Events":
"Consolidated" shall refer to the consolidation of any Persons, 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.
"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 Initial
Financial Statements; provided, that with respect to the Corporation, "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
Standard Board in the United States 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 the
Corporation 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
the holders of the Class A Preferred Shares, Series I and the holders of a
majority of the Class A Preferred Shares, Series I then outstanding agrees to
such change insofar as it affects the accounting of the Corporation and its
Consolidated subsidiaries.
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"Initial Financial Statements" shall mean (a) the audited annual
Consolidated financial statements of the Corporation, dated as of August 31,
1997 and (b) the unaudited quarterly Consolidated financial statements of the
Corporation dated as of November 30, 1997.
"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, providence or
other political subdivision thereof.
"Material Subsidiary" shall mean (i) Texstar Petroleum, Inc. and (ii) any
other Subsidiary of the Corporation which has assets the value of which
constitute in excess of 25% of the value of the Consolidated assets of the
Corporation as determined in accordance with GAAP.
"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.
"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.
"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, national,
territory, possession, county, parish, town, township, village or municipality,
whether now or hereafter constituted and/or existing.
So long as any of the Class A Preferred Shares, Series I remain
outstanding, the consent of the holders of at least a majority of the Class A
Preferred Shares, Series I 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 Class A Preferred Shares,
Series I are not fully current, except dividends on Junior Stock payable in
additional shares of Junior Stock (it being agreed that "Junior Stock"
shall mean 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 Class A
Preferred Shares, Series I as to dividend rights and rights on
liquidation, winding-up and dissolution of the Corporation). 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
the terms of which expressly provide that such class or series will rank on
a parity with the Class A Preferred Shares, Series I 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 Class A
Preferred Shares, Series I in cash. In addition,
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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 Class A Preferred Shares, Series I 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 Class A Preferred Shares, Series I as to dividends or the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation.
(c) the creation, authorization, issuance or reclassification of any
additional Class A Preferred Shares, Series I; provided, however, the
foregoing shall not apply to the issuance of additional Class A Preferred
Shares, Series I 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, with RP&C International Inc. ("RP&C") and other lenders
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
Class A Preferred Shares, Series I or (ii) the relative rights,
preferences, qualifications, limitations or restrictions of the Class A
Preferred Shares, Series I or of the holders thereof; or
(e) any amendment or modification to the terms and conditions of the
Class A Preferred Shares, Series I, which amends or modifies the terms of
this Section 2.6 or may have a materially adverse impact on (i) the ability
of the Corporation to perform its obligations with respect to the Class A
Preferred Shares, Series I or (ii) the relative rights, preferences,
qualifications, limitations or restrictions of the Class A Preferred
Shares, Series I or of the holders thereof; or
(f) any amendment or modification to the terms and conditions of the
Class A Preferred Shares, Series II ("Series II"), which may have a
material adverse impact on the Class A Preferred Shares, Series I; or
(g) the setting aside of funds for the purpose of redeeming,
repurchasing or otherwise retiring the Series II, unless the Corporation
has first offered the holders of the Class A Preferred Shares, Series I the
option of redeeming their shares in cash, as provided herein,
contemporaneously with the redemption of the Series II.
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Section 2.7 PAYMENTS
All cash payments shall be by wire transfer in lawful money of the United
States of America to an account or accounts designated in writing by the holders
of the Class A Preferred Shares, Series I.
Section 2.8 NOTICES
Any notice required by the provisions hereof to be given to the holders of
the Class A Preferred Shares, Series I shall be deemed given when deposited in
the United States Mail, postage prepaid, and addressed to each holder of record
at his or her address appearing on the books of the Corporation."
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Benz Energy Inc. has caused this Certificate to be
signed by a duly authorized officer, this 27th day of September, 1999.
BENZ ENERGY INC.
By: /s/ ROBERT S. HERLIN
-------------------------------------------------
Robert S. Herlin
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
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EXHIBIT 3.5
DATED AS OF MARCH 25, 1998
BENZ ENERGY LTD.
AND
MONTREAL TRUST COMPANY OF CANADA
TRUSTEE
TRUST INDENTURE
PROVIDING FOR THE ISSUE OF DEBENTURES IN SERIES
- ----------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ARTICLE 1
INTERPRETATION...........................................................................................1
1.1 Definitions.....................................................................................1
1.2 Meaning of "outstanding" for Certain Purposes...................................................7
1.3 Interpretation Not Affected By Headings, etc....................................................7
1.4 Statute References..............................................................................7
1.5 Monetary Reference..............................................................................7
1.6 Day Not a Business Day..........................................................................7
1.7 Invalidity of Provisions........................................................................7
1.8 Governing Law...................................................................................8
ARTICLE 2
THE DEBENTURES...........................................................................................8
2.1 No Fixed Limitation.............................................................................8
2.2 Issuance in Series..............................................................................8
2.3 Issuance of Convertible Debentures Series 1.....................................................9
2.4 Form of Debentures..............................................................................9
2.5 Execution of Debentures.........................................................................9
2.6 Certification..................................................................................10
2.7 Concerning Interest............................................................................10
2.8 Debentures to Rank Equally.....................................................................10
2.9 Registration of Debentures.....................................................................10
2.10 Payment of Principal and Interest in Respect of Registered Debentures..........................11
2.11 Payment of Principal and Interest in Respect of Bearer Debentures..............................12
2.12 Ownership of Registered Debentures.............................................................12
2.13 Negotiability and Ownership of Bearer Debentures and Coupons...................................13
2.14 Exchange Of Debentures.........................................................................13
2.15 Replacement of Debentures and Coupons..........................................................14
2.16 Interim Debentures.............................................................................14
2.17 Option of Holder as to Place of Payment........................................................15
2.18 Payment Agreements for Debentures..............................................................15
ARTICLE 3
REDEMPTION AND PURCHASE FOR CANCELLATION OF THE DEBENTURES..............................................15
3.1 General........................................................................................15
3.2 Notice of Redemption...........................................................................15
3.3 Debentures Due On Redemption Dates.............................................................15
3.4 Deposit of Redemption Monies...................................................................16
3.5 Cancellation and Destruction of Debentures and Coupons.........................................16
3.6 Surrender of Debentures for Cancellation.......................................................16
3.7 Purchase of Debentures for Cancellation........................................................16
ARTICLE 4
CONVERSION OF THE CONVERTIBLE DEBENTURES................................................................17
4.1 Conversion Privileges and Conversion Prices....................................................17
4.2 Revival of Right To Convert....................................................................17
4.3 Adjustment of Conversion Price.................................................................17
4.4 No Requirement To Issue Fractional Shares......................................................20
4.5 Corporation To Reserve Shares..................................................................20
4.6 Taxes and Charges on Conversion................................................................20
<PAGE>
-ii-
4.7 Cancellation of Converted Debentures...........................................................21
4.8 Certificate as to Adjustment...................................................................21
4.9 Notice of Special Matters......................................................................21
4.10 Protection of Trustee..........................................................................21
4.11 Definitions....................................................................................21
ARTICLE 5
COVENANTS OF THE CORPORATION............................................................................22
5.1 Payment of Principal, Premium, if any, and Interest............................................22
5.2 Maintenance of Corporate Existence.............................................................23
5.3 Financial Statements...........................................................................23
5.4 Trustee Remuneration...........................................................................23
5.5 Maintenance of Office or Agency................................................................23
5.6 Money for Debentures Payments to Be Held in Trust..............................................24
5.7 Statement as to Compliance.....................................................................25
5.8 Additional Amounts.............................................................................26
5.9 Long Term Debt and Tangible Assets.............................................................26
5.10 Limitation upon Credit Facility and Repayments.................................................27
5.11 Waiver of Certain Covenants....................................................................27
5.12 Payment of Taxes and Other Claims..............................................................27
5.13 Maintenance of Properties......................................................................27
5.14 Insurance......................................................................................27
5.15 Restrictions on Charter Amendments.............................................................28
5.16 Canadian Withholding and Reporting Requirements................................................28
5.17 Maintenance of Listings for Common Shares and Debentures.......................................28
5.18 Trustee May Perform Covenants..................................................................28
ARTICLE 6
REMEDIES................................................................................................28
6.1 Events of Default..............................................................................28
6.2 Notice of Events of Default....................................................................30
6.3 Acceleration of Maturity; Rescission and Annulment.............................................30
6.4 Collection Of Indebtedness and Suits for Enforcement by Trustee................................31
6.5 Trustee May File Proofs of Claim...............................................................32
6.6 Trustee May Enforce Claims Without Possession of Debentures....................................32
6.7 Application of Money Collected.................................................................32
6.8 Limitation on Suits............................................................................33
6.9 Restoration of Rights and Remedies.............................................................34
6.10 Rights and Remedies Cumulative.................................................................34
6.11 Delay or Omission Not Waiver...................................................................34
6.12 Control by Holders.............................................................................34
6.13 Waiver of Past Defaults........................................................................34
6.14 Waiver of Stay or Extension....................................................................35
ARTICLE 7
SATISFACTION AND DISCHARGE..............................................................................35
7.1 Cancellation and Destruction...................................................................35
7.2 Non-Presentation of Debentures and Coupons.....................................................35
7.3 Defeasance.....................................................................................36
7.4 Trustee Unable to Apply Money or Debentures....................................................36
7.5 Discharge......................................................................................37
<PAGE>
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ARTICLE 8
SUCCESSOR CORPORATIONS..................................................................................37
8.1 Certain Requirements in Respect of Merger etc..................................................37
8.2 Vesting of Powers in Successor.................................................................38
ARTICLE 9
MEETINGS OF DEBENTUREHOLDERS............................................................................38
9.1 Right to Convene Meetings......................................................................38
9.2 Notice of Meetings.............................................................................38
9.3 Chairman.......................................................................................38
9.4 Quorum.........................................................................................39
9.5 Power to Adjourn...............................................................................39
9.6 Show of Hands..................................................................................39
9.7 Poll...........................................................................................39
9.8 Voting.........................................................................................39
9.9 Regulations....................................................................................40
9.10 Corporation and Trustee May Be Represented.....................................................41
9.11 Powers Exercisable by Extraordinary Resolution.................................................41
9.12 Meaning of "Extraordinary Resolution"..........................................................43
9.13 Powers Cumulative..............................................................................43
9.14 Minutes........................................................................................44
9.15 Signed Instruments.............................................................................44
9.16 Binding Effect of Resolutions..................................................................44
9.17 Serial Meeting.................................................................................44
9.18 Evidence of Rights of Debentureholders.........................................................45
ARTICLE 10
NOTICES.................................................................................................46
10.1 Notice to the Corporation......................................................................46
10.2 Notice to Debentureholders.....................................................................46
10.3 Notice to the Trustee..........................................................................46
10.4 Mail Service Interruption......................................................................46
ARTICLE 11
CONCERNING THE TRUSTEE..................................................................................47
11.1 Trust Indenture Legislation....................................................................47
11.2 No Conflict of Interest........................................................................47
11.3 Rights and Duties of Trustee...................................................................47
11.4 Evidence, Experts and Advisers.................................................................48
11.5 Trustee May Deal in Debentures.................................................................48
11.6 Trustee Not Required to Give...................................................................48
11.7 Protection of Trustee..........................................................................48
11.8 Investment of Trust Moneys.....................................................................49
11.9 Action by Trustee to Protect Interests.........................................................49
11.10 Replacement of Trustee.........................................................................49
11.11 Acceptance of Trusts...........................................................................50
11.12 Indemnification of Trustee.....................................................................50
ARTICLE 12
SUPPLEMENTAL INDENTURES.................................................................................50
12.1 Supplemental Indentures........................................................................50
12.2 Supplemental Indentures with Consent of Holders................................................51
<PAGE>
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ARTICLE 13
EXECUTION...............................................................................................52
13.1 Counterparts and Formal Date...................................................................52
13.2 Language of Indenture..........................................................................52
SCHEDULE A
CONVERTIBLE DEBENTURES SERIES 1........................................................................A-1
TERMS AND CONDITIONS OF THE CONVERTIBLE DEBENTURES....................................................A-21
</TABLE>
<PAGE>
THIS TRUST INDENTURE made as of the 25th day of March, 1998
BETWEEN:
BENZ ENERGY LTD., a corporation continued under the laws
of the Yukon Territories having its registered office in
the City of Whitehorse in the Yukon Territories
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated
under the laws of Canada and having an office in the City of
Calgary in the Province of Alberta
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS the Corporation considers it necessary for its corporate purposes to
create and issue Debentures in the manner provided herein; and
WHEREAS the Corporation is duly authorized to create and issue Debentures to
be issued as provided herein; and
WHEREAS all necessary resolutions of the directors of the Corporation have
been duly passed and confirmed and other proceedings taken to make this Trust
Indenture a valid and binding indenture in accordance with its terms; and
WHEREAS the foregoing recitals are made as representations and statements of
fact by the Corporation and not by the Trustee;
NOW THEREFORE THIS INDENTURE WITNESSETH and it is hereby covenanted, agreed
and declared as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Trust Indenture, unless there is something in the subject matter or
context inconsistent therewith:
"AFFILIATE" has the meaning ascribed thereto in the BUSINESS
CORPORATIONS ACT (Yukon);
"AUTHORIZED NEWSPAPER" means a newspaper, in the English language or
in an official language of the country of publication, customarily
published on each Business Day, whether or not published on Saturdays,
Sundays, or holidays, and of general circulation in each place in
connection with which the term is used or in the financial community
of each such place. Where successive publications are required to be
made in Authorized Newspapers, the successive publications may be made
in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day;
<PAGE>
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"BANK ONE CREDIT FACILITY" means Texstar Petroleum, Inc.'s line of
credit with Bank One, Texas, N.A. in effect at the date hereof and
as it may be increased, decreased, supplanted or amended from time
to time hereafter;
"BEARER DEBENTURES" means Debentures issued hereunder payable to
bearer with Coupons attached;
"BUSINESS DAY" means any day, other than Saturday, Sunday or any
statutory holiday in both the city of Toronto and any other relevant
place or places where any action is required or permitted to be
performed hereunder provided that, with respect to any particular
series of Debentures, "Business Day" shall have the meaning specified
in the terms and conditions attached to such Debentures if one is so
specified;
"CAPITALIZED LEASE OBLIGATION" means the amount of the liability under
any capital lease that, in accordance with Generally Accepted
Accounting Principles, is required to be capitalized and reflected as
a liability on the balance sheet of the relevant Person;
"CERTIFICATE OF THE CORPORATION" means a certificate signed in the name
of the Corporation by the Chairman, the President or a Vice President
and by the Secretary, the Treasurer, an Assistant Secretary or an
Assistant Treasurer or Controller of the Corporation, and may consist
of one or more instruments so executed;
"COMMON DEPOSITORY" means any common depositary appointed in respect
of any series of Debentures, including any nominee of or successor
thereto;
"CONVERSION AGENT" means any Person (including the Corporation acting
as Conversion Agent) authorized by the Corporation to act on behalf of
the Corporation in the conversion of any Debentures into other
securities;
"CONVERTIBLE DEBENTURES" means the Convertible Debentures Series 1 and
such other Debentures as are designated Convertible Debentures in the
terms and conditions attached to such Debentures pursuant to this
Indenture;
"CONVERTIBLE DEBENTURES SERIES 1" means the Convertible Debentures
Series 1 issued hereunder and in accordance with Schedule "A";
"CORPORATION" includes any successor corporation to or of the party
of the first part which shall have complied with the provisions of
Article 8;
"COUNSEL" means a barrister or solicitor or firm of barristers and
solicitors retained by the Trustee or retained by the Corporation
and acceptable to the Trustee;
"COUPONS" means the interest coupons attached or appertaining to
Bearer Debentures;
"DEBENTURES" means debentures issued hereunder, including the
Convertible Debentures Series 1;
"DEBENTUREHOLDERS" or "HOLDERS" means, with respect to Registered
Debentures, the Persons for the time being entered in the registers
hereinafter mentioned as holders thereof and, with respect to Bearer
Debentures, means the Persons who are the possessors of such
Debentures;
"DEBENTUREHOLDERS' REQUEST" means an instrument signed in one or more
counterparts by the Holders of not less than 25% in principal amount of
the outstanding Debentures requesting the Trustee to take the action or
proceeding specified therein;
<PAGE>
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"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 Generally Accepted Accounting
Principles shall be classified upon a balance sheet of such Person
as liabilities of such Person, (ii) for borrowed money, (iii) which
have been incurred in connection with the acquisition of Property
(including, without limitation, all obligations of such Person
evidenced by any debenture, bond, note, commercial paper or other
similar security, but excluding, in any case, obligations arising
from the endorsement in the ordinary course of business of
negotiable instruments for deposit or collection), (iv) secured by
any Lien existing on Property owned by such Person, even though such
Person has not assumed or become liable for the payment of such
obligations, (v) 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, (vi)
which are Capitalized Lease Obligations, (vii) for all Guaranties,
whether or not reflected in the balance sheet of such Person and
(viii) 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 (i) 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 (ii)
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;
"DIRECTOR" means a director of the Corporation for the time being and
"Directors" means the board of directors of the Corporation or,
whenever duly empowered, the executive committee (if any) of the board
of directors of the Corporation for the time being, and reference to
action by the Directors means action by the directors as a board or
action by the executive committee of the board as a committee;
"ENCAP CREDIT FACILITY" means Texstar Petroleum, Inc.'s credit facility
with EnCap Energy Capital Fund III, LP in effect at the date hereof and
as it may be increased, decreased, supplanted or amended from time to
time hereafter;
"EVENT OF DEFAULT" has the meaning attributed to such term in
section 6.1;
"EXTRAORDINARY RESOLUTION" has the meaning attributed to such term
in sections 9.12 and 9.15;
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means generally accepted
accounting principles in Canada or the United States, as applicable,
from time to time as applied by the Corporation and its Subsidiaries
in preparation of its financial statements;
"GLOBAL DEBENTURE" means any global debenture representing any series
of Debentures which has been duly executed by the Corporation,
authenticated or certified by the Trustee or its agent, and deposited
with a Common Depository;
"GUARANTY" means all obligations of any Person (other than endorsements
in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect
guaranteeing any Debt, dividend or other obligation, of any other
Person (the "primary obligor") in any manner, whether directly or
indirectly, including without limitation all obligations incurred
through an agreement, contingent or otherwise, by such Person: (i) to
purchase such Debt or obligation or any Property or assets constituting
security therefor, or (ii) to advance or supply funds (1) for the
purchase or payment of such Debt or obligation, or (2) to enable the
recipient of such funds to maintain certain financial conditions (e.g.
agreed amount of working capital) under loan or similar documents, or
(iii) to lease Property or to purchase securities or other Property or
services primarily for the purpose of assuring the owner of such Debt
or obligation of the ability of the primary obligor to make payment of
the Debt or obligation, or (iv) otherwise to assure the owner of the
Debt or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations
<PAGE>
- 4 -
made under this Indenture, a Guaranty in respect of any Debt shall be
deemed to be Debt equal to the principal amount and accrued interest of
such Debt which has been guaranteed, and a Guaranty in respect of any
other obligation or liability or any dividend shall be deemed to be
Debt equal to the maximum aggregate amount of such obligation,
liability or dividend.
"HYDROCARBON INTERESTS" means all rights, titles, interests and
estates in and to oil and gas leases, oil, gas and mineral leases,
oil and gas concession agreements, production sharing agreements,
association contracts and similar agreements, or other liquid or
gaseous hydrocarbon leases, mineral fee interests, overriding
royalty and royalty interests, net profit interests and production
payment interests, or which may arise under operating agreements,
unit agreements or other contract rights, including any reserved or
residual interests of whatever nature and without regard to whether
such rights cover or exist with respect to lands located within or
without the United States.
"HYDROCARBONS" means oil, gas, casing head gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined therefrom and all other minerals.
"INDENTURE LEGISLATION" has the meaning attributed to such term in
section 11.1;
"INDEPENDENT RESERVE REPORT" means one or more independent reservoir
engineering reports or other independent third party valuations of the
Corporation's and its Subsidiaries' Oil and Gas Properties or any
portion thereof which are presented to the Trustee by the Corporation
which are used in determining the Tangible Assets, each of which
reports shall be dated as of the end of the Corporation's most recent
fiscal year or as of a later date, at the Corporation's option;
"INTEREST PAYMENT DATE" when used with respect to any Debenture, means
the Stated Maturity of an instalment of interest on such Debenture;
"LIEN" means any mortgage, charge, pledge, lien, security interest or
encumbrance of any kind whatsoever, including any interest in Property
securing an obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on the common
law, statute or contract, and including but not limited to the security
interest lien arising from a mortgage, encumbrance, pledge, conditional
sale or trust receipt or a lease, consignment or bailment for security
purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purposes of this Indenture, the Corporation
or its Subsidiary shall be deemed to be the owner of any Property which
it has acquired or holds subject to a conditional sale agreement,
financing lease or other arrangement pursuant to which title to the
Property has been retained by or vested in some other Person for
security purposes;
"LONG TERM DEBT" has the meaning specified in the Corporation's and
its Subsidiaries' audited financial statements or their audited
consolidated financial statements, as the case may be, and shall
include any amounts outstanding under the Bank One Credit Facility
and the EnCap Credit Facility;
"MARKETABLE SECURITIES" means any security of any Person listed,
admitted to trading or quoted on any nationally recognized stock
exchange or quotation system in Canada or the United States, or any
other market or quotation system approved by the Trustee;
"MATERIAL SUBSIDIARY" means a Subsidiary of a Person which as of the
last audited consolidated financial statements of the Person
constituted more than 15% of the consolidated assets of the Person or
15% of the consolidated revenue of the Person for the 12 months then
ended;
<PAGE>
- 5 -
"MATURITY" when used with respect to any Debenture, means the date on
which the principal of such Debenture or an instalment of principal
becomes due and payable as therein or herein provided, whether at
the Stated Maturity or by declaration of acceleration, notice of
redemption, notice of option to elect repayment or otherwise;
"OIL AND GAS PROPERTIES" means Hydrocarbon Interests; any Properties
now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and
declarations of pooled units and the units created thereby (including
without limitation all units created under orders, regulations and
rules of any governmental body or agency having jurisdiction) which may
affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or
processing of Hydrocarbons from or attributable to such Hydrocarbon
Interests; all Hydrocarbons in and under and which may be produced and
saved or attributable to the Hydrocarbon Interests, the lands covered
thereby and all oil in tanks and all rents, issues, profits, proceeds,
products, revenues and other income from or attributable to the
Hydrocarbon Interests; all tenements, hereditaments, appurtenances and
Properties in anywise appertaining, belonging, affixed or incidental to
the Hydrocarbon Interests, Properties, rights, titles, interests and
estates described or referred to above, including any and all Property,
real or personal, now owned or hereafter acquired and situated upon,
used, held for use or useful in connection with the operating, working
or development of any of such Hydrocarbon Interests (excluding drilling
rigs, automotive equipment or other personal property which may be on
such premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells,
injection wells or other wells, buildings, structures, fuel separators,
liquid extraction plants, plant compressors, pumps, pumping units,
field gathering systems, tanks and tank batteries, fixtures, valves,
fittings, machinery and parts, engines, boilers, meters, apparatus,
equipment, appliances, tools, implements, cables, wires, towers,
casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacement,
accessions and attachments to any and all of the foregoing;
"PAYING AGENT" means any Person (including the Corporation acting as
Paying Agent) authorized by the Corporation to pay the principal of
(or premium, if any) or interest on any Debentures on behalf of the
Corporation;
"PERSON" means any individual, partnership, limited partnership, joint
venture, syndicate, sole proprietorship, company or corporation with
or without share capital, unincorporated association, trust, trustee,
executor, administrator or other legal personal representative,
government or governmental authority or entity, however designated or
constituted;
"PLACE OF PAYMENT" means, when used with respect to the Debentures
of or within any series, the place or places where the principal of
(and premium, if any), and interest on such Debentures are payable as
specified, as contemplated by sections 2.2 and 5.5;
"PROPERTY" or "PROPERTIES" means any interest in any kind of property
or asset, whether real, personal or mixed, or tangible or intangible,
and including any Oil and Gas Property;
"REGISTERED DEBENTURES" means Debentures issued hereunder payable as to
principal and interest to the person in whose name such Debentures are
registered;
"STATED MATURITY" when used with respect to any Debenture or any
instalment of principal thereof or interest thereon, means the date
specified in such Debenture or a Coupon representing such instalment of
interest as the fixed date on which the principal of such Debenture or
such instalment of principal or interest is due and payable;
<PAGE>
- 6 -
"SUBSIDIARY" means any corporation more than 50% of the outstanding
voting shares of which are owned, directly or indirectly, by the
Corporation or by one or more Subsidiaries, or by the Corporation and
one or more Subsidiaries. The term "voting shares" means shares having
general voting power under ordinary circumstances to elect at least a
majority of the board of directors (irrespective of whether or not
shares of any other class or classes shall have or might have voting
power by reason of the happening of any contingency);
"SUCCESSOR CORPORATION" has the meaning attributed to such term in
section 8.1;
"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;
(ii) cash held by the Corporation or its Subsidiaries;
(iii) the fair market value of Marketable Securities held
by the Corporation or its Subsidiaries; and
(iv) the net book value of Oil and Gas Properties that do
not constitute Proved Reserves, 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;
"TAXES" means all taxes of any kind or nature whatsoever including,
without limitation, all federal, provincial, municipal and local taxes,
income taxes, capital taxes, levies, imposts, stamp taxes, royalties,
duties, charges to tax, value added taxes, commodity taxes, goods and
services taxes, excise taxes, business taxes, property taxes and
withholding taxes charged, levied, collected, withheld or assessed by
any relevant authority within any jurisdiction in Canada having power
to tax together with any penalties, fines, additions to tax and
interest thereon and any instalments in respect thereof and, for
greater certainty, does not include taxes charged, levied, collected,
withheld or assessed by an authority outside Canada;
"THIS INDENTURE" , "THIS TRUST INDENTURE", "HERETO", "HEREBY",
"HEREUNDER", "HEREOF", "HEREIN" and similar expressions refer to this
Indenture and not to any particular Article, section, subsection,
paragraph, clause, subdivision or other portion hereto and include any
and every schedule and supplemental indenture; and "supplemental
indenture" and "indenture supplemental hereto" include any and every
instrument supplemental or ancillary hereto or in implement hereof;
"TRUSTEE" means the party of the second part and its successors for
the time being in the trusts hereby created; and
"WRITTEN ORDER OF THE CORPORATION" and "WRITTEN REQUEST OF THE
CORPORATION" mean, respectively, an order or a request signed in the
name of the Corporation by the Chairman, the President or a
Vice-President and by the Secretary, the Treasurer, an Assistant
Secretary or an Assistant Treasurer or Controller of the Corporation,
and may consist of one or more instruments so executed.
Words importing the singular include the plural and vice versa and words
importing the masculine gender include the feminine gender and vice versa.
<PAGE>
- 7 -
1.2 MEANING OF "OUTSTANDING" FOR CERTAIN PURPOSES
Every Debenture certified and delivered by or on behalf of the Trustee hereunder
shall be deemed to be outstanding until it shall be cancelled or delivered to
the Trustee for cancellation, or a new Debenture shall be issued in substitution
therefor under section 2.14 or 2.15, or moneys for the payment thereof shall be
set aside under Article 6, provided that:
(a) where a new Debenture has been issued in substitution for a
Debenture which has been lost, stolen or destroyed, only one
of such Debentures shall be counted for the purpose of
determining the aggregate principal amount of Debentures
outstanding;
(b) for the purposes of any provision of this Indenture entitling
Holders of outstanding Debentures to vote, sign consents,
requests or other instruments or take other action under this
Indenture, Debentures owned directly or indirectly, legally or
equitably, by the Corporation, any Subsidiary or any Affiliate
shall be disregarded, except that:
(i) for the purpose of determining whether the Trustee shall
be protected in relying on any such vote, consent, request
or other instrument or other action, only Debentures of
which the Trustee has notice that they are so owned shall
be so disregarded; and
(ii) Debentures so owned which have been pledged in good faith
other than to the Corporation, a Subsidiary or an Affiliate
shall not be so disregarded if the pledgee shall establish
to the satisfaction of the Trustee the pledgee's right to
vote such Debentures in the pledgee's discretion free from
the control of the Corporation, a Subsidiary or an Affiliate.
1.3 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Indenture into Articles, sections, subsections and
paragraphs, the provision of a table of contents and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Indenture.
1.4 STATUTE REFERENCES
Unless the context otherwise requires, any reference in this Indenture to a
statute shall be deemed to be a reference to such statute as amended, re-enacted
or replaced from time to time.
1.5 MONETARY REFERENCE
Unless the context otherwise requires, any reference in this Indenture to
"Dollars", "dollars" or the sign shall be deemed to be a reference to lawful
money of the United States.
1.6 DAY NOT A BUSINESS DAY
In the event that any day on or before which any action is required to be taken
hereunder is not a Business Day, then such action shall be required to be taken
on or before the requisite time on the first Business Day thereafter.
1.7 INVALIDITY OF PROVISIONS
Each of the provisions contained in this Indenture or the Debentures is distinct
and severable and a declaration of invalidity or unenforceability of any such
provision by a court of competent jurisdiction shall not affect the validity or
enforceability of any other provision hereof or thereof.
<PAGE>
- 8 -
1.8 GOVERNING LAW
This Indenture and the Debentures shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein and shall be treated in all respects as Ontario contracts.
ARTICLE 2
THE DEBENTURES
2.1 NO FIXED LIMITATION
The aggregate principal amount of Debentures which may be issued under this
Indenture is unlimited but Debentures may be issued hereunder only upon the
terms and subject to the conditions herein provided.
2.2 ISSUANCE IN SERIES
The Debentures may be issued in one or more series, subject to compliance
with the provisions and conditions hereinafter set forth. Subject to the
provisions hereof, the Debentures of each such series shall bear such date or
dates, and mature on such date or dates, shall bear interest at such rate or
rates, may be issued in such denominations, may be issued in global or
definitive form, may be issued in bearer or registered form, may be
redeemable before maturity in such manner and subject to payment of such
premium, or without premium, may be payable as to principal, interest and
premium, if any (calculated in such manner or with reference to such index,
formula or other method), at such place or places and in such currency or
currencies, may provide for such sinking fund, if any, may contain such
provisions for the interchange or transfer of Debentures of different
denominations and forms, may have attached thereto and/or issued therewith
warrants entitling the Holders to subscribe for or purchase shares or other
securities of the Corporation upon such terms, may give the Holders thereof
the right to convert the same into shares or other securities of the
Corporation upon such terms and may contain such other provisions, not
inconsistent with the provisions of this Indenture, as may be determined by
resolution of the Directors passed at or prior to the time of issue thereof
and expressed in an indenture supplemental hereto providing for the issuance
of the Debentures of such series and (to such extent as the Directors may
deem appropriate) in the Debentures of such series. At the option of the
Corporation the maximum principal amount of Debentures of any series may be
limited, such limitation to be expressed in the supplemental indenture
providing for the issuance of the Debentures of such series and/or in the
Debentures of such series.
Whenever any series of Debentures has been authorized they may be from time to
time executed by the Corporation and delivered to the Trustee, and shall be
certified by the Trustee or its designated agent and delivered by the Trustee or
its designated agent to or to the order of the Corporation upon receipt by the
Trustee of:
(a) a certified resolution of the Directors authorizing issuance and
requesting certification and delivery of a specified principal
amount of Debentures of such subsequent series;
(b) a Written Order of the Corporation for the certification and
delivery of such Debentures specifying the principal amount of
the Debentures so to be certified and delivered;
(c) an opinion of Counsel in favour of the Trustee to the effect that
all legal requirements in connection with the issue of such
Debentures have been complied with;
(d) a Certificate of the Corporation that, so far as is known to the
persons signing the same, it is not in default in the performance
of any of its covenants herein contained and that it has complied
with the requirements of this Indenture in connection with the
issue of the Debentures; and
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(e) such Certificate of the Corporation, if any, as may be required
by any provision hereof or of Indenture Legislation in connection
with the issue, certification and delivery of the Debentures.
2.3 ISSUANCE OF CONVERTIBLE DEBENTURES SERIES 1
Notwithstanding that a supplemental indenture will provide for the issuance of
the Debentures in series pursuant to section 2.2 above, the following series of
Convertible Debentures in the aggregate principal amount of up to US$30,000,000
is hereby created and the terms and conditions attached to such Convertible
Debentures are provided for in the designated Schedule hereto:
Convertible Debentures Series 1 - Schedule A
2.4 FORM OF DEBENTURES
The Debentures of any series may be of different denominations and forms
(either Bearer Debentures or Registered Debentures or both), may be issued in
global or definitive form and may contain such variations of tenor and
effect, not inconsistent with the provisions of this Indenture, as are
incidental to such differences of denomination and form including variations
in the provisions for the exchange of Debentures of different denominations
or forms and in the provisions for the registration or transfer of Debentures
and any series of Debentures may consist of Debentures having different dates
of issue, different dates of maturity, different rates of interest and/or
different redemption prices, if any, and/or different sinking fund
provisions, if any, and/or partly of Debentures carrying the benefit of a
sinking fund and partly of Debentures with no sinking fund provided therefor.
All series of Debentures which may at any time be issued hereunder and the
Coupons, if any, appertaining thereto and the certificate of the Trustee
endorsed on such Debentures may be in such form or forms as the Directors
shall by resolution determine at the time of the first issue of any series or
part of a series of such Debentures and as shall be approved by the Trustee
whose approval shall be conclusively evidenced by the certification thereof.
The Debentures of any series may be engraved, lithographed, printed,
mimeographed or typewritten, or partly in one form and partly in another, as
the Corporation may determine; provided that if the Debentures of any series
are issued in mimeographed or typewritten form, the Corporation, on demand of
any Holder or Holders thereof, shall make available within a reasonable time
after such demand, without expense to such Holder or Holders, engraved,
lithographed or printed Debentures in exchange therefor.
2.5 EXECUTION OF DEBENTURES
The Debentures shall be signed (either manually or by facsimile signature) by
any one of the Chairman, the President, Vice President, the Secretary, the
Treasurer, an Assistant Secretary or an Assistant Treasurer or Controller of
the Corporation. A facsimile signature upon any of the Debentures shall for
all purposes of this Indenture be deemed to be the signature of the
individual whose signature it purports to be and to have been signed at the
time such facsimile signature is reproduced. Notwithstanding that any
individual whose signature (either manual or in facsimile) may appear on the
Debentures is not, at the date of this Indenture or at the date of the
Debentures or at the date of the certifying and delivery thereof the
Chairman, the President, a Vice President, the Secretary, the Treasurer, an
Assistant Secretary or an Assistant Treasurer or Controller, as the case may
be, of the Corporation, such Debentures shall be valid and binding upon the
Corporation and entitled to the benefits of this Indenture.
2.6 CERTIFICATION
No Debenture shall be issued or, if issued, shall be obligatory or shall
entitle the Holder thereof to the benefits of this Indenture until it has
been certified by or on behalf of the Trustee substantially in the form
approved by the Trustee, whose approval shall be conclusively evidenced by
the certification thereof. Such certificate on any Debenture shall be
conclusive evidence that such Debenture is duly issued and is a valid
obligation of the Corporation.
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The certificate of the Trustee on any Debenture shall not be construed as a
representation or warranty by the Trustee as to the validity of this
Indenture or of the Debentures (except the due certification thereof) and the
Trustee shall in no respect be liable or answerable for the use made of the
Debentures or any of them or the proceeds thereof.
2.7 CONCERNING INTEREST
(a) Any Coupons which have matured at the date of delivery by the
Trustee of any Bearer Debenture shall be detached from the same
and cancelled before delivery, unless such Bearer Debenture is
being issued in exchange or in substitution for another Bearer
Debenture and such matured Coupons represent unpaid interest to
which the Holder of such exchanged or substituted Debenture is
entitled.
(b) Every Registered Debenture of any series issued prior to the
first Interest Payment Date for such series in exchange or
substitution for, or upon the transfer of, the whole or any
part of one or more other Debentures of the same series,
bearing the same rate of interest and having the same Interest
Payment Dates and Stated Maturity, shall be dated as of the
date from which interest is payable on such other Debenture or
Debentures and every Registered Debenture issued after the
first Interest Payment Date for such series in exchange or
substitution for, or upon the transfer of, the whole or any
part of one or more other Debentures of the same series bearing
the same rate of interest and having the same Interest Payment
Dates and Stated Maturity, shall be dated as of the Interest
Payment Date next preceding the date of certification thereof
to which interest has been paid on the Debentures of such
series, unless the date of certification is an Interest Payment
Date to which interest has been paid, in which case it shall be
dated as of the date of certification. Every Registered
Debenture shall bear interest from its date. Nevertheless in
the case of any Registered Debenture issued originally, or upon
exchange, substitution, transfer or otherwise, if the dating of
such Debenture as of the actual date of certification would
result in the Holder either losing or gaining interest, the
Trustee shall date such Debenture such date, other than the
actual date of certification, as will prevent any such loss or
gain, and such Debenture shall bear interest in accordance with
the foregoing provisions of this section 2.7.
2.8 DEBENTURES TO RANK EQUALLY
The Debentures may be issued in such amounts, to such Persons, on such terms not
inconsistent with the provisions of this Indenture, and either at par or at a
discount or at a premium as the Directors may determine. The Debentures shall be
direct obligations of the Corporation, shall rank pari passu without
discrimination, preference or priority with one another and with other unsecured
and unsubordinated indebtedness for borrowed money of the Corporation. Each
Debenture as soon as issued shall, subject to the terms hereof, be equally and
rateably entitled to the benefits hereof as if all the Debentures had been
issued and negotiated simultaneously.
2.9 REGISTRATION OF DEBENTURES
(a) The Corporation shall cause to be kept by and at the principal
office of the Trustee in the City of Calgary a central
register, and by and at the principal office of the Trustee in
each of the cities of Vancouver, Calgary and Toronto and in
such other place or places by the Trustee or by such other
registrar or registrars, if any, as the Corporation with the
approval of the Trustee may designate, branch registers in
which shall be entered the names and latest known addresses of
the Holders of Registered Debentures and the other particulars,
as prescribed by law, of the Debentures held by them
respectively and of all transfers of Registered Debentures.
Such registration shall be noted on the Debentures by the
Trustee or other registrar. No transfer of a Registered
Debenture shall be effective as against the Corporation unless
made on one of the appropriate registers by the Holder of such
Registered Debenture or his executors or administrators or
other legal representatives or his or their attorney duly
appointed by an instrument in form and execution satisfactory
to the Trustee
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and upon compliance with such requirements as the Trustee or
other registrar may prescribe, and unless such transfer shall
have been duly noted on such Debenture by the Trustee or other
registrar.
(b) The registers referred to in this section shall at all
reasonable times be open for inspection by the Corporation, the
Trustee and any Debentureholder.
(c) The Holder of a Registered Debenture may at any time and from
time to time have such Debenture transferred at any of the
places at which a register is kept pursuant to the provisions
of this section in accordance with such reasonable regulations
as the Trustee may prescribe. The Holder of a Registered
Debenture may at any time and from time to time have the
registration of such Debenture transferred from the register in
which the registration thereof appears to another register
maintained in another place authorized for that purpose under
the provisions of this Indenture upon payment of a reasonable
fee to be fixed by the Trustee.
(d) Neither the Corporation nor the Trustee nor any registrar shall
be required to transfer or exchange any Registered Debentures
on any Interest Payment Date or during the 15 Business Days
immediately preceding any Interest Payment Date.
(e) None of the Trustee, any registrar for any of the Registered
Debentures and the Corporation shall be charged with notice of
or be bound to see to the execution of any trust, whether
express, implied or constructive, in respect of any Registered
Debenture and may transfer any Registered Debenture on the
direction of the Holder thereof, whether named as trustee or
otherwise, as though that Person were the beneficial owner
thereof.
(f) Except in the case of the central register required to be kept
at the city of Calgary, the Corporation shall have power at any
time to close any branch register and in that event it shall
transfer the records thereof to another existing register or to
a new register and thereafter such Debentures shall be deemed
to be registered on such existing or new register, as the case
may be. In the event that the register in any place is closed
and the records transferred to a register in another place,
notice of such change shall be given to the Holders of the
Registered Debentures registered in the register so closed and
the particulars of such change shall be recorded in the central
register required to be kept in the city of Calgary.
(g) Every registrar shall, when requested to do so by the
Corporation or the Trustee, furnish the Corporation or the
Trustee, as the case may be, with a list of the names and
addresses of the Holders of Registered Debentures showing the
principal amounts and serial numbers of such Debentures held by
each Holder.
2.10 PAYMENT OF PRINCIPAL AND INTEREST IN RESPECT OF REGISTERED DEBENTURES
(a) As the interest on Registered Debentures of any series becomes
due (except interest payable at Maturity which may be paid upon
presentation and surrender of such Debentures for payment), the
Corporation, at least three days prior to each date on which
interest on such Debentures becomes due, shall forward or cause
to be forwarded by first class mail, postage prepaid, (or in
the event of mail service interruption by such other means as
the Trustee and the Corporation shall determine to be
appropriate) to the Holder for the time being at his address
appearing on the appropriate register hereinbefore mentioned a
cheque for such interest (less any tax required by law to be
deducted) payable to the order of such Holder and negotiable at
par at each of the places at which interest upon such
Registered Debentures is payable. The forwarding of such cheque
shall satisfy and discharge the liability for the interest on
such Registered Debentures to the extent of the sum represented
thereby (plus the amount of any tax deducted as aforesaid)
unless such cheque is not paid on presentation. In the event of
the non-receipt of such cheque by the Holder or the loss or
destruction
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thereof, the Corporation, upon being furnished with evidence of
such non-receipt, loss or destruction and an indemnity
reasonably satisfactory to it, shall issue or cause to be
issued to such Holder a replacement cheque for the amount of
such cheque.
(b) Where Registered Debentures are registered in more than one
name, the principal and interest from time to time payable in
respect thereof shall be paid by cheque payable to the order of
all such Holders, unless the Corporation has received written
instructions from them to the contrary, and the receipt of any
one of such Holders therefor shall be a valid discharge to the
Trustee, any registrar of Debentures and the Corporation.
2.11 PAYMENT OF PRINCIPAL AND INTEREST IN RESPECT OF BEARER DEBENTURES
(a) Interest payments in respect of Bearer Debentures of any series
shall be made (less any tax required by law to be deducted)
against presentation and surrender of the appropriate Coupons
at the place or places specified with respect to such series.
(b) Any payment of principal in respect of a Bearer Debenture shall
be made against presentation and surrender of such Bearer
Debenture, together with all unmatured Coupons (if any)
appertaining thereto, failing which the amount of the missing
unmatured Coupons will be deducted from the principal amount
due for payment, at the place or places specified with respect
to such series. Amounts of principal so deducted will be paid
against surrender of the relevant missing Coupons within a
period of six years from the date upon which such amount would
otherwise have been payable.
(c) Interest payable in respect of any interest payment which is in
default shall be paid to the Holder of the Coupon representing
such interest payment and interest payable in respect of any
other amount in default shall be paid to the Holder of the
Bearer Debenture in respect of which such payment is due.
2.12 OWNERSHIP OF REGISTERED DEBENTURES
(a) The Person in whose name any Registered Debenture shall be
registered shall be deemed to be the owner thereof for all
purposes of this Indenture and payment of or on account of the
principal of and interest on such Registered Debenture shall be
made only to or upon the order in writing of the Holder thereof
and such payment shall be a complete discharge to the Trustee,
any registrar of Debentures, the Corporation and any Paying
Agent for the amounts so paid.
(b) The Holder for the time being of any Registered Debenture shall
be entitled to the principal, interest and premium, if any,
evidenced by such Registered Debenture, free from all equities
or rights of set-off or counterclaim between the Corporation
and the original or any intermediate Holder thereof (except any
equities of which the Corporation is required to take notice by
law) and all Persons may act accordingly and a transferee of a
Registered Debenture shall, after the appropriate form of
transfer is lodged with the Trustee or other registrar of
Debentures and upon compliance with all other conditions in
that behalf required by this Indenture or by any conditions
contained in such Registered Debenture or by law, be entitled
to be entered on the appropriate register or on any one of the
appropriate registers as the owner of such Registered Debenture
free from all equities or rights of set-off or counterclaim
between the Corporation and his transferor or any previous
Holder thereof, save in respect of equities of which the
Corporation is required to take notice by law.
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2.13 NEGOTIABILITY AND OWNERSHIP OF BEARER DEBENTURES AND COUPONS
(a) Bearer Debentures and Coupons shall be negotiable and title
thereto shall pass by delivery.
(b) Except as may be ordered by a court of competent jurisdiction
or as required by law, the Corporation and the Trustee may deem
and treat the bearer of any Bearer Debenture or Coupon as the
absolute owner thereof for all purposes and none of the
Corporation, the Trustee or any Paying Agent shall be affected
by any notice to the contrary.
(c) The Holder of any Bearer Debenture and the bearer of any Coupon
shall be entitled to the principal, interest or premium, if
any, evidenced by such instrument free from all equities or
rights of set-off or counterclaim between the Corporation and
the original or any intermediate or subsequent Holder or bearer
thereof (except any equities of which the Corporation is
required to take notice of by law) and all persons may act
accordingly and the receipt of any such Holder or bearer for
any such principal or interest shall be a complete discharge to
the Corporation and the Trustee for the same and none of the
Corporation, the Trustee or any Paying Agent shall be bound to
inquire into the title of any such Holder or bearer.
2.14 EXCHANGE OF DEBENTURES
(a) Bearer Debentures may be exchanged for Registered Debentures
and Registered Debentures may be exchanged for Bearer
Debentures (provided, in either case, that such Debentures are
issuable), and Debentures of any denomination may be exchanged
for Debentures of any other authorized denomination or
denominations, any such exchange to be for Debentures of an
equivalent aggregate principal amount of Debentures of the same
series, carrying the same rate of interest and having the same
Stated Maturity and the same redemption and sinking fund
provisions, if any. Exchanges of Debentures may be made at the
principal offices of the Trustee in the cities of Vancouver,
Calgary and Toronto. Any Debentures tendered for exchange shall
be surrendered to the Trustee and shall be cancelled. The
Corporation shall execute, and the Trustee shall certify, all
Debentures necessary to carry out such exchanges.
(b) Except as otherwise provided herein, upon any exchange of
Bearer Debentures for Registered Debentures or Registered
Debentures for Bearer Debentures or Debentures of any
denomination for Debentures of any other authorized
denominations and upon any transfer of Registered Debentures,
the Trustee or other registrar of Debentures may make a
sufficient charge to reimburse it for any stamp tax, security
transfer tax or other governmental charge required to be paid,
and in addition a reasonable charge for its services for each
Debenture exchanged or transferred, and payment of such charges
shall be made by the party requesting such exchange or transfer
as a condition precedent thereto.
(c) Notwithstanding the foregoing, no charge (other than for
insurance on any Debentures forwarded by mail) shall be made by
the Trustee, any registrar of Debentures or the Corporation (i)
for any exchange, registration or transfer of any Debenture
applied for within a period of 30 days from the date hereof; or
(ii) for any exchange, after such period, of Debentures for
Debentures in lesser denominations, provided that the
Debentures surrendered for exchange shall not have been issued
as a result of any previous exchange, other than an exchange
pursuant to clause (i) of this subsection or section 3.7.
(d) Bearer Debentures surrendered for exchange shall be accompanied
by all unmatured Coupons appertaining thereto and Bearer
Debentures issued on an exchange shall have detached therefrom
and cancelled all Coupons appertaining thereto which have
matured and in respect of which the interest has been paid.
Each Debenture delivered under this Indenture in exchange for
or in lieu of
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any other Debenture shall carry the rights to principal and
interest accrued and unpaid, and to accrue, which were carried
by such other Debenture.
(e) Neither the Corporation, the Trustee nor any other registrar of
Debentures shall be required to make exchanges of Debentures on
any Interest Payment Date or during the 15 Business Days
immediately preceding any Interest Payment Date.
2.15 REPLACEMENT OF DEBENTURES AND COUPONS
If any of the Debentures or Coupons shall become mutilated or be lost, stolen or
destroyed and in the absence of notice that such Debentures have been acquired
by a bona fide purchaser within the meaning of the BUSINESS CORPORATIONS ACT
(Yukon), the Corporation in its discretion may issue, and thereupon the Trustee
shall certify and deliver, a new Debenture or Coupon upon surrender and
cancellation of the mutilated Debenture or Coupon, or, in the case of a lost,
stolen or destroyed Debenture or Coupon, in lieu of and in substitution for the
same, and the substituted Debenture or Coupon shall be in a form approved by the
Trustee and shall be entitled to the benefits of this Indenture equally with all
other Debentures or Coupons issued or to be issued hereunder. Each Debenture
delivered under this Indenture in exchange for or in lieu of any other Debenture
shall carry the rights to principal and interest accrued and unpaid, and to
accrue, which were carried by such other Debenture. In case of loss, theft or
destruction the applicant for a new Debenture or Coupon shall furnish to the
Corporation and to the Trustee such evidence of such loss, theft or destruction
as shall be satisfactory to them in their discretion and shall also furnish an
indemnity in amount and form satisfactory to them in their discretion. The
applicant shall pay all expenses incidental to the issuance of any such new
Debenture or Coupon.
2.16 INTERIM DEBENTURES
Pending delivery to the Trustee of definitive Debentures of any series or
part of a series, the Corporation may execute in lieu thereof (but subject to
the same provisions, conditions and limitations), and the Trustee may
certify, interim printed, mimeographed or typewritten Debentures, in such
form and in such denominations as may be approved by the Trustee and the
Chairman, the President or a Vice President of the Corporation (whose
certification or signature, either manual or in facsimile, as the case may
be, on any such interim Debentures shall be conclusive evidence of such
approval) entitling the Holders thereof to definitive Debentures of such
series or part of a series in any authorized denominations when the same are
ready for delivery, without expense to such Holders, but the total amount of
interim Debentures of any series or part of a series so issued shall not
exceed the aggregate principal amount of Debentures of such series or part of
a series for the time being authorized. Forthwith after the issuance of any
such interim Debentures the Corporation shall cause to be prepared the
appropriate definitive Debentures for delivery to the Holders of such interim
Debentures.
Interim Debentures which have been duly issued shall, until exchanged for
definitive Debentures, entitle the Holders thereof to rank for all purposes
as Debentureholders and otherwise in respect of this Indenture to the same
extent and in the same manner as though such exchange had actually been made.
When exchanged for definitive Debentures such interim Debentures shall
forthwith be cancelled by the Trustee. Any interest paid upon interim
Debentures shall be noted thereon by the Paying Agent at the time of payment
unless paid by cheque to the Holders thereof.
2.17 OPTION OF HOLDER AS TO PLACE OF PAYMENT
Except as otherwise provided herein, all sums which may at any time become
payable, whether at Maturity or on a declaration by the Trustee pursuant to
section 6.3 or on redemption or otherwise, on account of any Debenture or
Coupon or any principal, interest or premium shall be payable at the option
of the Holder or the bearer thereof at any of the places at which the
principal of and interest or premium (if any) on such Debenture or Coupon are
payable.
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2.18 PAYMENT AGREEMENTS FOR DEBENTURES
Notwithstanding anything contained herein, the Corporation may enter into an
agreement with the Holder of a Registered Debenture or with the Person for
whom such Holder is acting as nominee providing for the payment to such
Holder of the principal of and interest or premium (if any) on such Debenture
at a place or places other than the place or places specified herein or any
supplemental indenture and in such Debenture as the place or places for such
payment. Any payment of the principal of and interest or premium (if any) on
any such Registered Debenture at such other place or places pursuant to such
agreement shall, notwithstanding any other provision of this Indenture or any
supplemental indenture, be valid and binding on the Corporation, the Trustee
and the Holders of Debentures.
ARTICLE 3
REDEMPTION AND PURCHASE FOR CANCELLATION OF THE DEBENTURES
3.1 GENERAL
The Corporation, when not in default hereunder, shall have the right at its
option to redeem, either in whole at any time or in part from time to time
before Maturity, Debentures issued hereunder of any series or part of a
series which by their terms are made so redeemable at such rate or rates of
premium, if any, and at such date or dates and on such terms and conditions
as shall have been determined at the time of the issue of such Debentures and
as shall be expressed in this Indenture and/or in the Debentures and/or in
the supplemental indenture authorizing or providing for the issue thereof.
"Premium" as used in this Article 3 with reference to any Debenture shall
mean the excess of the then applicable redemption price of such Debenture
(excluding interest) over the principal amount of such Debenture.
3.2 NOTICE OF REDEMPTION
Notice of intention to redeem any Debenture shall be given by or on behalf of
the Corporation to the Holders of the Debenture which are to be redeemed, not
more than 60 days nor less than 30 days prior to the date fixed for
redemption, in the manner provided in section 10.2. Every notice of
redemption shall designate the series and Stated Maturity of the Debentures
so called for redemption, and unless all of the Debentures or all of the
Debentures of a series or all of the Debentures of one Stated Maturity so
designated for the time being outstanding are to be redeemed, state the
designating numbers of the Debentures so called for redemption and in case a
Debenture is to be redeemed in part only that part of the principal amount
thereof so to be redeemed, and shall specify the redemption date, the
redemption price and the place or places of payment and shall state that all
interest thereon shall cease from and after the said date.
3.3 DEBENTURES DUE ON REDEMPTION DATES
Notice having been given as aforesaid, all the Debentures so called for
redemption shall thereupon become due and payable at the redemption price, on
the redemption date specified in such notice, at any of the places where the
principal of such Debentures is expressed to be payable in the same manner
and with the same effect as if it were the Stated Maturity specified in such
Debentures respectively, anything therein or herein to the contrary
notwithstanding, and from and after such redemption date, if the moneys
necessary to redeem such Debentures shall have been deposited as provided in
section 3.4 and the Trustee shall have been furnished with affidavits or
other proof satisfactory to it as to the publication and/or mailing of such
notices, interest on the said Debentures shall cease and Coupons for interest
to accrue after such redemption date on said Debentures shall become and be
void.
In case any question shall arise whether any notice has been given as above
provided and such deposit made, such question shall be decided by the Trustee
whose decision shall be final and binding upon all parties in interest.
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3.4 DEPOSIT OF REDEMPTION MONIES
Such redemption shall be provided for by the Corporation irrevocably
depositing with the Trustee or any Paying Agent to the order of the Trustee
in trust for the Holders of the Debentures called for redemption, before the
redemption date specified in such notice, such sums as may be sufficient to
pay the redemption price of such Debentures including accrued interest and
premium, if any, on the Debentures so called for redemption to the date fixed
for redemption. The Corporation shall also deposit with the Trustee if
required by it a sum sufficient to pay any charges or expenses which may be
incurred by the Trustee in connection with such redemption. From the sums so
deposited the Trustee shall pay or cause to be paid to the Holders of such
Debentures so called for redemption, upon surrender of such Debentures with
all unmatured Coupons, if any, appertaining thereto (or without such
surrender if the registered Holder of the Debentures to be redeemed or the
person for whom such registered Holder is acting as nominee has entered into
an agreement with the Corporation to that effect) the principal, interest and
premium, if any, to which they are respectively entitled on redemption.
Provided that in the case of Bearer Debentures the accrued interest as
represented by Coupons matured prior to, or on, the redemption date shall
continue to be payable (but without interest thereon, unless the Corporation
shall make default in the payment thereof upon demand) to the respective
bearers of such Coupons upon presentation and surrender thereof.
3.5 CANCELLATION AND DESTRUCTION OF DEBENTURES AND COUPONS
All Debentures surrendered for cancellation upon any redemption under this
Article, together with the unmatured Coupons, if any, thereto appertaining,
shall forthwith be delivered to the Trustee and shall be cancelled by it and
no Debentures shall be issued in substitution therefor.
All Debentures and Coupons which shall have been delivered to and cancelled
by the Trustee shall be destroyed by the Trustee and if required by the
Corporation the Trustee shall furnish to it a destruction certificate setting
out the designating numbers and denominations of the Debentures so destroyed.
3.6 SURRENDER OF DEBENTURES FOR CANCELLATION
If the principal moneys of Debentures issued hereunder shall become payable
by redemption or otherwise before the Stated Maturity thereof, the person
presenting such Debenture for payment must surrender the same for
cancellation together with all unmatured Coupons, if any, appertaining
thereto, the Corporation nevertheless paying the interest accrued and unpaid
thereon if the date fixed for payment be not an Interest Payment Date.
3.7 PURCHASE OF DEBENTURES FOR CANCELLATION
At any time when the Corporation is not in default hereunder it may purchase
all or any of the Debentures in the market (which shall include purchase from
or through an investment dealer or a firm holding membership on a recognized
stock exchange) or by invitation for tenders or by private contract and, in
each case, at any price. All Debentures so purchased, together with the
unmatured Coupons (if any) appertaining thereto, shall forthwith be delivered
to the Trustee and shall be cancelled by it and, except as hereinafter
provided, no Debentures shall be issued in substitution therefor.
If and upon an invitation for tenders, more Debentures are tendered at the
same lowest price that the Corporation is prepared to accept, the Debentures
to be purchased by the Corporation shall be selected by the Trustee by lot,
or in such other manner as the Trustee may consider equitable, from the
Debentures tendered by each Debentureholder who tendered at such lowest
price. For this purpose the Trustee may make, and from time to time amend,
regulations with respect to the manner in which Debentures may be so selected
and regulations so made shall be valid and binding upon all Debentureholders,
notwithstanding the fact that, as a result thereof, one or more of such
Debentures become subject to purchase in part only. The Holder of any
Debenture of which a part only is purchased, upon surrender of such Debenture
for payment, shall be entitled to receive, without expense to such Holder,
one or more new Debentures for
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the unpurchased part so surrendered and the Trustee shall certify and deliver
such new Debenture or Debentures upon receipt of the Debenture so surrendered.
ARTICLE 4
CONVERSION OF THE CONVERTIBLE DEBENTURES
4.1 CONVERSION PRIVILEGES AND CONVERSION PRICES
The Holders of any Debentures shall have the right, at the holder's option,
to convert such Debentures into Common Shares at such times, at such rates
and on such terms and conditions as shall have been determined at the time of
the issue of such Debentures and as shall be expressed in this Indenture
and/or in the Debentures and/or in the supplemental indenture authorizing or
providing for the issue thereof.
Such right of conversion shall extend only to the maximum number of whole
Common Shares into which the aggregate principal amount of the Convertible
Debenture surrendered for conversion at any one time by the holder thereof
may be converted in accordance with the foregoing provisions of this
subsection and Article 4 hereof. Fractional interests in Common Shares shall
be adjusted for in the manner provided in section 4.4.
4.2 REVIVAL OF RIGHT TO CONVERT
If payment of the purchase price or the redemption price of any Convertible
Debenture which has been tendered in acceptance of an offer by the
Corporation to purchase Convertible Debentures for cancellation or called for
redemption is not made, in the case of a purchase on the date on which such
purchase is required to be made or, in the case of a redemption on the date
when the due surrender of a Convertible Debenture is required to be made, the
right to convert such Convertible Debenture shall revive and continue as if
such Convertible Debenture had not been tendered in acceptance of the
Corporation's offer or called for redemption as the case may be.
4.3 ADJUSTMENT OF CONVERSION PRICE
The Conversion Price for any Convertible Debenture in effect at any date
shall be subject to adjustment from time to time as follows:
(a) If and whenever at any time prior to the Time of Expiry
specified for the series of Convertible Debentures the
Corporation shall (i) subdivide or redivide the outstanding
Common Shares into a greater number of shares, (ii) reduce,
combine or consolidate the outstanding Common Shares into a
smaller number of shares, or (iii) issue Common Shares or other
securities convertible into or exchangeable for Common Shares
to the holders of all or substantially all of the outstanding
Common Shares by way of a stock dividend (other than the issue
of Common Shares to holders of Common Shares pursuant to their
exercise of options to receive dividends in the form of Common
Shares in lieu of dividends paid in the ordinary course on the
Common Shares), the 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
Shares by way of a stock dividend, as the case may be, shall be
adjusted by multiplying the Conversion Price then in effect by
a fraction the numerator of which is the number of Common
Shares 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 Shares 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 Common
Shares under subsections (c) and (d) of this section 4.3.
(b) If and whenever at any time prior to the Time of Expiry
specified for the series of the Convertible Debentures the
outstanding Common Shares are reclassified into different
shares any holder of a Convertible Debenture who has not
exercised his right of conversion prior to the effective date of
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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 Common Shares to which he was theretofore entitled
upon conversion, the aggregate number of shares of the
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 registered holder of
the number of Common Shares 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 4.3 and in section 4.4.
(c) If and whenever at any time prior to the Time of Expiry
specified for the series of Convertible Debentures 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 Shares entitling them, for a period expiring
not more than 45 days after such record date, to subscribe for
or purchase Common Shares (or securities exchangeable for or
convertible into Common Shares) at a price per share (or having
a conversion or exchange price per share) less than 95% of the
then Current Market Price of a Common Shares on such record
date, the Conversion Price shall be adjusted immediately after
such record date so that it shall equal the price determined by
multiplying the Conversion Price in effect on such record date
by a fraction, of which the numerator shall be the total number
of Common Shares outstanding on such record date plus a number
of Common Shares equal to the number of additional Common
Shares offered for subscription or purchase (or the aggregate
conversion or exchange price of the convertible securities so
offered) by such Current Market Price per Common Shares, and of
which the denominator shall be the total number of Common
Shares outstanding on such record date plus the total number of
additional Common Shares offered for subscription or purchase
(or into which the convertible securities so offered are
convertible); any Common Shares 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
adjustment 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 Conversion Price
shall be readjusted to the Conversion Price which would then be
in effect if such record date had not been fixed or to the
Conversion Price which would then be in effect based upon the
number of Common Shares (or securities convertible into Common
Shares) actually issued upon the exercise of such rights or
warrants, as the case may be, provided that this subsection (c)
of section 4.3 will not apply to adjust the Conversion Price if
each holder of a Convertible Debenture is permitted to
participate in the receipt and exercise of such rights or
warrants as though such holder had converted the whole of his
Convertible Debenture in accordance with this Article 4 prior
to such record date.
(d) If and whenever at any time prior to the Time of Expiry
specified for the series of Convertible Debentures the
Corporation shall fix a record date for the making of a
distribution to all or substantially all the holders of its
outstanding Common Shares of (i) shares of any class other than
Common Shares and other than shares distributed to holders of
Common Shares 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 Shares and other than
shares issued upon any subdivision of Common Shares referred to
in subsection (a) of this section 4.3 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) then, in each such case,
the Conversion Price shall be adjusted immediately after such
record date so that it shall equal the price determined by
multiplying the Conversion Price in effect on such record date
by a fraction, of which the numerator shall be the total number
of Common Shares outstanding on such record date multiplied by
the Current Market Price for such Shares, 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 Common Shares
outstanding on such record date multiplied by such Current
Market Price
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per Common Share; any Common Shares 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 Conversion Price shall be readjusted to the
Conversion Price which would then be in effect if such record
date had not been fixed or the Conversion Rate 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 4.3
will not apply to adjust the Conversion Price if each holder of
a Convertible Debenture is permitted to participate in such
Distribution as though such holder had converted the whole of
his Convertible Debenture in accordance with this Article 4
prior to such record date.
(e) In case of any reclassification of, or any other material
change in, the outstanding Common Shares of the Corporation
other than a subdivision, redivision, reduction, combination or
consolidation, the Conversion Price shall be adjusted in such
manner as the board of directors, with the approval of the
Trustee, determines to be appropriate on a basis consistent
with this section 4.3.
(f) If and whenever at any time prior to the Time of Expiry
specified for the series of Convertible Debentures, there is a
capital reorganization of the Corporation not covered by the
foregoing provisions of this section 4.3 or a consolidation or
merger or amalgamation of the Corporation with or into any
other company including by way of a sale whereby all or
substantially all of the Corporation's undertaking and assets
would become the property of any other company, and holder of a
Convertible Debenture 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 accept, upon the exercise of such right at
any time on such effective date or thereafter, in lieu of the
number of Common Shares to which he was theretofore entitled
upon conversion, the aggregate number of shares or other
securities or 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 Common Shares 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 4.3 and in
section 4.4.
(g) In any case in which this section 4.3 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 occurrence of such event, issuing to the holder of
any Convertible Debenture converted after such record date and
before the occurrence of such event the additional Common
Shares 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 Common Shares
upon the occurrence of the event requiring such adjustment and
the right to receive any distributions made on such additional
Common Shares declared in favour of holders of record of Common
Shares 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 Common
Shares.
(h) The adjustments provided for in this section 4.3 and in section
4.4 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 Conversion
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Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the 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.
(i) In the event of any question arising with respect to the
adjustments provided in this section 4.3, such question shall
be conclusively determined by a firm of chartered accountants
appointed by the Corporation and acceptable to the Trustee (who
may be the auditors of the Corporation); such accountants shall
have access to all necessary records of the Corporation and
such determination shall be binding upon the Corporation, the
Trustee and the Debentureholders.
4.4 NO REQUIREMENT TO ISSUE FRACTIONAL SHARES
The Corporation shall not be required to issue fractional Common Shares upon the
conversion of Convertible Debentures pursuant to this Article. If more than one
Convertible Debenture shall be surrendered for conversion at one time by the
same holder, the number of whole Common Shares issuable upon conversion thereof
shall be computed on the basis of the aggregate principal amount of such
Convertible Debentures to be converted. If any fractional interest in a Common
Share would, except for the provisions of this section, be deliverable upon the
conversion of any principal amount of Convertible Debentures the Corporation
shall, in lieu of delivering any certificate of such fractional interest,
satisfy such fractional interest by paying to the holder of such surrendered
Convertible Debenture an amount in lawful money of Canada equal (computed to the
nearest cent) to the appropriate fraction of the value (being the last reported
sale price or, if none, the mean between the closing bid and ask quotations on
The Vancouver Stock Exchange, on such stock exchange on which the Common Shares
are listed, as may be selected for such purpose by the Directors of, if the
Common Shares are not listed on any stock exchange, a value determined by the
Directors and approved by the Trustee) of a Common Share on the business day
next preceding the Date of Conversion.
4.5 CORPORATION TO RESERVE SHARES
The Corporation covenants with the Trustee that it will at all times reserve and
keep available out of its authorized Common Shares, solely for the purpose of
issue upon conversion of Convertible Debentures as in this Article provided, and
conditionally allot to Debentureholders who may exercise their conversion rights
hereunder, such number of Common Shares as shall then be issuable upon the
conversion of all outstanding Convertible Debentures. The Corporation covenants
with the Trustee that all Common Shares which shall be so issuable shall be duly
and validly issued as fully-paid and non-assessable.
4.6 TAXES AND CHARGES ON CONVERSION
The Corporation will from time to time promptly pay or make provision
satisfactory to the Trustee for the payment of any and all taxes and charges
which may be imposed by the laws of Canada or any province thereof (except
income tax, withholding tax, security transfer tax, if any, or taxes or levies
which are in substance of the same nature as any of the foregoing) which shall
be payable with respect to the issuance and/or delivery to the holders of
Convertible Debentures, upon the exercise of their right to conversion, of
Common Shares of the Corporation pursuant to the terms of the Convertible
Debentures and of this Indenture.
4.7 CANCELLATION OF CONVERTED DEBENTURES
All Convertible Debentures converted in whole or in part under the provisions of
this Article shall be forthwith delivered to and cancelled by the Trustee and,
subject to the provisions of any particular Debentures, no Debenture shall be
issued in substitution therefor.
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4.8 CERTIFICATE AS TO ADJUSTMENT
The Corporation shall from time to time immediately after the occurrence of any
event which requires an adjustment or readjustment as provided in section 4.3,
deliver an Officers' Certificate to the Trustee and, where specified with
respect to any series of Convertible Debentures, each Paying Agent and
Conversion Agent specifying the nature of the event requiring the same and the
amount of the adjustment necessitated thereby and setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based, which certificate and the amount of the adjustment specified therein
shall be verified by an opinion of a firm of chartered accountants appointed by
the Corporation and acceptable to the Trustee (who may be the auditors of the
Corporation) and, when approved by the Trustee, shall be conclusive and binding
on all parties in interest. When so approved, the Corporation shall, except in
respect of any subdivision, redivision, reduction, combination or consolidation
of the Common Shares, forthwith give notice to the holders of Convertible
Debentures in the manner provided in section 10.2 specifying the event requiring
such adjustment or readjustment and the results thereof, including the resulting
Conversion Price of the series of Convertible Debentures of which the holder is
registered; provided that, if the Corporation has given notice under section 4.9
covering all the relevant facts in respect of such event, no such notice need be
given under this section 4.8.
4.9 NOTICE OF SPECIAL MATTERS
The Corporation covenants with the Trustee that so long as any Convertible
Debenture remains outstanding, it will give notice in the manner provided in
section 10.3 to the Trustee, and to the holders of Convertible Debentures of its
intention to fix a record date or an effective date for any event referred to in
subsections (a), (b), (c), (d) or (f) of section 4.3 (other than the
subdivision, redivision, reduction, combination or consolidation of its Common
Shares) which may give rise to an adjustment in the Conversion Price, and, in
each case, such notice shall specify the particular of such event; provided that
the Corporation shall only be required to specify in such notice such
particulars of such event as shall have been fixed and determined on the date on
which such notice is given. Such notice shall be given not less than 10 days in
each case prior to such applicable record date or effective date.
4.10 PROTECTION OF TRUSTEE
Subject to section 11.7, the Trustee (i) shall not at any time be under any duty
or responsibility to any holder of a Convertible Debenture to determine whether
any facts exist which may require any adjustment in the Conversion Price, or
with respect to the nature or extent of any such adjustment when made, or with
respect to the method employed in making the same; (ii) shall not be accountable
with respect to the validity or value (or kind or amount) of any Common Shares
or of any shares or other securities or property which may at any time be issued
or delivered upon the conversion of any Convertible Debenture; or (iii) shall
not be responsible for any failure of the Corporation to make any cash payment
or to issue, transfer or deliver Common Shares or share certificates upon the
surrender of any Convertible Debenture for the purpose of conversion, or to
comply with any of the covenants contained in this Article.
4.11 DEFINITIONS
In this Article 4 and in the Convertible Debentures, unless there is something
in the subject matter or context inconsistent therewith, the expressions
following shall have the following meanings, namely:
(a) "COMMON SHARES" means the common shares of the Corporation as
constituted on the date hereof; provided that, in the event of
a subdivision, redivision, reduction, combination or
consolidation thereof, or successive such subdivisions,
redivisions, reductions, combinations or consolidations, then,
subject to adjustments, if any, having been made in accordance
with section 4.3, "COMMON SHARES" shall thereafter mean the
shares resulting from such subdivisions, redivisions,
reductions, combinations or consolidations;
<PAGE>
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(b) "CONVERTIBLE DEBENTURE" means any Debentures in respect of
which the terms and conditions as expressed in this Indenture
and/or in the Debentures and/or in the supplemental indenture
authorizing or providing for the issue thereof provide for the
conversion thereof into Common Shares;
(c) "CONVERSION PRICE" means the dollar amount for which each
Common Share may be issued from time to time upon conversion of
Convertible Debentures in accordance with the provisions of
Article 4 provided that in the event the Conversion Price is
denominated in a currency other than that in which the
principal amount of the Convertible Debenture is denominated,
the Conversion Price shall be that amount of the currency in
which the principal amount of the Convertible Debentures is
denominated based upon the exchange rate specified in the terms
and conditions of the Convertible Debentures;
(d) "CURRENT MARKET PRICE" per Common Share on any date shall be
the weighted average price per Common Share for 20 consecutive
trading days commencing not more than 30 trading days and
ending not less than five trading days before such date on the
principal stock exchange in Canada on which the Common Shares
are traded. The weighted average price shall be determined by
dividing the aggregate sale price of all Common Shares sold on
the said exchange, as the case may be, during the said 20
consecutive trading days by the total number of Common Shares
so sold;
(e) "DISTRIBUTION" means:
(i) any payment or distribution to the holders of Common Shares
of the Corporation or any of them by way of dividend in cash
or in specie; and
(ii) any payment or distribution to the holders of Common Shares
of the Corporation or any of them by way of purchase,
redemption, reduction or any other payment of or in respect
of capital unless made out of the proceeds of an issue of
shares by the Corporation made concurrently with or prior
to such purchase, redemption, reduction or payment; and
(f) "DIVIDENDS PAID IN THE ORDINARY COURSE" means cash dividends
declared payable on the Common Shares in any fiscal year of the
Corporation to the extent that such cash dividends do not
exceed, in the aggregate, 100% of the aggregate consolidated
net income of the Corporation, before extraordinary items, for
its immediately preceding fiscal year as determined by the
auditors of the Corporation in accordance with generally
accepted accounting principles.
ARTICLE 5
COVENANTS OF THE CORPORATION
5.1 PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST
The Corporation covenants and agrees for the benefit of the Debentureholders and
the holders of any Coupons of each series of Debentures that it will duly and
punctually pay the principal of (and premium, if any) and interest on the
Debentures of that series in accordance with the terms of the Debentures, any
Coupons appertaining thereto and this Indenture. Unless otherwise specified as
contemplated by section 2.2 with respect to any series of Debentures, any
interest due on Bearer Debentures on or before Maturity shall be payable only
upon presentation and surrender of the several Coupons for such interest
instalments as are evidenced thereby as they severally mature.
<PAGE>
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5.2 MAINTENANCE OF CORPORATE EXISTENCE
Except as herein otherwise expressly provided, the Corporation will at all times
maintain, preserve and keep in full force and effect its corporate existence,
rights (charter and statutory) and franchises and the Corporation will carry on
and conduct or will cause to be carried on and conducted its business and the
business of its Subsidiaries in a proper and efficient manner and will keep or
cause to be kept proper books of account and make or cause to be made therein
true and accurate entries of all its dealings and transactions in relation to
its business and the business of its Subsidiaries, as the case may be, all in
accordance with Generally Accepted Accounting Principles, and at all reasonable
times it will furnish or cause to be furnished to the Trustee or its duly
authorized agent or attorney such information relating to its business and that
of its Subsidiaries as the Trustee may reasonable require and such books of
account shall at all reasonable times be open for inspection by the Trustee or
such agent or attorney.
5.3 FINANCIAL STATEMENTS
The Corporation will furnish to the Trustee a copy of all financial statements,
whether annual or interim, of the Corporation and the report, if any, of the
Corporation's auditors thereon and of all annual and other regular periodic
reports of the Corporation furnished to its shareholders at the same time as
they are furnished to such shareholders. The Corporation will cause the
consolidated financial statements of the Corporation and its Subsidiaries to
be prepared in accordance with Generally Accepted Accounting Principles.
5.4 TRUSTEE REMUNERATION
That the Corporation will pay the Trustee reasonable remuneration for its
services as Trustee hereunder and will repay to the Trustee on demand all moneys
which shall have been paid by the Trustee in and about the execution of the
trusts hereby created with interest at 6% per annum from 30 days after the date
of the invoice from the Trustee to the Corporation in respect of such
expenditure until repayment, and such moneys and the interest thereon, including
the Trustee's remuneration, shall be payable out of any funds coming into the
possession of the Trustee in priority to any of the Debentures or interest
thereon. The said remuneration shall continue to be payable until the trusts
hereof be finally wound up and whether or not the trusts of this Indenture shall
be in the course of administration by or under the direction of the court.
5.5 MAINTENANCE OF OFFICE OR AGENCY
If the Debentures of a series are issuable only as Registered Debentures, the
Corporation will maintain in each Place of Payment for such Debentures an office
or agency where Debentures of that series may be presented or surrendered for
payment, where Debentures of that series may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Corporation in
respect of the Debentures of that series and this Indenture may be served.
If Debentures of a series are issuable as Bearer Debentures, the Corporation
will maintain:
(a) in the city of Calgary, an office or agency where any
Registered Debentures of that series may be presented or
surrendered for payment, where any Registered Debentures of
that series may be surrendered for registration of transfer,
where Debentures of that series may be surrendered for
exchange, where notices and demands to or upon the Corporation
in respect of the Debentures of that series and this Indenture
may be served and where Bearer Debentures of that series and
related Coupons may be presented or surrendered for payment in
the circumstances described in the following paragraph (and not
otherwise);
(b) subject to any laws or regulations applicable thereto, in a
Place of Payment for that series which is located outside
Canada, an office or agency where Debentures of that series and
related Coupons may be presented or surrendered for payment;
provided, however, that, if the Debentures of that series
<PAGE>
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are listed on any stock exchange located outside Canada and
such stock exchange shall so require, the Corporation will
maintain a Paying Agent for the Debentures of that series in
any required city located outside Canada so long as the
Debentures of that series are listed on such exchange; and
(c) subject to any laws or regulations applicable thereto, in a
Place of Payment for that series located outside Canada, an
office or agency where any Registered Debentures of that series
may be surrendered for registration of transfer, where
Debentures of that series may be surrendered for exchange and
where notices and demands to or upon the Corporation in respect
of the Debentures of that series and this Indenture may be
served. The Corporation will give prompt written notice to the
Trustee of the location, and any change in the location, of
such office or agency. If at any time the Corporation shall
fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or
served at the principal office of the Trustee in the city of
Calgary, except that Bearer Debentures of that series and the
related Coupons may be presented and surrendered for payment at
the offices specified in the Debenture, and the Corporation
hereby appoints the same as its agent to receive such
respective presentations, surrenders, notices and demands.
The Corporation may also from time to time designate one or more other offices
or agencies where the Debentures of one or more series may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall in
any manner relieve the Corporation of its obligation to maintain an office or
agency in accordance with the requirements set forth above for Debentures of any
series for such purposes. The Corporation will give prompt written notice to the
Trustee of any such designation or rescission and of any change in the location
of any such other office or agency. Unless otherwise specified with respect to
any Debentures as contemplated by section 2.2 with respect to a series of
Debentures, the Corporation hereby designates as a Place of Payment for each
series of Debentures the principal office of the Trustee in the city of Calgary,
and initially appoints the Trustee at its principal office as Paying Agent in
such city and as its agent to receive all such presentations, surrenders,
notices and demands.
5.6 MONEY FOR DEBENTURES PAYMENTS TO BE HELD IN TRUST
If the Corporation shall at any time act as its own Paying Agent with respect to
any series of Debentures and any related Coupons, it will, on or before each due
date of the principal of (and premium, if any) or interest on any of the
Debentures of that series, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum in the currency in which the Debentures of such
series are payable (except as otherwise specified pursuant to section 2.2 for
the Debentures of such series) sufficient to pay the principal (and premium, if
any) or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action or failure to so act.
Whenever the Corporation shall have one or more Paying Agents for any series of
Debentures and any related Coupons, it will, prior to or on each due date of the
principal of (and premium, if any) or interest on any Debentures of that series,
deposit with a Paying Agent a sum (in the currency described in the preceding
paragraph) sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Corporation will promptly notify the Trustee of its action
or failure to so act.
The Corporation will cause each Paying Agent (other than the Trustee) for any
series of Debentures to execute and deliver to the Trustee an instrument in
which such Paying Agent shall agree with the Trustee, subject to the provisions
of this section, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of
(and premium, if any) and interest on securities of such series
(where such sums have been paid to it by the Corporation or by
any other
<PAGE>
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obligor on the Debentures) in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Corporation (or
any other obligor upon the securities of such series) in the
making of any payment of principal of (or premium, if any) or
interest on the Debentures of such series; and
(c) at any time during the continuance of such default, upon the
written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
The Corporation may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Written
Order of the Corporation direct any Paying Agent to pay, to the Trustee all sums
held in trust by the Corporation or such Paying Agent, such sum to be held by
the Trustee upon the same trusts as those upon which sums were held by the
Corporation or such Paying Agent; and, upon such payment by any Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability with
respect to such sums.
Except as provided in the Debentures of any series, any money deposited with the
Trustee or any Paying Agent, or then held by the Corporation, in trust for the
payment of the principal of (and premium, if any) or interest on any Debenture
of any series and remaining unclaimed for two years after such principal (and
premium, if any) or interest have become due and payable shall be paid to the
Corporation on Written Request of the Corporation, or (if then held by the
Corporation) shall be discharged from such trust; and the Holder of such
Debenture shall thereafter, as an unsecured general creditor, look only to the
Corporation for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Corporation as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Corporation cause to be published once, in an Authorized
Newspaper, notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Corporation.
5.7 STATEMENT AS TO COMPLIANCE
The Corporation covenants that, on or before December 31, 1998, and on or before
December 31 in each subsequent year and at any other time if requested by the
Trustee, the Corporation will furnish to the Trustee a Certificate of the
Corporation stating that the Corporation has performed its obligations under and
complied with all covenants, conditions and other requirements contained in this
Indenture, non-compliance with which would, with the giving of notice or the
lapse of time or both, constitute an Event of Default hereunder or, if such is
not the case, specifying the covenant, condition or other requirement which has
not been complied with and giving particulars of such non-compliance and the
action, if any, the Corporation proposes to take with respect thereto. If the
officer signing the Certificate of the Corporation knows of such an Event of
Default, whether then existing or occurring during such preceding fiscal year,
the Certificate of the Corporation shall describe such Event of Default and its
status with particularity. The Corporation shall also promptly notify the
Trustee if the Company's fiscal year is changed so that the end thereof is on
any date other than the then current fiscal year end date. For purposes of this
section, such compliance shall be determined without regard to any period of
grace granted by the Trustee or requirement of notice under this Indenture. The
Corporation will deliver to the Trustee, forthwith upon becoming aware of any
default in the performance or observance of any covenant, agreement or condition
contained in this Indenture, or any Event of Default, a Certificate of the
Corporation specifying with particularity such Event of Default and further
stating what action the Corporation has taken or is taking or proposes to take
with respect thereto.
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5.8 ADDITIONAL AMOUNTS
If any Debentures of a series provide for the payment of additional amounts to
any Holder in respect of any tax, assessment or governmental charge ("Additional
Amounts"), the Corporation will pay to the Holder of any Debenture of such
series or any Coupon appertaining thereto such Additional Amounts as may be
specified as contemplated by section 2.2. Whenever in this Indenture there is
mentioned, in any context, the payment of the principal of or any premium or
interest on, or in respect of, any Debenture of a series or payment of any
related Coupon or the net proceeds received on the sale or exchange of any
Debenture of a series, such mention shall be deemed to include mention of the
payment of Additional Amounts provided for by the terms of such series
established pursuant to section 2.2 to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof pursuant to
such terms and express mention of the payment of Additional Amounts (if
applicable) in any provisions hereof shall not be construed as excluding
Additional Amounts in those provisions hereof where such express mention is not
made.
Except as otherwise specified as contemplated by section 2.2, if the Debentures
of a series provide for the payment of Additional Amounts, at least 10 days
prior to the first Interest Payment Date with respect to that series of
Debentures (or if the Debentures of that series will not bear interest prior to
Maturity, the first day on which a payment of principal and any premium is
made), and at least 10 days prior to each date of payment of principal and any
premium or interest if there has been any change with respect to the matters set
forth in the below-mentioned Certificate of the Corporation, the Corporation
will furnish the Trustee and the Corporation's principal Paying Agent or Paying
Agents, if other than the Trustee, with a Certificate of the Corporation
instructing the Trustee and such Paying Agent or Paying Agents whether such
payment of principal of and any premium of interest on the Debentures of that
series shall be made to the Holders of Debentures of that series or any related
Coupons without withholding for or on account of any tax, assessment or other
governmental charge described in the Debentures of the series. If any such
withholding shall be required, then such Certificate of the Corporation shall
specify by country the amount, if any, required to be withheld on such payments
to such Holders of Debentures of that series or related Coupons and the
Corporation will pay to the Trustee or such Paying Agent the Additional Amounts
required by the terms of such Debentures. In the event that the Trustee or any
Paying Agent, as the case may be, shall not so receive the above-mentioned
certificate, then the Trustee or such Paying Agent shall be entitled to (i)
assume that no such withholding or deduction is required with respect to any
payment of principal or interest with respect to any Debentures of a series or
related Coupons until it shall have received a certificate advising otherwise
and (ii) to make all payments of principal and interest with respect to the
Debentures of a series or related Coupons without withholding or deductions
until otherwise advised. The Corporation covenants to indemnify the Trustee and
any Paying Agent for, and to hold them harmless against, any loss, liability or
expense reasonably incurred without negligence or bad faith on their part
arising out of or in connection with actions taken or omitted by any of them in
reliance on any Certificate of the Corporation furnished pursuant to this
section.
5.9 LONG TERM DEBT AND TANGIBLE ASSETS
The Corporation will, so long as any Debenture is outstanding, maintain Tangible
Assets equal to or greater than 140% of Long Term Debt at all times including
after redemption of any redeemable preference shares of the Corporation or any
Subsidiary. This ratio shall be calculated no later than the 135th day following
the end of each of the Corporation'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.
5.10 LIMITATION UPON CREDIT FACILITY AND REPAYMENTS
The Corporation will not:
(a) have outstanding more than US$12,000,000 under the EnCap
Credit Facility for the period commencing 30 days from the
date hereof; and
(b) use any of the net proceeds from the issuance of the
Convertible Debentures Series 1 to reduce the Corporation's
existing indebtedness; provided, however, that the Corporation
may use net proceeds
<PAGE>
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in an amount not to exceed US$6,000,000 to reduce the EnCap
Credit Facility to an amount outstanding of not less than
US$12,000,000.
5.11 WAIVER OF CERTAIN COVENANTS
The Corporation may omit in any particular instances to comply with any term,
provision or condition set forth in section 5.10, if the Holders of Debentures
outstanding, by Extraordinary Resolution, waive such compliance in such
instances with such term, provision or condition, but no such waiver shall
extend to or affect such term, provision or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the Corporation and the duties of the Trustee in respect of any such term,
provision or condition shall remain in full force and effect.
5.12 PAYMENT OF TAXES AND OTHER CLAIMS
The Corporation will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (a) all taxes, assessments and governmental
charges levied or imposed upon the Corporation or any Subsidiary or upon the
income, profits or property of the Corporation or any Subsidiary and (b) all
lawful claims for labour, materials and supplies which, if unpaid, might by law
become a Lien upon the property of the Corporation or any Subsidiary; PROVIDED,
HOWEVER, that the Corporation shall not be required to pay or discharge or cause
to be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
5.13 MAINTENANCE OF PROPERTIES
The Corporation will cause all properties owned by the Corporation or any
Subsidiary or used or held for use in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order (ordinary wear and tear excepted) and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Corporation may be necessary so that the business carried on in connection
therewith may be conducted at all times; PROVIDED, HOWEVER, that nothing in this
section shall prevent the Corporation from discontinuing the maintenance of any
of such properties if such discontinuance is, in the judgment of the
Corporation, desirable in the conduct of its business or the business of any
Subsidiary and not disadvantageous in any material respect to the
Debentureholders.
5.14 INSURANCE
The Corporation will at all times keep all of the Corporation's and its
Subsidiaries' properties which are of an insurable nature insured with insurers,
believed by the Corporation to be responsible, against loss or damage to the
extent that property of similar character is usually so insured by corporations
similarly situated and owning like properties in similar geographic areas in
which the Corporation or each such Subsidiary operates; provided that such
insurance is generally available at commercially reasonable rates, and provided
further that the Corporation or such Subsidiary may self-insure directly or
through captive insurers or insurance cooperatives, to the extent that the
Corporation determines that such practice is consistent with prudent business
practices. Such insurance shall be in such amount, on such terms, in such forms
and for such periods as are customary for similarly situated Persons in the
Corporation's industry or in insurance markets available to the Corporation.
5.15 RESTRICTIONS ON CHARTER AMENDMENTS
The Corporation will not amend its Memorandum and Articles of Association except
as required by law or except to the extent that such amendment would not have a
material adverse effect on (a) the ability of the Corporation to perform its
obligations under this Indenture or the Debentures or (b) the rights of the
Debenture Holders, except that neither (i) increases in the number of common
shares and issuance thereof with related securities, nor (ii) designations of
preferred stock of the Company, modifications of the terms of such designations
and issuance thereof with related
<PAGE>
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securities, nor (iii) modification or expansion of the indemnity provisions
provided by the Corporation to its directors and officers, nor (iv) change of
the Corporation's registered agent shall be deemed an amendment hereunder.
5.16 CANADIAN WITHHOLDING AND REPORTING REQUIREMENTS
To the extent permitted by law, the Corporation will provide to the Trustee, the
Paying Agent or to any Debenture Holder such statements, certificates or other
documentation concerning the organization or operations of the Corporation as
may be reasonably necessary to establish any exceptions or exemptions from
Canadian federal income tax withholding and reporting requirements.
5.17 MAINTENANCE OF LISTINGS FOR COMMON SHARES AND DEBENTURES
While any Convertible Debenture remains outstanding, the Corporation will
maintain a listing for its common shares on a nationally recognized stock
exchange in Canada or the United States and, while any Convertible Debenture
Series 1 is outstanding, will use its best efforts to maintain a listing for the
Convertible Debentures Series 1 on the Luxembourg Stock Exchange or such
alternative stock exchange as the Trustee may approve.
5.18 TRUSTEE MAY PERFORM COVENANTS
If the Corporation shall fail to perform any of its covenants contained herein,
the Trustee may in its discretion, but (subject to section 6.3) need not, notify
the Debentureholders of such failure or may itself perform any of such covenants
capable of being performed by it and, if any such covenant requires the payment
of money, it may make such payment with its own funds, or with money borrowed by
it for such purpose, but shall be under no obligation to perform such covenants
or to make any such payments with its own funds or with money borrowed by it;
and all sums so paid shall be payable by the Corporation in accordance with the
provisions of section 5.4. No such performance by the Trustee of any covenant
contained herein or payment by the Corporation of any sums advanced or borrowed
by the Trustee pursuant to the foregoing provisions shall be deemed to relieve
the Corporation from any default hereunder.
ARTICLE 6
REMEDIES
6.1 EVENTS OF DEFAULT
"Event of Default", wherever used herein with respect to Debentures of any
series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of and administrative or governmental body):
(a) default in the payment of any interest upon any Debenture of
that series, or any related Coupon, when such interest or
Coupon becomes due and payable, and continuance of such
default for a period of 7 days; or
(b) default in the payment of the principal of (or premium, if
any, on) any Debenture of that series as and when it shall
become due and payable at its Maturity, upon redemption, by
declaration or otherwise; or
(c) default in the performance, or breach, of any covenant or
warranty of the Corporation in this Indenture (other than a
covenant or warranty a default in performance of which or
breach of which is elsewhere in this section specifically
dealt with or which has expressly been included in this
Indenture solely for the benefit of one or more series of
Debentures other than that series), and continuance of such
default or breach for a period of 60 days after there has been
given, by registered
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or certified mail, to the Corporation by the Trustee or to the
Corporation and the Trustee by the Holders of at least 25% in
principal amount of all outstanding Debentures a written
notice specifying such default or breach and requiring it to
be remedied and stating that such notice is a "Notice of
Default" hereunder; or
(d) the entry of a decree or order by a court having jurisdiction
in the premises adjudging the Corporation or any Material
Subsidiary a bankrupt or insolvent under any bankruptcy,
insolvency or analogous laws or appointing a receiver,
liquidator, assignee, trustee, sequestrator, rehabilitator (or
other similar official) of the Corporation or any Material
Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their
respective affairs, and the continuance of any such decree or
order unstayed and in effect for a period of 90 consecutive
days; or
(e) the institution by the Corporation or any Material Subsidiary
of proceedings to be adjudicated a bankrupt or insolvent, or
the consent by it to the institution of bankruptcy or
insolvency proceedings against it under any bankruptcy,
insolvency or analogous laws, or the consent by it to the
filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator,
rehabilitator (or other similar official) of the Corporation
or any Material Subsidiary or of any substantial part of their
respective properties, or the making by the Corporation or any
Material Subsidiary of an assignment for the benefit of
creditors, or the admission by the Corporation or any Material
Subsidiary in writing of its inability to pay its debts
generally as they become due; or
(f) if (i) any other Debt of the Corporation or any Material
Subsidiary becomes due and payable prior to its Stated
Maturity by reason of an event of default (howsoever defined)
or (ii) any such Debt of the Corporation or any Material
Subsidiary is not paid when due or, as the case may be, within
any applicable grace period or (iii) the Corporation or any
Material Subsidiary fails to pay when due (or, as the case may
be, within any applicable grace period) any amount payable by
it under any present or future guarantee for, or indemnity in
respect of, any Indebtedness of any Person or (iv) any
security given by the Corporation or any Material Subsidiary
for any Indebtedness of any Person or any guarantee or
indemnity of Debt of any Person by the Corporation or any
Material Subsidiary becomes enforceable by reason of default
in relation thereto and steps are taken to enforce such
security save in any such case where there is a bona fide
dispute as to whether the relevant Debt or any such guarantee
or indemnity as aforesaid shall be due and payable (following
any applicable grace period), PROVIDED that in each such case
the Debt exceeds in the aggregate US$1,500,000 and in each
such case such event continues unremedied for a period of 30
calendar days (or such longer period as the Trustee may in its
sole discretion consent to in writing upon receipt of written
notice from the Company); or
(g) if there is any final judgment or judgments for the payment of
money exceeding in the aggregate U.S.$1,5000,000 outstanding
against the Corporation or any Material Subsidiary which has
been outstanding for more than 60 calendar days from the date
of its entry and shall not have otherwise been discharged in
full or stayed by appeal, bond or otherwise; or
(h) if the Issuer or any Material Subsidiary shall generally fail
to pay its Debts as such Debts come due (except Debts which
the Issuer or such Material Subsidiary, as the case may be,
may contest in good faith generally) or 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); or
(i) if a warranty, representation, or other statement made by or
on behalf of the Issuer contained in this Indenture, the
Debentures or any certificate or other agreement furnished in
compliance with such
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documents is false in any material respect when made and
(except where the Trustee shall have certified to the Issuer
that it considers such falsity to be incapable of remedy, in
which case no such notice or continuation as is hereinafter
mentioned will be required) such falsity continues for a
period of 30 calendar days (or such longer period as the
Trustee may in its absolute discretion permit) next following
the service by the Trustee on the Issuer of notice requiring
the same to be remedied; or
(j) any other Event of Default provided with respect to Debentures
of that series.
6.2 NOTICE OF EVENTS OF DEFAULT
The Corporation shall, within 30 days after it becomes aware that an Event of
Default has occurred, notify the Trustee of the occurrence of such Event of
Default and upon receipt of such notice and if the Event of Default is
continuing the Trustee shall, within 30 days after it becomes aware of the
occurrence of such Event of Default, give notice thereof to the
Debentureholders, provided that, notwithstanding the foregoing, the Trustee
shall not be required to give such notice if the Trustee in good faith shall
have decided that the withholding of such notice is in the best interests of the
Debentureholders and shall have so advised the Corporation in writing. Where
notice of the occurrence of an Event of Default has been given and the Event of
Default is thereafter cured, notice that the Event of Default is no longer
continuing shall be given by the Trustee to the Debentureholders within 30 days
after the Trustee becomes aware that the Event of Default has been cured.
6.3 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT
If an Event of Default described in clause (a), (b) or (j) of section 6.1 with
respect to Debentures of any series at the time outstanding occurs and is
continuing, then in every such case the Trustee or the Holders of not less than
25% in principal amount of the outstanding Debentures of that series may declare
the principal amount of all the Debentures of that series to be due and payable
immediately, by a notice in writing to the Corporation (and to the Trustee if
given by Holders), and upon any such declaration such principal amount (or
specified portion thereof) shall become immediately due and payable. If an Event
of Default described in clause (c), (d), (e), (f), (g), (h) or (i) of section
6.1 occurs and is continuing, then in every such case the Trustee or the Holders
of not less than 25% in principal amount of all the Debentures then outstanding
may declare the principal amount of all the outstanding Debentures to be due and
payable immediately, by a notice in writing to the Corporation (and to the
Trustee if given by the Holders) and upon any such declaration such principal
amount (or specified portion thereof) shall become immediately due and payable.
At any time after such a declaration of acceleration with respect to Debentures
of any series (or of all series, as the case may be) has been made and before a
judgment or decree for payment of the money due has been obtained by the Trustee
as hereinafter in this Article provided, the Holders of the outstanding
Debentures of that series (or of all series, as the case may be), by
Extraordinary Resolution, may rescind and annul such declaration and its
consequences if:
(a) the Corporation has paid or deposited with the Trustee a sum
sufficient to pay in the currency in which the Debentures of
such series are payable (except as otherwise specified
pursuant to section 2.2 for the Debentures of such series):
(i) all overdue interest on all outstanding Debentures of
that series (or of all series, as the case may be)
and any related Coupons,
(ii) all unpaid principal of (and premium, if any, on) any
outstanding Debentures of that series (or of all
series, as the case may be) which has become due
otherwise than by such declaration of acceleration,
and interest on such unpaid principal at the rate or
rates prescribed therefor in such Debentures,
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(iii) interest upon overdue interest at the rate or rates
prescribed therefor in such Debentures, and
(iv) all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents
and counsel and any sales, value-added or goods and
services tax thereon; and
(b) all Events of Default with respect to Debentures of that
series (or of all series, as the case may be), other than the
non-payment of amounts of principal of (or premium, if any) or
interest on Debentures of that series (or of all series, as
the case may be) which have become due solely by such
declaration of acceleration, have been cured or waived as
provided in section 6.14.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
6.4 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE
The Corporation covenants that if:
(a) default is made in the payment of any instalment of interest
on any Debenture and any related Coupon when such interest
becomes due and payable and such default continues for a
period of 30 days or
(b) default is made in the payment of the principal of (or
premium, if any, on) any Debenture at the Maturity thereof,
then the Corporation will, upon demand of the Trustee, pay to the Trustee for
the benefit of the Holders of such Debentures and Coupons the whole amount then
due and payable on such Debentures and Coupons for principal (and premium, if
any) and interest on any overdue principal (and premium, if any) and on any
overdue interest, at the rate or rates prescribed therefor in such Debentures,
and, in addition thereto, such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Corporation fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Corporation or any other obligor upon such Debentures and collect
the moneys adjudged or decreed to be payable in the manner provided by law out
of the property of the Corporation or any other obligor upon such Debentures,
wherever situated.
If an Event of Default with respect to Debentures of any series (or of all
series, as the case may be) occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders of Debentures of such series (or of all series, as the case may be) by
such appropriate judicial proceedings as the Trustee shall deem most effectual
to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
6.5 TRUSTEE MAY FILE PROOFS OF CLAIM
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustments, composition or other
judicial proceeding relative to the Corporation or any other obligor upon the
Debentures or the property of the Corporation or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Debentures
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Corporation for the payment
<PAGE>
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of overdue principal, premium, if any or interest) shall be entitled and
empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of principal
(and premium, if any) and interest owing and unpaid in respect
of the Debentures and to file such other papers or documents
as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and any sales, value added or
goods and services tax thereon) and of the Holders allowed in
such judicial proceedings; and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claim and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under section 5.4.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Debentures
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
6.6 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF DEBENTURES
All rights of action and claims under this Indenture or the Debentures or
Coupons may be prosecuted and enforced by the Trustee without the possession of
any of the Debentures or Coupons or the production thereof in any proceedings
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel and
any sales, value-added or goods and services tax thereon, be for the rateable
benefit of the Holders of the Debentures and Coupons in respect of which such
judgement has been recovered.
6.7 APPLICATION OF MONEY COLLECTED
Any money collected by the Trustee pursuant to this Article shall be applied in
the following order, at the date or dates fixed by the Trustee and, in case of
the distribution of such money on account of principal (or premium, if any, on)
or interest, upon presentation of the Debentures or Coupons, or both, as the
case may be, and the notation thereon of the payment if only partially paid and
upon surrender thereof if fully paid:
First: To the payment of all amounts due the Trustee under
section 5.4;
Second: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on
the Debentures and Coupons in respect of which or for
the benefit of which such money has been collected,
rateably, without preference or priority of any kind,
according to the amounts due and payable on such
Debentures and Coupons for principal (and premium, if
any) and interest, respectively; and
Third: The balance, if any, to the Person or Persons
entitled thereto.
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6.8 LIMITATION ON SUITS
No Holder of any Debenture of any series or any related Coupons shall have any
right to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee
of a continuing Event of Default with respect to the
Debentures of that series;
(b) the Holders of not less than 25% in principal amount of the
outstanding Debentures of that series in the case of any Event
of Default described in clause (a), (b) or (j) of section 6.1,
or, in the case of any Event of Default described in clause
(c), (d), (e), (f), (g), (h) or (i) of section 6.1, the
Holders of not less than 25% in principal amount of all
outstanding Debentures, shall have made written request to the
Trustee to institute proceedings in respect of such Event of
Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any
such proceeding, and
(e) no direction inconsistent with such written request has been
given, by Extraordinary Resolution, to the Trustee during such
60 day period by the Holders of the outstanding Debentures of
that series in the case of any Event of Default described in
clause (a), (b) or (j) of section 6.1, or, in the case of any
Event of Default described in clause (c), (d), (e), (f), (g),
(h) or (i) of section 6.1, by the Holders of all outstanding
Debentures;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Debentures of the same series, in the case of any Event of Default
described in clause (a), (b) or (j) of section 6.1 or of Holders of all
Debentures in the case of an Event of Default described in clause (c), (d), (e),
(f), (g), (h) or (i) of section 6.1, or to obtain or to seek to obtain priority
or preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and rateable
benefit of all Holders of Debentures of the same series, in the case of any
Event of Default described in clause (a), (b) or (j) of section 6.1, or of
Holders of all Debentures in the case of any Event of Default described in
clause (c), (d), (e), (f), (g), (h) or (i) of section 6.1.
6.9 RESTORATION OF RIGHTS AND REMEDIES
If the Trustee or any Holder has instituted any proceeding to enforce any right
or remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or to
such Holder, then and in every such case, subject to any determination in such
proceeding, the Corporation, the Trustee and the Holders of Debentures and
Coupons shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the Holders
shall continue as though no such proceeding had been instituted.
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6.10 RIGHTS AND REMEDIES CUMULATIVE
No right or remedy herein conferred upon or reserved to the Trustee or to the
Holders of Debentures or Coupons is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in additional to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
6.11 DELAY OR OMISSION NOT WAIVER
No delay or omission of the Trustee or of any Holder of any Debentures or
Coupons to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this
Indenture or by law to the Trustee or to the Holders may be exercised from time
to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
6.12 CONTROL BY HOLDERS
With respect to the Debentures of any series, the Holders of the outstanding
Debentures of such series shall have the right, by Extraordinary Resolution, to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee relating to or arising under clause (a), (b) or (j) of section 6.1, and,
with respect to all Debentures, the Holders of all outstanding Debentures shall
have the right to direct, by Extraordinary Resolution, the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, or exercising any trust
or power conferred on the Trustee, not relating to or arising under clause (a),
(b) or (j) of section 6.1, provided that in each case:
(a) such direction shall not be in conflict with any rule of law
or with this Indenture,
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(c) the Trustee need not take any action which might involve it in
personal liability or be unjustly prejudicial to the Holders
of Debentures of such series not consenting.
6.13 WAIVER OF PAST DEFAULTS
Subject to section 6.3, the Holders of the outstanding Debentures of any series
may on behalf of the Holders of all the Debentures of such series, by
Extraordinary Resolution, waive any past default described in clause (a), (b) or
(j) of section 6.1 (or, in the case of a default described in clause (c), (d),
(e), (f), (g), (h) or (i) of section 6.1, the Holders of all outstanding
Debentures may, by Extraordinary Resolution, waive any such past default), and
its consequences, except a default:
(a) in respect of the payment of the principal of (or premium, if
any) or interest of any Debenture or any related Coupon, or
(b) in respect of a covenant or provision hereof which under
Article 12 cannot be modified or amended without the consent
of the Holder of each outstanding Debenture of such series
affected.
Upon any such waiver, any such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right consequent thereon.
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6.14 WAIVER OF STAY OR EXTENSION
The Corporation covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Corporation (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE 7
SATISFACTION AND DISCHARGE
7.1 CANCELLATION AND DESTRUCTION
All matured Debentures and Coupons shall forthwith after payment thereof be
delivered to the Trustee and cancelled by it. All Debentures and Coupons which
are cancelled or required to be cancelled under this or any other provision of
this Indenture shall be destroyed by the Trustee and, if required by the
Corporation, the Trustee shall furnish to the Corporation a destruction
certificate setting out the designating numbers and denominations of the
Debentures and Coupons so destroyed.
7.2 NON-PRESENTATION OF DEBENTURES AND COUPONS
If the Holder of any Debenture or Coupon shall fail to present the same for
payment on the date on which the principal thereof and/or the interest thereon
or represented thereby becomes payable either at Maturity or otherwise or shall
not accept payment on account thereof and give such receipt therefor (if any) as
the Trustee may require:
(a) the Corporation shall be entitled to pay to the Trustee and
direct it to set aside; or
(b) in respect of moneys in the hands of the Trustee which may or
should be applied to the payment of the Debentures, the
Corporation shall be entitled to direct the Trustee to set
aside;
the principal moneys and/or the interest, as the case may be, in trust to be
paid to the Holder of such Debenture or Coupon upon due presentation and
surrender thereof in accordance with the provisions of this Indenture; and
thereupon the principal moneys and/or the interest payable on or represented by
each Debenture and each Coupon in respect whereof such moneys have been set
aside shall be deemed to have been paid and thereafter such Debentures and
Coupons shall not be considered as outstanding hereunder and the Holders thereof
shall thereafter have no right in respect thereof except that of receiving
payment of the moneys so set aside by the Trustee (without interest thereon)
upon due presentation and surrender thereof, subject always to the provisions of
section 5.6 as they relate to the repayment of unclaimed moneys. Any moneys so
set aside may, and, if remaining unclaimed for 60 days shall, be invested by the
Trustee in accordance with section 11.8.
7.3 DEFEASANCE
The Trustee shall, at the request and at the expense of the Corporation, execute
and deliver to the Corporation such deeds or other instruments as shall be
necessary to release the Corporation, subject to section 7.4, from its covenants
contained herein except those relating to the indemnification of the Trustee and
to the maintenance of an office or agency for the Debentures as contemplated by
sections 5.4 and 5.5 upon:
(a) proof being given to the reasonable satisfaction of the
Trustee that the Corporation has deposited funds or made
provision for payment of the expenses of the Trustee, for
payment of all principal and interest and other amounts due or
to become due on the Debentures (including amounts due or to
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become due with respect to any series of Debentures as a
result of a provision contemplated by section 2.2) and for the
payment of Taxes arising with respect to such deposited funds
or other provision for payment (collectively, the "Payments")
pursuant to the terms of an irrevocable trust agreement in
form and substance satisfactory to the Trustee; and
(b) delivery by the Corporation to the Trustee of an opinion of
Counsel, which opinion shall be satisfactory to the Trustee in
its sole discretion, that the Debentureholders will not be
subject to any Taxes as a result of the Corporation's exercise
of this defeasance option and that they will be subject to
Taxes, including those in respect of income (including taxable
capital gains), in the same amount, in the same manner and at
the same time or times as would have been the case if such
option had not been exercised.
The Corporation shall be deemed to have made such due provision for payment if,
and only if, it has deposited or caused to be deposited with the Trustee under
the terms of the irrevocable trust agreement, and solely for the benefit of the
Debentureholders for the purpose stated therein, cash or securities issued or
guaranteed by the Government of Canada which will be sufficient, in the opinion
of an independent chartered accountant or investment dealer acceptable to the
Trustee, to provide for the Payments.
The Trustee shall hold in trust, all monies or securities deposited with it
pursuant to this section 7.3, and shall apply the deposited monies and the money
from such securities in accordance with this Indenture to the payment of
principal of, interest and premium, if any, on the Debentures.
7.4 TRUSTEE UNABLE TO APPLY MONEY OR DEBENTURES
If the Trustee is unable to apply any money or securities in accordance with
section 7.3 by reason of any legal proceeding or by reason of any order or
judgment of any Court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Corporation's obligations under this
Indenture and the Debentures shall be revived and reinstated as though no
deposit of money or securities had occurred pursuant to section 7.3 until such
time as the Trustee is permitted to apply all such money or securities in
accordance with section 7.3; provided that if the Corporation has made any
principal or interest payments or paid any premium, if any, on the Debentures
because of the reinstatement of its obligations, the Corporation shall be
subrogated to the rights of the Debentureholders of such Debentures to receive
such payment from the money or securities held by the Trustee. Notwithstanding
the foregoing, upon proof being given to the reasonable satisfaction of the
Trustee that all the Debentures of a particular series and the premium, if any,
thereon, and interest (including interest on amounts in default) thereon and
other moneys payable in respect thereof have been paid or satisfied or that, all
the outstanding Debentures of a particular series having matured or having been
duly called for redemption, or the Trustee having been given irrevocable
instructions by the Corporation to publish within ninety (90) days notice of
redemption of all the outstanding Debentures of a particular series, such
payment and/or redemption has been duly and effectually provided for by payment
to the Trustee or otherwise, and upon payment of all costs, charges and expenses
properly incurred by the Trustee in relation to the supplemental indenture
providing for the issue of such series of Debentures and all interest thereon,
or upon provision satisfactory to the Trustee being made therefor, the Trustee
shall at the request and at the expense of the Corporation, execute and deliver
to the Corporation such deeds or other instruments as shall be requisite to
evidence the satisfaction and discharge of the supplemental indenture providing
for the issue of such series of Debentures and to release the Corporation from
the covenants therein contained.
7.5 DISCHARGE
Upon proof being given to the reasonable satisfaction of the Trustee that all
the Debentures and interest (including interest on amounts in default) thereon
have been paid or satisfied or that, all the outstanding Debentures having
matured, such payment has been duly provided for by payment to the Trustee or
otherwise, and upon payment of all costs, charges and expenses properly incurred
by the Trustee in relation to this Indenture and all interest thereon and the
remuneration of the Trustee, or upon provision satisfactory to the Trustee being
made therefor, the Trustee shall,
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at the request and at the expense of the Corporation, execute and deliver to the
Corporation such deeds or other instruments as shall be necessary to evidence
the satisfaction and discharge of this Indenture and to release the Corporation
from its covenants contained herein except those relating to the indemnification
of the Trustee.
ARTICLE 8
SUCCESSOR CORPORATIONS
8.1 CERTAIN REQUIREMENTS IN RESPECT OF MERGER ETC.
The Corporation shall not enter into any transaction, whether by way of
amalgamation (except a vertical short-form amalgamation with one or more of its
wholly-owned Subsidiaries pursuant to the BUSINESS CORPORATIONS ACT (Yukon)),
merger, reconstruction, reorganization, consolidation, transfer, sale, lease or
otherwise, whereby all or substantially all of its undertaking, property and
assets would become the property of any other Person or, in the case of any such
amalgamation, of the continuing corporation resulting therefrom, but may do so
if:
(a) such other Person or continuing corporation is a corporation
(the "Successor Corporation") incorporated under the laws of
Canada or any province thereof;
(b) the Successor Corporation shall execute, prior to or
contemporaneously with the completion of such transaction,
such indenture supplemental hereto and other instruments (if
any) as are satisfactory to the Trustee and in the opinion of
Counsel are necessary or advisable to evidence the assumption
by the Successor Corporation of the liability for the due and
punctual payment of all the Debentures and the interest
thereon and all other moneys payable thereunder and the
covenant of such Successor Corporation to pay the same and its
agreement to observe and perform all the covenants and
obligations of the Corporation under this Indenture;
(c) such transaction shall, to the satisfaction of the Trustee and
in the opinion of Counsel, be upon such terms as substantially
to preserve and not to impair any of the rights and powers of
the Trustee or of the Debentureholders hereunder and upon such
terms as are not in any way prejudicial to the interests of
the Debentureholders; and
(d) no condition or event shall exist in respect of the
Corporation or the Successor Corporation, either at the time
of such transaction or immediately thereafter after giving
full effect thereto, which constitutes or would, after the
giving of notice or the lapse of time or both, constitute an
Event of Default hereunder.
8.2 VESTING OF POWERS IN SUCCESSOR
Whenever the conditions of section 8.1 have been duly observed and performed,
the Trustee shall execute and deliver the supplemental indenture provided for in
Article 12 and thereupon:
(a) the Successor Corporation shall possess and from time to time
may exercise each and every right and power of the Corporation
under this Indenture in the name of the Corporation or
otherwise, and any act or proceeding by any provision of this
Indenture required to be done or performed by any Directors or
officers of the Corporation may be done and performed with
like force and effect by the like directors or officers of
such Successor Corporation; and
(b) the Corporation shall be released and discharged from
liability under this Indenture and the Trustee may execute any
documents which it may be advised are necessary or advisable
for effecting or evidencing such release and discharge.
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ARTICLE 9
MEETINGS OF DEBENTUREHOLDERS
9.1 RIGHT TO CONVENE MEETINGS
The Trustee may at any time and from time to time and shall, (i) on receipt of a
Written Request of the Corporation or a written request signed by the Holders of
not less than 25% in principal amount of the Debentures of any series then
outstanding and upon being indemnified to its reasonable satisfaction by the
Corporation or by the Holders of the Debentures of such series signing such
request against the costs which may be incurred in connection with the calling
and holding of such meeting, convene a meeting of the Holders of the Debentures
of such series and, (ii) on receipt of a Written Request of the Corporation or a
Debentureholders' Request and upon being indemnified to its reasonable
satisfaction by the Corporation or by the Debentureholders against the costs
which may be incurred in connection with the calling and holding of such
meeting, convene a meeting of the Debentureholders. If the Trustee fails within
30 days after receipt of such written request and such indemnity to give notice
convening a meeting, the Corporation, such Debentureholders or the Holders of
the Debentures of such series, as the case may be, may convene such meeting.
Every such meeting shall be held in the city of Calgary or at such other place
as may be approved or determined by the Trustee.
9.2 NOTICE OF MEETINGS
At least 21 days' notice of any meeting of Debentureholders or the Holders of
the Debentures of a series shall be given to the Debentureholders or the Holders
of the Debentures of such series, as the case may be, in accordance with section
10.2 and a copy thereof shall be sent by mail to the Trustee unless the meeting
has been called by it and to the Corporation unless the meeting has been called
by it. Such notice shall state the time when and the place where the meeting is
to be held and shall state briefly the general nature of the business to be
transacted thereat, but it shall not be necessary for any such notice to set out
the terms of any resolution to be proposed at the meeting or any of the
provisions of this Article.
9.3 CHAIRMAN
An individual, who need not be a Debentureholder or a Holder of the Debentures
of such series, as the case may be, nominated in writing by the Trustee shall be
chairman of the meeting and if no individual is so nominated or the individual
so nominated is unable or unwilling to act or if the individual so nominated is
not present within 15 minutes from the time fixed for the holding of the
meeting, the Debentureholders or the Holders of the Debentures of such series,
as the case may be, present in person or by proxy shall choose an individual
present to be chairman.
9.4 QUORUM
At any meeting of the Debentureholders or the Holders of any series of
Debentures, as the case may be, other than a meeting convened for the purpose of
considering a resolution proposed to be passed as an Extraordinary Resolution,
as to which the provisions of section 9.11 shall be applicable, a quorum shall
consist of Holders present in person or by proxy and representing at least 25%
in principal amount of the outstanding Debentures or Debentures of such series,
as the case may be. If a quorum of the Debentureholders or the Holders of
Debentures of such series, as the case may be, shall not be present within 30
minutes from the time fixed for holding any such meeting, the meeting, if
convened by the Debentureholders or the Holders of Debentures of such series or
pursuant to a Debentureholder's Request or the request of the Holders of the
Debentures of a series, shall be dissolved; but in any other case the meeting
shall be adjourned to the same day in the next week (unless such day is not a
Business Day, in which case it shall be adjourned to the next following Business
Day) at the same time and place. At the adjourned meeting the Debentureholders
or the Holders of Debentures of such series, as the case may be, present in
person or by proxy shall form a quorum and may transact the business for which
the meeting was originally convened notwithstanding that they may not represent
25% of the principal amount of the outstanding Debentures or Debentures of such
series.
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9.5 POWER TO ADJOURN
The chairman of any meeting at which a quorum of the Debentureholders or the
Holders of Debentures of a series, as the case may be, is present may, with the
consent of the Holders of a majority in principal amount of the Debentures or
the Debentures of such series, as the case may be, represented thereat, adjourn
any such meeting and no notice of such adjournment need be given except such
notice, if any, as the meeting may prescribe.
9.6 SHOW OF HANDS
Every question submitted to a meeting shall be decided in the first place by a
majority of the votes given on a show of hands except that votes on
Extraordinary Resolutions shall be given in the manner hereinafter provided. At
such meeting, unless a poll is duly demanded as herein provided, a declaration
by the chairman that a resolution has been carried or carried unanimously or by
a particular majority or lost or not carried by a particular majority shall be
conclusive evidence of the fact.
9.7 POLL
On every Extraordinary Resolution, and on any other question submitted to a
meeting, when demanded by the chairman or by a Holder and/or proxies for Holders
holding at least 5% of the principal amount of the Debentures or the Debentures
of a series, as the case may be, represented thereat, a poll shall be taken in
such manner and either at once or after an adjournment as the chairman shall
direct. Questions other than Extraordinary Resolutions shall, if a poll is
taken, be decided by the votes of the Holders of a majority in principal amount
of the Debentures or the Debentures of such series, as the case may be,
represented at the meeting and voted on the poll.
9.8 VOTING
On a show of hands every Person who is present and entitled to vote, whether as
a Holder or as proxy, shall have one vote. On a poll each Holder present in
person or represented by a duly appointed proxy at the meeting of
Debentureholders or the Holders of the Debentures of a series shall be entitled
to one vote in respect of each $1,000 principal amount of Debentures or
Debentures of such series, as the case may be, of which he shall then be the
Holder. A proxy need not be a Holder of Debentures of any series. In the case of
joint registered Holders of a Debenture, any one of them present in person or by
proxy at the meeting may vote in the absence of the other or others; but in case
more than one of them are present in person or by proxy, they shall vote
together in respect of the Debentures of which they are joint registered
Holders.
9.9 REGULATIONS
The Trustee or the Corporation, with the approval of the Trustee, may from time
to time make and from time to time vary such regulations as it shall from time
to time think fit providing for:
(a) voting by proxy and the form of the instrument appointing a
proxy (which shall be in writing) and the manner in which the
same shall be executed and for the production of the authority
of any Person signing on behalf of a Holder;
(b) the issue of voting certificates:
(i) by any bank, trust company or other depositary
approved by the Trustee certifying that specified
Bearer Debentures have been deposited with it by a
named Person and will remain on deposit until after
the meeting of Debentureholders or Holders of
Debentures of a series, as the case may be, specified
therein;
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(ii) by any bank, trust company, insurance company,
governmental department or agency approved by the
Trustee certifying that it is the Holder of specified
Bearer Debentures and will continue to hold the same
until after the meeting of Debentureholders or
Holders of Debentures of a series, as the case may
be, specified therein;
which voting certificates shall entitle the Persons named
therein to be present and vote at any such meeting and at any
adjournment thereof or to appoint a proxy or proxies to
represent them at such meeting and at any adjournment thereof,
in the same manner and with the same effect as though the
persons so named in such voting certificates were the actual
bearers of the Bearer Debentures specified therein;
(c) the deposit of voting certificates and/or instruments
appointing proxies at such place as the Trustee, the
Corporation or the Debentureholders or the Holders of the
Debentures of a series, convening a particular meeting, as the
case may be, may in the notice convening the meeting direct
and the time, if any, before the holding of the meeting or any
adjournment thereof by which the same shall be deposited; and
(d) the deposit of voting certificates and/or instruments
appointing proxies at some approved place or places other than
the place at which a particular meeting is to be held and
enabling particulars of such voting certificates and/or
instruments appointing proxies to be mailed, cabled,
telegraphed, telecopied or sent by telex before the meeting to
the Corporation or to the Trustee at the place where the same
is to be held and for the voting of proxies so deposited as
though the instruments themselves were produced at the
meeting.
Any regulations so made shall be binding and effective and the votes given in
accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only Persons who shall be recognized at any meeting
as the Holders of any Debentures, or as entitled to vote or be present at the
meeting in respect thereof, shall be persons who produce Bearer Debentures or
voting certificates at the meeting and Holders of Registered Debentures and
persons whom Holders of Registered Debentures or voting certificates have duly
appointed as their proxies.
9.10 CORPORATION AND TRUSTEE MAY BE REPRESENTED
The Corporation and the Trustee, by their respective officers and directors, and
the legal advisers of the Corporation and the Trustee may attend any meeting of
the Debentureholders or the Holders of Debentures of any series, as the case may
be, but shall have no vote as such.
9.11 POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION
In addition to the powers conferred upon them by any other provisions of this
Indenture or by law, a meeting of the Debentureholders or a meeting of the
Holders of Debentures of any series, as the case may be, shall have the
following powers exercisable from time to time by Extraordinary Resolution:
(a) in the case of a meeting of Debentureholders, subject to the
requirement to obtain the consent of the Holder of each
outstanding Debenture affected thereby where so required in
section 12.2, power to approve any change whatsoever in any of
the provisions of this Indenture or the Debentures and any
modification, abrogation, alteration, compromise or
arrangement of the rights of the Debentureholders and/or the
Trustee against the Corporation or against its undertaking,
property and assets or any part thereof, whether such rights
arise under this Indenture or the Debentures or otherwise and,
in the case of a meeting of the Holders of Debentures of such
series, subject to the requirement to obtain the consent of
the Holder of each outstanding Debenture affected thereby
where so required in section 12.2, power to approve any change
whatsoever in any of the provisions of this Indenture
specifically affecting such series of Debentures or the
Debentures of such series and
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any modification, abrogation, alteration, compromise or
arrangement of the rights of the Holders of such series of
Debentures and/or the Trustee against the Corporation or
against its undertaking, property and assets or any part
thereof, whether such rights arise under this Indenture or the
Debentures of such series or otherwise;
(b) in the case of a meeting of Debentureholders, power to approve
any scheme for the reconstruction or reorganization of the
Corporation or for the consolidation, amalgamation or merger
of the Corporation with any other corporation or for the
selling or leasing of the undertaking, property and assets of
the Corporation or any part thereof (where such approval is
required), provided that no such approval shall be necessary
in respect of any such transaction if the provisions of
Article 8 shall have been complied with;
(c) in the case of a meeting of Debentureholders, power to direct
or authorize the Trustee to exercise any power, right, remedy
or authority given to it by this Indenture or the Debentures
in any manner specified in such Extraordinary Resolution or to
refrain from exercising any such power, right, remedy or
authority or, in the case of a meeting of the Holders of
Debentures of such series, power to direct or authorize the
Trustee to exercise any power, right, remedy or authority
given to it in respect of the Debentures of such series by
this Indenture or the Debentures of such series in any manner
specified in such Extraordinary Resolution or to refrain from
exercising any such power, right, remedy or authority;
(d) in the case of a meeting of Debentureholders, power to waive
and direct the Trustee to waive any default or Event of
Default hereunder provided with respect to all outstanding
Debentures and/or cancel any declaration made by the Trustee
pursuant to section 6.3 either unconditionally or upon any
conditions specified in such Extraordinary Resolution or, in
the case of a meeting of the Holders of Debentures of such
series, power to waive and direct the Trustee to waive any
default or Event of Default hereunder (or in any supplemental
indenture hereto creating such series) provided with respect
to Debentures of such series and/or cancel any declaration
made by the Trustee pursuant to section 6.3 either
unconditionally or upon any conditions specified in such
Extraordinary Resolution;
(e) power to direct any Debentureholder or Holder of Debentures of
such series, as the case may be, who, as such, has brought any
action, suit or proceeding to stay or discontinue or otherwise
deal with the same in the manner directed by such
Extraordinary Resolution upon payment, if the taking of such
action, suit or proceeding shall have been permitted by
section 6.8, of the costs, charges and expenses reasonably and
properly incurred by such Debentureholder or Holder of
Debentures of such series, as the case may be, in connection
therewith;
(f) power to restrain any Debentureholder or Holder of Debentures
of such series, as the case may be, from taking or instituting
any suit, action or proceeding for the purpose of enforcing
payment of the principal or interest of any Debenture or
Debenture of such series, as the case may be, or for the
execution of any trust or power hereunder or for any other
remedy hereunder;
(g) power to appoint a committee to consult with the Trustee (and
to remove any committee so appointed) and to delegate to such
committee (subject to such limitations, if any, as may be
prescribed in such Extraordinary Resolution) all or any of the
powers which the Debentureholders or the Holders of the
Debentures of such series, as the case may be, may exercise by
Extraordinary Resolution under this section 9.11; the
Extraordinary Resolution making such appointment may provide
for payment of the expenses and disbursements of and
compensation to such committee; such committee shall consist
of such number of individuals (who need not be
Debentureholders or the Holders of the Debentures of such
series or any series) as shall be prescribed in the
Extraordinary Resolution appointing it; subject to the
Extraordinary Resolution appointing it, every such committee
may elect its chairman and may make regulations respecting its
quorum, the calling
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of its meetings, the filling of vacancies occurring in its
number, the manner in which it may act and its procedure
generally and such regulations may provide that the committee
may act at a meeting at which a quorum is present or may act
by resolution signed in one or more counterparts by a majority
of the members thereof or the number of members thereof
necessary to constitute a quorum, whichever is the greater;
all acts of any such committee within the authority delegated
to it shall be binding upon all Debentureholders or the
Holders of the Debentures of such series, as the case may be;
(h) power to agree to any compromise or arrangement with any
creditor or creditors or any class or classes of creditors,
whether secured or otherwise, and with holders of any shares
or other securities of the Corporation;
(i) power to authorize the distribution in specie of any shares,
bonds, debentures or other securities or obligations and/or
cash or other consideration received or the use or disposition
of the whole or any part of such shares, bonds, debentures or
other securities or obligations and/or cash or other
consideration in such manner and for such purpose as may be
considered advisable and specified in such Extraordinary
Resolution;
(j) power to approve the exchange of the Debentures or the
Debentures of such series, as the case may be, for or the
conversion thereof into shares, bonds, debentures or other
securities or obligations of the Corporation or of any
corporation formed or to be formed;
(k) in the case of a meeting of Debentureholders, power to remove
the Trustee from office and to appoint a new Trustee or
Trustees; and
(l) power to amend, alter or repeal any Extraordinary Resolution
previously passed or approved by the Debentureholders or the
Holders of the Debentures of such series, as the case may be,
or by any committee appointed pursuant to subsection 9.11(g).
9.12 MEANING OF "EXTRAORDINARY RESOLUTION"
(a) The expression "Extraordinary Resolution" when used in this
Indenture means, in respect of a meeting of Debentureholders,
subject as hereinafter provided in this Article 9, a
resolution proposed to be passed as an Extraordinary
Resolution at the meeting of Debentureholders duly convened
for the purpose and held in accordance with the provisions of
this Article 9 at which the Holders of more than 25% of the
principal amount of the Debentures then outstanding are
present in person or by proxy and passed by the favourable
votes of the Holders of not less than 66 2/3% of the principal
amount of Debentures represented at the meeting and voted on a
poll upon such resolution and, in respect of a meeting of the
Holders of Debentures of any series, a resolution proposed to
be passed as an Extraordinary Resolution at the meeting of the
Holders of Debentures of such series duly convened for the
purpose and held in accordance with the provisions of this
Article 9 at which the Holders of more than 25% of the
principal amount of the Debentures of such series then
outstanding are present in person or by proxy and passed by
the favourable votes of the Holders of not less than 66 2/3%
of the principal amount of the Debentures of such series
represented at the meeting and voted on a poll upon such
resolution.
(b) If at any meeting of the Holders of all outstanding Debentures
the Holders of more than 25% of the principal amount of the
Debentures then outstanding, or at a meeting of the Holders of
Debentures of any series the Holders of more than 25% of the
principal amount of the Debentures of such series then
outstanding, are not present in person or by proxy within 30
minutes after the time appointed for the meeting, then the
meeting, if convened by the Debentureholders or the Holders of
Debentures of such series or pursuant to a Debentureholder's
Request or a written request signed by the Holders
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of not less than 25% in principal amount of the Debentures of
such series, as the case may be, shall be dissolved; but in
any other case it shall be adjourned to such date, being not
less than 21 nor more than 60 days later, and to such place
and time as may be appointed by the chairman. Not less than 10
days' notice shall be given of the time and place of such
adjourned meeting in the manner provided in Article 9. Such
notice shall state that at the adjourned meeting the
Debentureholders or the Holders of Debentures of such series,
as the case may be, present in person or by proxy shall form a
quorum, but it shall not be necessary to set forth the
purposes for which the meeting was originally called or any
other particulars. At the adjourned meeting the
Debentureholders or the Holders of the Debentures of such
series, as the case may be, present in person or by proxy
shall form a quorum and may transact the business for which
the meeting was originally convened and a resolution proposed
at such adjourned meeting and passed in accordance with
subsection 9.12(a) shall be an Extraordinary Resolution within
the meaning of this Indenture, notwithstanding that the
Holders of more than 25% of the principal amount of the
Debentures then outstanding or the Debentures of such series
then outstanding, as the case may be, are not present in
person or by proxy at such adjourned meeting.
(c) Votes on an Extraordinary Resolution shall always be given on
a poll and no demand for a poll on an Extraordinary Resolution
shall be necessary.
9.13 POWERS CUMULATIVE
It is hereby declared and agreed that any one or more of the powers and/or any
combination of the powers in this Indenture stated to be exercisable by the
Debentureholders or the Holders of Debentures of any series by Extraordinary
Resolution or otherwise may be exercised from time to time and the exercise of
any one or more of such powers or any combination of powers from time to time
shall not be deemed to exhaust the right of the Debentureholders or the Holders
of the Debentures of such series, as the case may be, to exercise the same or
any other such power or powers or combination of powers thereafter from time to
time.
9.14 MINUTES
Minutes of all resolutions and proceedings at every meeting of Debentureholders
or the Holders of Debentures of any series, as the case may be, shall be made
and duly entered in books to be provided for that purpose by the Trustee at the
expense of the Corporation, and any such minutes, if signed by the chairman of
the meeting at which such resolutions were passed or proceedings had, or by the
chairman of the next succeeding meeting of the Debentureholders or the Holders
of Debentures of such series, as the case may be, shall be prima facie evidence
of the matters therein stated and, until the contrary is proved, every such
meeting, in respect of the proceedings of which minutes shall have been made,
shall be deemed to have been duly held and convened, and all resolutions passed
or proceedings had thereat, to have been duly passed and had.
9.15 SIGNED INSTRUMENTS
Any action which may be taken and any power which may be exercised by the
Debentureholders or the Holders of Debentures of any series, as the case may be,
under this Indenture may also be taken and exercised, in respect of an action
which may be taken or power which may be exercised by the Holders of not less
than 66 2/3% of the principal amount of the outstanding Debentures and, in
respect of an action which may be taken or power which may be exercised by the
Holders of Debentures of a series, by the Holders of not less than 66 2/3% of
the principal amount of the outstanding Debentures of such series by signed
instrument and the expression "Extraordinary Resolution" when used in this
Indenture shall include an instrument so signed. Notice of any Extraordinary
Resolution passed in accordance with this section 9.15 shall be given by the
Trustee to the Holders of Debentures or the Holders of Debentures of the series
affected thereby, as the case may be, within 30 days of the date on which such
Extraordinary Resolution was passed.
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9.16 BINDING EFFECT OF RESOLUTIONS
Every resolution and every Extraordinary Resolution passed in accordance with
the provisions of this Article 9 at a meeting of Debentureholders or Holders of
the Debentures of any series, as the case may be, shall be binding upon all the
Debentureholders or the Holders of Debentures of such series, as the case may
be, whether present at or absent from such meeting, and every instrument signed
by the Debentureholders or the Holders of the Debentures of any series, as the
case may be, in accordance with section 9.15 shall be binding upon all the
Debentureholders; or the Holders of the Debentures of such series, as the case
may be, whether signatories thereto or not, and each and every Debentureholder
or Holder of Debentures of such series, as the case may be, and the Trustee
(subject to the provisions for its indemnity herein contained) shall be bound to
give effect to every such resolution, Extraordinary Resolution and instrument.
9.17 SERIAL MEETING
(a) In addition to the power to convene a meeting of the Holders
of the Debentures of any series as provided in section 9.1, if
in the opinion of the Trustee any business to be transacted at
a meeting of Debentureholders, or any action to be taken or
power to be exercised by instrument in writing under section
9.15, especially affects the rights of the Holders of
Debentures of one or more series in a manner or to an extent
differing from that in which it affects the rights of the
Holders of Debentures of any other series, then:
(i) reference to such fact, indicating each series so
especially affected, shall be made in the notice of
such meeting and the meeting shall be and is herein
called a "serial meeting";
(ii) the Holders of Debentures of a series so especially
affected shall not be bound by any action taken or
power exercised at a serial meeting unless in
addition to the other provisions of this Article:
(A) there are present in person or by proxy at
the said meeting Holders of at least 25% in
principal amount of the outstanding
Debentures of such series, subject to the
provisions of this Article as to adjourned
meetings; and
(B) the resolution is passed by the favourable
votes of the Holders of at least a majority
(or in the case of an Extraordinary
Resolution not less than 66 2/3%), of the
principal amount of Debentures of such
series voted on the resolution;
(iii) the Holders, of Debentures of a series so especially
affected shall not be bound by any action taken or
power exercised by instrument in writing by the
Debentureholders under section 9.15 unless in
addition to the other provisions of this Article such
instrument is signed in one or more counterparts by
the Holders of 66 2/3% of the principal amount of the
outstanding Debentures of such series.
(b) Notwithstanding anything herein contained (but subject to the
provisions of any indenture, deed or instrument supplemental
or ancillary hereto), any covenant or other provision
contained herein or in any indenture supplemental hereto which
is expressed to be effective only so long as any Debentures of
a particular series remain outstanding may be modified by the
required resolution or consent of the Holders of the
Debentures of such series in the same manner as if the
Debentures of such series were the only Debentures outstanding
hereunder.
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9.18 EVIDENCE OF RIGHTS OF DEBENTUREHOLDERS
Any request, direction, notice, consent or other instrument which this Indenture
may require or permit to be signed or executed by the Debentureholders or the
Holders of Debentures of any series, as the case may be, may be in any number of
concurrent instruments of similar tenor and may be signed or executed by such
Debentureholders or Holders of Debentures of such series, as the case may be, in
person or by attorney duly appointed in writing. Proof of the execution of any
such request, direction, notice, consent or other instrument or of a writing
appointing any such attorney or (subject to the provisions of section 9.9 with
regard to voting at meetings of Debentureholders or Holders of any series of
Debentures) of the holding by any Person of Debentures or Coupons shall be
sufficient for any purpose of this Indenture if made in the following manner:
(a) the fact and date of the execution by any Person of such
request, direction, notice, consent or other instrument or
writing may be proved by the certificate of any notary public,
or other officer authorized to take acknowledgements of deeds
to be recorded at the place where, such certificate is made,
that the Person signing such request, direction, notice,
consent or other instrument or writing acknowledged to him the
execution thereof, or by an affidavit of a witness of such
execution or in any other manner which the Trustee may
consider adequate; and
(b) the fact of the holding by any Person executing such request,
direction, notice, consent or other instrument or writing of
Bearer Debentures and the amounts, designations and numbers
thereof and the date of his holding the same may be proved by
deposit of such Bearer Debentures with the Trustee or by a
certificate executed by any bank, trust company or other
depositary satisfactory to the Trustee certifying that on the
date therein mentioned such Person had on deposit with such
depositary the Bearer Debentures described in such certificate
and that, if applicable, such Bearer Debentures will remain so
deposited until the expiration of the time specified in such
certificate.
The Trustee may, nevertheless, in its discretion require further proof in cases
where it considers further proof necessary or desirable or may accept such other
proof as it shall consider proper.
ARTICLE 10
NOTICES
10.1 NOTICE TO THE CORPORATION
Any notice to the Corporation under the provisions of this Indenture shall be
valid and effective if delivered personally to, or, subject to section 10.4, if
given by registered mail, postage prepaid, addressed to, the Corporation at 1000
Louisiana, Suite 1500, Houston, Texas, 77002, Attention: Secretary and shall be
deemed to have been given on the date of delivery or on the third Business Day
after such letter has been mailed, as the case may be. The Corporation may from
time to time notify the Trustee of a change in address which thereafter, until
changed by further notice, shall be the address of the Corporation for all
purposes of this Indenture.
10.2 NOTICE TO DEBENTUREHOLDERS
Except as otherwise expressly provided herein, all notices to be given hereunder
with respect to the Debentures shall be valid and effective if, in the case of
Registered Debentures, such notice is delivered personally or is sent by first
class mail, postage prepaid, addressed to the Holders of the Registered
Debentures at their post office addresses appearing in any of the registers
hereinbefore mentioned, and, in the case of Bearer Debentures, such notice is
published in one or more daily newspapers of general circulation published in
the English language in the respective cities in which the Corporation is for
the time being required to maintain a register for the Debentures and in a daily
newspaper or newspapers published in such other place or places (if any) and in
such other language or languages (if any) as the Corporation or the Trustee may
determine or as may be specified in the terms and conditions relating to such
series
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of Debentures, once in each of two successive weeks. Any notice so delivered,
sent by mail or published shall be deemed to have been given on the day upon
which it is delivered, mailed or the latest date on which the first publication
in each of such cities takes place, as the case may be. Any accidental error,
omission or failure in giving or in delivering, mailing or publishing any such
notice or the non-receipt of any such notice by any Debentureholders or Holders
shall not invalidate or otherwise prejudicially affect any action or proceeding
founded thereon.
10.3 NOTICE TO THE TRUSTEE
Any notice to the Trustee under the provisions of this Indenture shall be valid
and effective if delivered personally to, or, subject to section 10.4, if given
by registered mail, postage prepaid, addressed to, the Trustee at Montreal Trust
Corporate Services, 710, 530 - 8th Avenue SW, Calgary, Alberta, T2P 3S8,
Attention: Manager, Corporate Trust Department and shall be deemed to have been
given on the date of delivery or on the third Business Day after such letter has
been posted, as the case may be. The Trustee may from time to time notify the
Corporation of a change in address which thereafter, until changed by further
notice, shall be the address of the Trustee for all purposes of this Indenture.
10.4 MAIL SERVICE INTERRUPTION
If the Trustee determines that mail service is or is threatened to be
interrupted at the time when the Trustee is required or elects to give any
notice to the Holder of Registered Debentures hereunder, the Trustee shall,
notwithstanding the provisions hereof, give such notice by means of publication
in The Globe and Mail, national edition, or any other English language daily
newspaper or newspapers of general circulation in Canada and in a French
language daily newspaper of general circulation in the Province of Quebec, once
in each of two successive weeks, and any notice so published shall be deemed to
have been given on the latest date on which the first publication takes place.
If, by reason of any actual or threatened interruption of mail service due to
strike, lock-out or otherwise, any notice to be given to the Trustee or to the
Corporation would be unlikely to reach its destination in a timely manner, such
notice shall be valid and effective only if delivered personally in accordance
with sections 10.1 or 10.3, as the case may be.
ARTICLE 11
CONCERNING THE TRUSTEE
11.1 TRUST INDENTURE LEGISLATION
(a) In this Article 11, the term "Indenture Legislation" means the
provisions, if any, of the BUSINESS CORPORATIONS ACT (Canada),
the BUSINESS CORPORATIONS ACT (Yukon) and the BUSINESS
CORPORATIONS ACT (Ontario), and any other statute of Canada or
a province thereof, and of the regulations under any such
statute, relating to trust indentures and to the rights,
duties and obligations of trustees under trust indentures and
of corporations issuing debt obligations under trust
indentures, to the extent that such provisions are at the time
in force and applicable to this Indenture or the Corporation;
(b) If and to the extent that any provision of this Indenture
limits, qualifies or conflicts with a mandatory requirement of
Indenture Legislation, such mandatory requirement shall
prevail; and
(c) At all times in relation to this Indenture and any action to
be taken hereunder, the Corporation and the Trustee each shall
observe and comply with Indenture Legislation and the
Corporation, the Trustee and each Debentureholder shall be
entitled to the benefits of Indenture Legislation.
<PAGE>
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11.2 NO CONFLICT OF INTEREST
The Trustee represents to the Corporation that at the date of the execution and
delivery of this Indenture there exists no material conflict of interest in the
role of the Trustee as a fiduciary hereunder. If at any time a material conflict
of interest exists in the Trustee's role as a fiduciary hereunder the Trustee
shall, within 90 days after ascertaining that such a material conflict of
interest exists, either eliminate the same or else resign from the trusts
hereunder by giving notice in writing to the Corporation at least 21 days prior
to such resignation and shall thereupon be discharged from all further duties
and liabilities hereunder.
11.3 RIGHTS AND DUTIES OF TRUSTEE
(a) In the exercise of the rights and duties prescribed or
conferred by the terms of this Indenture, the Trustee shall
exercise that degree of care, diligence and skill that a
reasonably prudent trustee would exercise in comparable
circumstances;
(b) Subject only to subsection 11.3(a), the obligation of the
Trustee to commence or continue any act, action or proceeding
for the purpose of enforcing any rights of the Trustee or the
Debentureholders hereunder shall be conditional upon the
Debentureholders furnishing, when required by notice in
writing by the Trustee, sufficient funds to commence or
continue such act, action or proceeding and indemnity
reasonably satisfactory to the Trustee to protect and hold
harmless the Trustee against the costs, charges and expenses
and liabilities to be incurred thereby and any loss and damage
it may suffer by reason thereof. None of the provisions
contained in this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial
liability in the performance of any of its duties or in the
exercise of any of its rights or powers unless indemnified as
aforesaid;
(c) The Trustee may, before commencing or at any time during the
continuance of any such act, action or proceeding, require the
Debentureholders at whose instance it is acting to deposit
with the Trustee the Debentures held by them, for which
Debentures the Trustee shall issue receipts; and
(d) Every provision of this Indenture that by its terms relieves
the Trustee of liability or entitles it to rely upon any
evidence submitted to it is subject to the provisions of
Indenture Legislation, this section 11.3 and section 11.4.
11.4 EVIDENCE, EXPERTS AND ADVISERS
(a) In addition to the reports, certificates, opinions, statutory
declarations and other evidence required by this Indenture,
the Corporation shall furnish to the Trustee such additional
evidence of compliance with any provisions hereof, and in such
form, as may be prescribed by Indenture Legislation or as the
Trustee may reasonably require by written notice to the
Corporation;
(b) In the exercise of its rights, duties and obligations, the
Trustee may, if it is acting in good faith, rely as to the
truth of the statements and the accuracy of the opinions
expressed therein, upon statutory declarations, opinions,
reports, certificates or other evidence referred to in
subsection 11.4(a) provided that the Trustee examines the same
and determines that such evidence complies with the applicable
requirements of this Indenture and of Indenture Legislation;
and
(c) The Trustee may employ or retain such counsel, auditors,
accountants, appraisers or other experts or advisers, whose
qualifications give authority to any opinion or report made by
them, as it may reasonably require for the purpose of
discharging its duties hereunder and shall not be responsible
for any misconduct on the part of any of them.
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11.5 TRUSTEE MAY DEAL IN DEBENTURES
Subject to section 11.3, the Trustee may buy, sell, lend upon and deal in the
Debentures or other securities of the Corporation, either with the Corporation
or otherwise, and generally contract and enter into financial transactions with
the Corporation or otherwise, without being liable to account for any profits
made thereby.
11.6 TRUSTEE NOT REQUIRED TO GIVE
The Trustee shall not be required to give any bond or security in respect of the
execution of the trusts and powers of this Indenture or otherwise in respect of
this Indenture.
11.7 PROTECTION OF TRUSTEE
By way of supplement to the provisions of any law for the time being relating to
trustees, it is expressly declared and agreed as follows:
(a) the Trustee shall not be liable for or by reason of any
statements of fact or recitals in this Indenture or in the
Debentures or Coupons (except the representation contained in
section 11.2 and in the certificate of the Trustee on the
Debentures) or required to verify the same, but all such
statements or recitals are and shall be deemed to be made by
the Corporation;
(b) nothing herein contained shall impose any obligation on the
Trustee to see to or to require evidence of the registration
or filing (or renewal thereof) of this Indenture or any
instrument ancillary or supplemental hereto;
(c) the Trustee shall not be bound to give notice to any Person or
Persons of the execution hereof; and
(d) the Trustee shall not incur any liability or responsibility
whatever or be in any way responsible for the consequence of
any breach on the part of the Corporation of any of the
covenants herein contained or of any acts of the agents of the
Corporation.
11.8 INVESTMENT OF TRUST MONEYS
Unless otherwise provided in this Indenture, any moneys held by the Trustee,
which under the trusts of this Indenture may or ought to be invested or which
may be on deposit with the Trustee or which may be in the hands of the Trustee,
may be invested and reinvested in the name or under the control of the Trustee
in any of the debt securities in which trustees are by the laws of the Province
of Ontario authorized to invest at the time of investment maturing not later
than one year from such time. Pending such investment such moneys may be placed
by the Trustee on deposit in a chartered bank in Canada or with its own deposit
department. The Trustee shall allow interest at the current rate for similar
deposits on moneys remaining on deposit with it and, provided that the
Corporation is not in default hereunder, shall credit the Corporation with
interest received on moneys deposited with other depositories and on all moneys
invested as provided in this section 11.8.
The Trustee shall be accountable only for reasonable diligence in the investment
of moneys under this section 11.8 and the Trustee shall not be liable for any
loss or losses realized on such investments, negligence, wilful acts or defaults
only excepted.
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11.9 ACTION BY TRUSTEE TO PROTECT INTERESTS
The Trustee shall have the power to institute and maintain all and any such
actions, suits or proceedings as it may consider necessary or expedient to
preserve, protect or enforce its interests and the interests of the Holders of
the Debentures.
11.10 REPLACEMENT OF TRUSTEE
The Trustee may resign from the trusts hereunder and thereupon be discharged
from all further duties and liabilities hereunder by giving to the Corporation
three months' notice in writing or such shorter notice as the Corporation may
accept as sufficient. The Debentureholders by Extraordinary Resolution shall
have power at any time to remove the Trustee and to appoint a new trustee
hereunder. In the event of the Trustee resigning or being removed as aforesaid
or being dissolved, becoming bankrupt, going into liquidation or otherwise
becoming incapable of acting hereunder, the Corporation shall forthwith appoint
a new trustee hereunder unless a new trustee has already been appointed by the
Debentureholders; failing such appointment by the Corporation, the retiring
trustee hereunder or any Debentureholder may apply to a Judge of the Ontario
High Court, on such notice as such Judge may direct, for the appointment of a
new trustee hereunder; but any trustee so appointed by the Corporation or by the
Court shall be subject to removal as aforesaid by the Debentureholders. Any new
trustee hereunder appointed under any provision of this section 11.10 shall be a
corporation authorized and qualified to carry on the business of a trust company
in the Province of Ontario and every other jurisdiction where such authorization
or qualification is necessary to enable it to act as a trustee hereunder and
shall certify that it will not have any material conflict of interest upon
becoming trustee hereunder. On any new appointment the new trustee shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as Trustee.
Any corporation into which the Trustee may be merged or with which it may be
consolidated or amalgamated, or any corporation resulting from any merger,
consolidation or amalgamation to which the Trustee shall be a party, shall be
the successor Trustee under this Indenture without the necessity of the
execution of any instrument or any further act.
11.11 ACCEPTANCE OF TRUSTS
The Trustee accepts the trusts in this Indenture declared and provided for and
agrees to perform the same upon the terms and conditions herein set forth and in
trust for the various Persons who shall from time to time be Debentureholders,
subject to the terms and conditions herein set forth.
11.12 INDEMNIFICATION OF TRUSTEE
Except for its gross negligence or wilful misconduct: (a) the Trustee shall not
be liable for any act done or step taken or omitted by it in good faith, or for
any mistake of fact or law; and (b) the Company agrees to indemnify and save
harmless the Trustee from and against all claims, demands, action, suits or
other proceedings by whomsoever made, prosecuted or brought and from all loss,
costs, damages and expenses in any manner based upon, occasioned by or
attributable to any act of the Trustee in the execution of its duties hereunder.
It is understood and agreed that this indemnification shall survive the
termination of this Indenture.
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ARTICLE 12
SUPPLEMENTAL INDENTURES
12.1 SUPPLEMENTAL INDENTURES
From time to time the Trustee and, when authorized by a resolution of the
Directors, the Corporation may and they shall, when required by this Indenture,
execute, acknowledge and deliver by their proper officers deeds or indentures
supplemental hereto, which thereafter shall form part hereof, for any one or
more of the following purposes:
(a) establishing the terms of any series of Debentures and the
forms and denominations in which they may be issued as
provided in Article 2;
(b) adding to the provisions hereof such additional covenants of
the Corporation, enforcement provisions and other provisions
for the protection of the Holders of the Debentures and/or
providing for events of default in addition to those herein
specified;
(c) making such provisions not inconsistent with this Indenture as
may be necessary or desirable with respect to matters or
questions arising hereunder, including the making of any
modifications in the form of the Debentures and/or Coupons
which do not affect the substance thereof and which, in the
opinion of the Trustee, it may be expedient to make, provided
that the Trustee shall be of the opinion that such provisions
and modifications will not be prejudicial to the interests of
the Debentureholders;
(d) providing for the issue as permitted hereby, of Debentures of
any one or more series on or after the date of this Indenture;
(e) evidencing the succession, or successive successions, of other
corporations to the Corporation and the covenants of and
obligations assumed by any such successor in accordance with
the provisions of this Indenture;
(f) giving effect to any Extraordinary Resolution passed as
provided in Article 9;
(g) making any modification of any of the provisions of this
Indenture or the Debentures which is of a formal, minor or
technical nature;
(h) making any additions to, deletions from or alterations of the
provisions of this Indenture (including any of the terms and
conditions of the Debentures) which, in the opinion of the
Trustee, are not materially prejudicial to the interests of
the Debentureholders and which are necessary or advisable in
order to incorporate, reflect or comply with Indenture
Legislation;
(i) adding to or altering the provisions hereof in respect of the
transfer of Debentures, including provision for the exchange
of Debentures of different denominations, and making any
modification in the form of the Debentures which does not
affect the substance thereof and which, in the opinion of the
Trustee, is not materially prejudicial to the interests of the
Debentureholders;
(j) correcting or rectifying any ambiguities, defective
provisions, errors or omissions herein, provided that, in the
opinion of the Trustee, the rights of the Trustee and the
Debentureholders are in no way prejudiced thereby; and
(k) any other purpose not inconsistent with the terms of this
Indenture provided that, in the opinion of the Trustee, the
rights of the Trustee and of the Debentureholders are in no
way prejudiced thereby.
<PAGE>
- 51 -
12.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS
With the consent of the Holders of the outstanding Debentures affected by such
supplemental indenture, given by Extraordinary Resolution, the Corporation, when
authorized by or pursuant to a resolution of the Directors, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Debentures under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of the Holder of each
outstanding Debenture affected thereby:
(a) change the Stated Maturity of the principal of, or any
instalment of interest on, any Debenture, or reduce the
principal amount thereof or the rate of interest thereon or
any premium payable upon the redemption thereof, or change any
obligation of the Corporation to pay Additional Amounts
contemplated by section 5.8 (except as contemplated by section
8.1(b) and permitted by section 12.1), or adversely affect any
right of repayment at the option of any Holder of any
Debenture or change any Place of Payment where, or the
currency in which, any Debenture or any premium or the
interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption or
repayment at the option of the Holder, on or after the
redemption date or repayment date, as the case may be), or
(b) reduce the percentage in principal amount of the outstanding
Debentures of any series, the consent of whose Holders is
required for any such supplemental indenture, or the consent
of whose Holders is required for any waiver of compliance with
certain provisions of this Indenture or certain defaults
hereunder and their consequences provided for in this
Indenture, or reduce the requirements of section 9.4 for
quorum or voting, or
(c) modify any of the provisions of this section, section 5.11 or
section 6.13, except to increase any such percentage or to
provide that certain other provisions of this Indenture cannot
be modified or waived without the consent of the Holder of
each outstanding Debenture affected thereby.
<PAGE>
- 52 -
A supplemental indenture which changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Debentures, or which modifies the
rights of the Holders of Debentures of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Debentures of any other series.
It shall not be necessary for any consent of Holders under this section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such action shall approve the substance thereof.
ARTICLE 13
EXECUTION
13.1 COUNTERPARTS AND FORMAL DATE
This Indenture may be executed in several counterparts, each of which when so
executed shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument and notwithstanding their date of
execution shall be deemed to bear date as of the 25th day of March, 1998.
13.2 LANGUAGE OF INDENTURE
The parties hereto have requested that this document be drafted in the English
language.
Les parties ont demande que le present document soit redige en langue anglaise.
IN WITNESS WHEREOF the parties hereto have executed this Indenture under their
respective corporate seals and the hands of their proper officers duly
authorized in that behalf.
<TABLE>
<CAPTION>
<S> <C>
BENZ ENERGY LTD.
By: /s/ ROBERT S. HERLIN, CHIEF FINANCIAL OFFICER
-----------------------------------------------------
c/s
By: XXX
-----------------------------------------------------
MONTREAL TRUST COMPANY OF CANADA
By: XXX
-----------------------------------------------------
c/s
By: /s/ MAUREEN BERGOS
-----------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE A
CONVERTIBLE DEBENTURES SERIES 1
to the foregoing Indenture made as of March 25, 1998 between Benz Energy Ltd.
and Montreal Trust Company of Canada, as Trustee.
1. MATURITY, INTEREST, CURRENCY OF DENOMINATION. The first series of
Debentures to be issued, certified and delivered hereunder (the
"Convertible Debentures Series 1") shall have the rights, conditions,
limitations and privileges in this Schedule set forth, shall be
denominated in U.S. dollars, shall consist of and be limited to US
$30,000,000 in principal amount of Debentures and shall be designated
as Convertible Debentures Series 1, shall mature on March 31, 2003 (the
"Maturity Date") and shall bear interest at 9% per annum from their
date, payable in lawful money of the United States after as well as
before maturity, default and judgment, with interest on amounts in
default at the same rate, semi-annually in arrears on March 31 and
September 30, in each year, the first of such payments to be made on
September 30, 1998.
2. INTEREST ACCRUED. The Convertible Debentures Series 1 shall cease to
bear interest (i) from their date of redemption unless, upon due
presentation, payment of the principal in respect of the Convertible
Debenture Series 1 is improperly withheld or refused or unless a
default is otherwise made in respect of such payment, in which event
interest shall continue to accrue as provided in the Indenture, or (ii)
where the right to convert the Convertible Debentures Series 1 shall
have been exercised in accordance with the provisions of the Indenture;
or (iii) respectively, from the interest payment date last proceeding
the day of conversion of the Convertible Debentures Series 1 or, if the
Convertible Debentures Series 1 are converted prior to the first
interest payment date, from the date of issue.
3. INTEREST FOR LESS THAN ONE YEAR. When interest is required to be
calculated in respect of a period of less than a full year, it shall be
calculated on the basis of the actual number of calendar days in such
year and the number of days elapsed.
4. PAYMENT OF PRINCIPAL, INTEREST.
(a) Payment of principal in respect of each Convertible Debenture
Series 1 shall only be made against presentation and surrender
(or, in the case of part payment only, endorsement) of the
relevant Convertible Debenture Series 1 at the specified
office of any of the Paying Agents. Payments of interest due
on the Convertible Debentures Series 1 on an interest payment
date shall only be made against presentation and surrender
(or, in the case of part payment only, endorsement) of the
relevant Coupons at the specified office of any of the Paying
Agents. All payments of principal or interest shall be made in
U.S. dollars. Such payments will be made by transfer to a U.S.
dollar account maintained by the payee with a bank outside of
the United States or by a U.S. dollar cheque mailed to an
address, or delivered, outside the United States, subject in
all cases to any fiscal or other local laws or regulations
applicable thereto.
(b) If, at any time, payments in U.S. dollars cannot, in the
opinion of the Issuer or of the Paying Agents, be so made,
payments will be made in U.S. dollars in such other manner as
may be approved by the Issuer and the Paying Agents, subject
as aforesaid in paragraph (a) above. In the event that payment
cannot be made as provided in paragraph (a) above, notice of
the alternative manner of payment will be given to the
Debentureholders in accordance with Condition 12 below.
(c) If the due date for payment of any amount of principal or
interest in respect of a Convertible Debenture Series 1 is not
at any place of payment a business day, then the holder
thereof will not be entitled to payment at the relevant place
of payment of the amount due until the next following business
day at the relevant place of payment and will not be entitled
to any further interest or other payment in respect of any
such delay. In this paragraph, "business day" means any day on
which
<PAGE>
A-2
banks are open for business in Toronto, London, New York and
the relevant place of payment or (in the case of payment by
transfer to a U.S. dollar account as referred to in paragraph
(a) above) on which dealings in foreign currencies may be
carried on in each of Toronto, London, New York and such place
of payment.
5. PAYMENT ON REDEMPTION. Each Convertible Debenture Series 1 must be
presented for redemption together with all unmatured Coupons relating
to such Convertible Debenture Series 1, failing which the full amount
of any missing unmatured Coupon (or, in the case of payment not being
made in full, that proportion of the full amount of the missing
unmatured Coupons which the amounts so paid bears to the total amount
due) will be deducted from the amount due for payment. Each amount so
deducted shall be paid in the manner mentioned above against
presentation and surrender (or, in the case of part payment only,
endorsement) of such missing Coupon at any time before the expiry of
six years after the date of redemption of the Convertible Debenture
Series 1 or, if later, five years after the date on which such Coupon
would have become due, but not thereafter.
6. UNCLAIMED AMOUNTS. All monies paid by the Corporation to the
Principal Paying Agent for the payment of principal or interest on
any Convertible Debenture Series 1 which remain unclaimed at the end
of two years after the principal on such Convertible Debenture
Series 1 will have become due and payable shall be repaid to the
Corporation and the holder of such Convertible Debenture Series 1 or
any Coupon appertaining thereto or thereafter shall have only the
rights of a creditor of the Corporation as described in the
Indenture or such rights as may be otherwise prescribed by
applicable law.
7. ROUNDING AMOUNTS. When making payments to holders of Convertible
Debentures Series 1 or holders of Coupons, fractions of US $0.01 shall
be rounded down to the nearest whole cent.
8. FORM AND DENOMINATIONS OF DEBENTURES. The Convertible Debentures Series
1 will initially be issued in temporary global form (the "Global
Debenture") and thereafter in bearer form in denominations of
U.S.$5,000, U.S.$10,000 and U.S.$50,000, serially numbered, with
coupons attached (at the date of issue) for payment of interest (the
"Coupons") and will be transferable by delivery.
a. Each Global Debenture shall bear the following legend on the
face thereof:
THIS DEBENTURE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, CONVERTED 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)
UNLESS THIS DEBENTURE HAS BEEN REGISTERED UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS ARE
AVAILABLE.
THIS DEBENTURE HAS NOT BEEN QUALIFIED FOR DISTRIBUTION IN
CANADA AND THIS DEBENTURE 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 COMPLIANCE WITH THE PROSPECTUS AND REGISTRATION
REQUIREMENTS THEREIN OR AVAILABLE EXEMPTIONS THEREFROM.
b. The Global Debenture initially shall be delivered to the
Common Depository and shall bear the legend set forth in (a)
above. Members of, or participants in, Euroclear and Cedel
Bank ("Agent Members") shall have no rights under this
Indenture with respect to any Global Debenture held on their
behalf by the Common Depository, or under the Global
Debenture, and the Common Depository may be treated by the
Issuer, the Trustee and any agent of the Issuer or the Trustee
as the absolute
<PAGE>
A-3
owner of such Global Debenture for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent
the Issuer, the Trustee or any agent of the Issuer or the
Trustee, from giving effect to any written certification,
proxy or other authorization furnished by the Common
Depository or shall impair, as between the Common Depository
and the Agent Members, the operation of customary practices
governing the exercise of the rights of a Debentureholder.
c. Transfers of the Global Debenture shall be limited to
transfers of such Global Debenture in whole, but not in part,
to the Common Depository, its successors or their respective
nominees. Interests of beneficial owners in the Global
Debenture may be transferred in accordance with the rules and
procedures of Euroclear or Cedel Bank and this section.
Beneficial owners will receive definitive Debentures in
exchange for their beneficial interests in the Global
Debenture upon request in accordance with the procedures of
Euroclear or Cedel Bank. Definitive Debentures shall be
transferred to all beneficial owners in exchange for their
beneficial interests in the Global Debenture if (i) the Common
Depository notifies the Issuer that it is unwilling or unable
to continue as Common Depository for the Global Debenture and
a successor depository is not appointed by the Issuer within
90 days of such notice or (ii) an Event of Default has
occurred and is continuing and the Trustee has received a
request from the Common Depository.
d. In connection with any transfer of beneficial interest in the
Global Debenture to beneficial owners pursuant to subsection
(c) of this section, the Common Depository shall reflect on
its books and records the date and cancellation of the Global
Debenture, and the Issuer shall execute, and the Trustee or
its agent shall authenticate and deliver, one or more
definitive Debentures in an amount equal to the principal
amount of the beneficial interest in the Global Debenture to
be transferred.
e. Any definitive Debenture delivered in exchange for an interest
in the Global Debenture pursuant to subsection (c) or
subsection (d) of this section shall bear the applicable
legend regarding transfer restrictions applicable to the
definitive Debenture set forth in the terms and conditions
relating to the relevant series of Debentures.
f. The Holder of the Global Debenture may grant proxies and
otherwise authorize any person, including Agent Members and
persons that may hold interests through Agent Members, to take
any action which a Debentureholder is entitled to take under
this Indenture or the Debentures.
g. Any definitive Debenture delivered in exchange for an interest
in the Global Debenture pursuant to subsection (c) or (d) of
this section will prior to delivery to the Debentureholder
have all matured Coupons as of such delivery date, which are
attached to such definitive Debenture, cancelled and voided by
the Trustee or its agent.
h. Each definitive Debenture shall bear the following legend on
the face thereof:
NEITHER THE CONVERTIBLE DEBENTURES NOR THE COMMON
SHARES ISSUABLE UPON CONVERSION OF THE CONVERTIBLE
DEBENTURES HAVE BEEN OR WILL BE REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND NEITHER THE CONVERTIBLE
DEBENTURES NOR THE COMMON SHARES MAY BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, CONVERTED OR OTHERWISE
DISPOSED OF IN THE UNITED STATES OR TO A U.S.
RESIDENT UNLESS SUCH CONVERTIBLE DEBENTURES OR COMMON
SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH LAWS ARE AVAILABLE.
<PAGE>
A-4
NEITHER THE CONVERTIBLE DEBENTURES NOR THE COMMON
SHARES ISSUABLE UPON CONVERSION OF THE CONVERTIBLE
DEBENTURES HAVE BEEN QUALIFIED FOR DISTRIBUTION IN
CANADA AND NEITHER THE CONVERTIBLE DEBENTURES NOR THE
COMMON SHARES MAY 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 COMPLIANCE WITH THE PROSPECTUS AND
REGISTRATION REQUIREMENTS THEREIN OR AVAILABLE
EXEMPTIONS THEREFROM.
9. CONVERSION:
a. The Convertible Debentures Series 1 shall be convertible at
the option of the holder into Common Shares, at any time prior
to the close of business on March 27, 2003 (the "Time of
Expiry"), at a conversion price of Cdn. $1.70 per Common
Share, subject to adjustment in accordance with the Indenture
and subsection (h) hereof (the "Conversion Price").
Notwithstanding the foregoing, if a Convertible Debenture
Series 1 is called for redemption by the Corporation (as
discussed below), the right of the holder to convert the
Convertible Debenture Series 1 shall expire at the close of
business on the second business day immediately prior to the
date of redemption.
b. If the holder of Convertible Debentures Series 1 elects to
convert the Convertible Debentures Series 1 prior to the date
of the third semi-annual coupon with respect thereto, the
holder shall receive on such conversion a premium on the
number of Common Shares to be issued on such conversion
determined based upon the aggregate principal amount of
Convertible Debentures Series 1 to be converted by multiplying
.05 by the number of Common Shares to be so issued and
rounding down to the nearest whole number.
c. The holder of a Convertible Debenture Series 1 desiring to
convert such Convertible Debenture Series 1 in whole or in
part into Common Shares shall surrender such Convertible
Debenture Series 1 to the specified office of any of the
Conversion Agents, together with the Conversion Form on the
back of such Convertible Debenture Series 1 or any other
written notice in a form satisfactory to the Conversion Agent,
in either case duly executed by the holder or his executors or
administrators or other legal representatives or his or their
attorney duly appointed by an instrument in writing in form
and executed in a manner satisfactory to the Conversion Agent,
exercising his right to convert such Convertible Debenture
Series 1 in accordance with the provisions of the Indenture
and any agency agreement thereunder. Thereupon such
Debentureholder and/or, subject to payment of all applicable
stamp or security transfer taxes or other governmental charges
and compliance with all reasonable requirements of the Trustee
or the Conversion Agent, his nominee(s) or assignee(s) shall
be entitled to be entered in the books of the Corporation as
at the Date of Conversion (or such later date as is specified
in Subsection 9(d)) as the holder of the number of Common
Shares into which such Convertible Debenture Series 1 is
convertible in accordance with the provisions thereafter, the
Corporation shall deliver to such Debentureholder and/or,
subject as aforesaid, his nominee(s) or assignee(s), a
certificate or certificates for such Common Shares and, if
applicable, a cheque for any amount payable under Section 4.4
of the Indenture.
d. For the purposes of this Schedule, a Convertible Debenture
Series 1 shall be deemed to be surrendered for conversion on
the date (herein called "Date of Conversion") on which it is
so surrendered in accordance with the provisions hereof and,
in the case of a Convertible Debenture Series 1 so surrendered
by post or other means of transmission, on the date on which
it is received at the specified office of any of the
Conversion Agents; provided that if a Convertible Debenture
Series 1 is surrendered for conversion on a day on which the
register of Common Shares is closed,
<PAGE>
A-5
the Person or Persons entitled to receive Common Shares shall
become the holder or holders of record of such Common Shares
as at the date on which such registers are next reopened.
e. Any part, being US $5,000 or an integral multiple thereof, of
a Convertible Debenture Series 1 of a denomination in excess
of US $5,000 may be converted as provided in this Schedule and
all references in this Schedule and in the Indenture to
conversion of Convertible Debenture Series 1 shall be deemed
to include conversion of such parts.
f. The holder of any Convertible Debenture Series 1 of which part
only is converted shall, upon the exercise of his right of
conversion, surrender the said Convertible Debenture Series 1
to the Trustee or its agent, and the Trustee or its agent
shall cancel the same and definitive Convertible Debentures
Series 1 for the unconverted principal balance, in
denominations of U.S. $5,000, U.S. $10,000 and U.S. $50,000,
as applicable, with unmatured Coupons attached, will be
available at the offices of the Paying and Conversion Agents.
g. The holder of a Convertible Debenture Series 1 surrendered for
conversion in accordance with this Schedule shall be entitled
to receive accrued and unpaid interest in respect thereof up
to the interest payment date on or next preceding the Date of
Conversion of such Convertible Debenture Series 1, but there
shall be no payment or adjustment by the Corporation on
account of any interest accrued or accruing on such
Convertible Debenture Series 1 from the latest interest
payment date, and the Common Shares issued upon such
conversion shall rank only in respect of dividends declared in
favour of shareholders of record on and after the Date of
Conversion or such later date as such holder shall become the
holder of record of such Common Shares pursuant to Subsection
(d) of this Section 9, from which applicable date they will
for all purposes be and be deemed to be issued and outstanding
as fully paid and non-assessable Common Shares.
h. The Conversion Price otherwise applicable hereunder shall be
converted to U.S. dollars based upon the Exchange Rate as of
the last day in the calendar quarter preceding the Date of
Conversion, where "Exchange Rate" means, on any date, for any
conversion of U.S. dollars into Canadian dollars, or VICE
VERSA, the applicable spot buying rate for Canadian dollars or
United States 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.
i. Any Officers' Certificate required by the Indenture after the
occurrence of any event which requires an adjustment or
readjustment as provided in section 4.3 of the Indenture shall
be delivered to each of the Paying and Conversion Agents
substantially concurrently with its delivery to the Trustee.
10. REQUIRED CONVERSION. The Corporation may, at any time after September
30, 1999 and prior to the Maturity Date, by notice in writing given to
the holders thereof, require that all outstanding Convertible
Debentures Series 1 be converted into Common Shares if the weighted
average trading price of the Common Shares on the principal stock
exchange in Canada on which the Common Shares are traded during a 20
consecutive trading day period ending not more than five days prior to
the giving of such notice is not less than 140% of the Conversion Price
then in effect.
11. REDEMPTION. The Convertible Debentures Series 1 shall be redeemable, in
whole or in part, at the option of the Corporation at any time after
March 31, 2002 and prior to maturity at the principal amount thereof to
be redeemed, together with accrued and unpaid interest.
12. NOTICES. In addition to notice to the holders of Convertible Debentures
Series 1 as provided in Section 10.2 of the Indenture, all notices to
holders of Convertible Debentures Series 1 shall be published in the
Financial
<PAGE>
A-6
Times, or such other leading daily financial newspaper with general
circulation in Europe as the Trustee may approve, and a daily leading
newspaper with general circulation in Luxembourg, which is expected to
be the Luxembourg Wort, for so long as the Convertible Debentures
Series 1 are listed on the Luxembourg Stock Exchange.
13. AGENTS. The Company shall have the right, subject to the prior approval
of the Trustee, at any time to vary or terminate the appointment of any
Paying Agent, Conversion Agent or Replacement Agent and to appoint
additional or other Paying Agents, Conversion Agents or Replacement
Agents, provided that, for so long as the Convertible Debentures Series
1 are listed on the Luxembourg Stock Exchange, it will at all times
maintain at least one Paying Agent, one Conversion Agent and one
Replacement Agent in Luxembourg and one Paying Agent and one Conversion
Agent having a specified office in one other European city approved by
the Trustee. Notice of any termination or appointment and of any
changes in specified offices will be given to the holders of the
Convertible Debentures Series 1 promptly in accordance with the terms
hereof and of the Indenture.
14. CERTIFICATES. The global and definitive Convertible Debentures Series 1
and the authentication by the Principal Paying Agent to be endorsed on
the Convertible Debentures Series 1 shall respectively be substantially
in the forms set out in Exhibits 1A and 1B hereto with such appropriate
insertions, omissions, substitutions and variations as may be approved
or permitted under the terms of the Indenture and/or as the Trustee may
approve.
15. In this Schedule A:
"BUSINESS DAY" means (except where otherwise specifically provided) any
day other than a Saturday and Sunday, which is a day on which banking
institutions in Luxembourg, Toronto, London and New York are not
authorized or obligated by law, regulation or executive order to close;
"CEDEL BANK" means Cedel Bank, societe anonyme;
"COMMON DEPOSITORY" means the common depository appointed by Morgan
Guaranty Trust Company of New York, Brussels office, as operator of the
Euroclear System, and Cedel Bank, societe anonyme, which shall
initially be Midland Bank plc, including the nominees and successors of
any Common Depository;
"CONVERSION AGENT" means Midland Bank plc, Kredietbank S.A.
Luxembourgeoise or Swiss Bank Corporation, or such other Person as the
Company may appoint in addition to or in replacement thereof;
"EUROCLEAR" means the Euroclear System;
"MATERIAL SUBSIDIARY" means a Subsidiary of a Person which as of the
last audited consolidated financial statements of the Person
constituted more than 15% of the consolidated assets of the Person or
15% of the consolidated revenue of the Person for the 12 months then
ended;
"PAYING AGENT" means Midland Bank plc, Kredietbank S.A.
Luxembourgeoise or Swiss Bank Corporation, or such other Person as the
Company may appoint in addition to or in replacement thereof;
"PRINCIPAL PAYING AGENT" means Midland Bank plc, or such other Person
as the Company may appoint in addition to or in replacement thereof;
and
"REPLACEMENT AGENT" means Kredietbank S.A. Luxembourgeoise, or such
other Person as the Company may appoint in addition to or in
replacement thereof.
<PAGE>
A-7
- -------------------------------------------------------------------------------
EXHIBIT 1A
FORM OF TEMPORARY GLOBAL CONVERTIBLE DEBENTURE
- -------------------------------------------------------------------------------
BENZ ENERGY LTD.
TEMPORARY GLOBAL CONVERTIBLE DEBENTURE
U.S. $30,000,000
9% CONVERTIBLE DEBENTURE, SERIES 1 DUE MARCH 31, 2003
This temporary Global Convertible Debenture is issued in respect of the U.S.
$30,000,000 9% Convertible Debentures, Series 1 due March 31, 2003 (the
"Convertible Debentures") of Benz Energy Ltd. (the "Issuer"). The Convertible
Debentures are issued subject to and with the benefits of a trust indenture as
of March 25, 1998 (the "Indenture") between the Issuer and Montreal Trust
Company of Canada (the "Trustee"), as trustee, and a paying and conversion
agency agreement made as of March 25, 1998 (the "Agency Agreement") among the
Issuer, the Trustee, Midland Bank plc (the "Principal Paying Agent") and
Kredietbank S.A. Luxembourgeoise and Swiss Bank Corporation (each a "Paying
Agent").
1. PROMISE TO PAY
Subject as provided in this temporary Global Convertible Debenture, the
Issuer, for value received, promises to pay the bearer upon
presentation and surrender of this temporary Global Convertible
Debenture the sum of U.S. $30,000,000 (Thirty million United States
dollars) or such lesser sum as is equal to the principal amount of the
Convertible Debentures represented by this temporary Global Convertible
Debenture on March 31, 2003 or on such earlier date as the principal of
this temporary Global Convertible Debenture may become due and to pay
interest on the principal sum for the time being outstanding at the
rate of 9% from March 25, 1998 payable in lawful money of the United
States, after as well as before maturity, default and judgement, with
interest on amounts in default at the same rate, semi-annually in
arrears on March 31 and September 30, in each year, the first such
payment to be made on September 30, 1998, together with any other
amounts as may be payable, all subject to and under the Terms and
Conditions set out in the definitive Convertible Debentures (the "Terms
and Conditions").
2. EXCHANGE FOR DEFINITIVE CONVERTIBLE DEBENTURES AND PURCHASES
Subject to the Exchange Agent (as defined below) having received a
certificate from Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System ("Euroclear") or Cedel
Bank, societe annoyme ("Cedel Bank") substantially in the form of the
certificate attached as Attachment I, this temporary Global Convertible
Debenture may be exchanged for duly executed definitive Convertible
Debentures without charge and the Principal Paying Agent or such other
person as the Principal Paying Agent may direct (the "Exchange Agent")
shall deliver, in full exchange for this temporary Global Convertible
Debenture, an aggregate principal amount of duly executed definitive
Convertible Debentures with Coupons attached equal to the principal
amount of this Global Convertible Debenture submitted for exchange.
Any person who would, but for the provisions of this temporary Global
Convertible Debenture, the Indenture and the Agency Agreement,
otherwise be entitled to receive a definitive Convertible Debenture
shall not be
<PAGE>
A-8
entitled to a definitive Convertible Debenture unless and until such
person shall have delivered or caused to be delivered to Euroclear or
Cedel Bank a certificate in substantially the form of the certificate
attached as Attachment II (copies of which form of certificate will be
available at the offices of Euroclear in Brussels and Cedel Bank in
Luxembourg).
The definitive Convertible Debentures to be issued on exchange will be
in bearer form in the denominations of U.S. $5,000, $10,000 and
$50,000, each with interest Coupons attached.
Subject as provided below, definitive Convertible Debentures will only
be issuable after the date (the "Exchange Date") which is 90 days after
the date of issue of the Global Convertible Debenture; provided
however, that in the event of the occurrence of an event of default in
respect of the Convertible Debentures before the Exchange Date, the
Issuer will procure that definitive Convertible Debentures will be
issued in respect of this temporary Global Convertible Debenture within
seven days of the occurrence of the event of default as if the eighth
day were the Exchange Date.
Upon receipt of instructions from Euroclear or Cedel Bank that,
following the purchase by or on behalf of the Issuer of a part of this
temporary Global Convertible Debenture, part is to be cancelled, the
portion of the principal amount of this temporary Global Convertible
Debenture to be so cancelled shall be endorsed by or on behalf of the
Principal Paying Agent on Part I of the Schedule to this temporary
Global Convertible Debenture, whereupon the principal amount of this
temporary Global Convertible Debenture shall be reduced for all
purposes by the amount so exchanged or cancelled and endorsed.
3. BENEFITS
Until the entire principal amount of this temporary Global Convertible
Debenture has been extinguished in exchange for definitive Convertible
Debentures, this temporary Convertible Debenture shall in all respects
be entitled to the same benefits as the definitive Convertible
Debentures for which it may be exchanged.
4. PAYMENTS
Payments in respect of Convertible Debentures for the time being
represented by this temporary Global Convertible Debenture shall be
made to the bearer only upon presentation by Euroclear or, as the case
may be, Cedel Bank, to the Principal Paying Agent as its specified
office of a certificate, substantially in the form of the certificate
attached as Attachment I, to the effect that Euroclear or, as the case
may be, Cedel Bank, has received a certificate substantially in the
form of the certificate attached as Attachment II.
Upon any payment in respect of the Convertible Debentures represented
by this temporary Global Convertible Debenture the amount so paid shall
be endorsed by or on behalf of the Principal Paying Agent on Part II of
the Schedule to this temporary Global Convertible Debenture. In the
case of any payment of principal, the principal amount of this
temporary Global Convertible Debenture shall reduced for all purposes
by the amount so paid and the remaining principal of this temporary
Global Convertible Debenture shall be endorsed by or on behalf of the
Principal Paying Agent on Part II of the Schedule to this temporary
Global Debenture.
5. AUTHENTICATION
This temporary Global Convertible Debenture shall not become valid or
enforceable for any purpose unless and until it has been authenticated
by or on behalf of the Principal Paying Agent.
<PAGE>
A-9
6. GOVERNING LAW
This temporary Global Convertible Debenture is governed by, and shall
be construed in accordance with, the laws of the Province of Ontario,
Canada.
IN WITNESS whereof this temporary Global Convertible Debenture has been manually
executed on behalf of the Issuer.
BENZ ENERGY LTD.
By:
-----------------------------------
Dated March 25, 1998
CERTIFICATE OF AUTHENTICATION
This is the temporary Global Convertible Debenture described in the Agency
Agreement referred to above.
By or on behalf of Midland Bank plc
as Principal Paying Agent (without recourse, warranty or
liability)
By:
-----------------------------------
<PAGE>
A-10
ATTACHMENT I
BENZ ENERGY LTD.
U.S.$30,000,000
9% CONVERTIBLE DEBENTURE, SERIES 1 DUE MARCH 31, 2003
(THE "SECURITIES")
This is to certify that, based solely on certifications we have received in
writing, by tested telex or by electronic transmission from member
organizations appearing in our records as persons being entitled to a portion
of the principal amount set forth below (our "Members Organizations")
substantially to the effect set forth in the Agency Agreement, as of the date
hereof, U.S. $- principal amount of the Securities: (i) is owned by persons
that are not citizens or residents of the United States, domestic
partnerships, domestic corporations or any estate or trust the income of
which is subject to United States Federal income taxation regardless of its
source ("United States persons"), (ii) is owned by United States persons that
(a) are foreign branches of United States financial institutions (as defined
in U.S. Treasury Regulations Section 1.165-12(c)(l)(v) ("financial
institutions") purchasing for their own account or for resale, or (b)
acquired the Securities through foreign branches of United States financial
institutions and who hold the Securities through such United States financial
institutions on the date hereof (and in either case (a) or (b), each such
United States financial institution has agreed, on its own behalf or through
its agent, that we may advise the Issuer or the Issuer's agent that it will
comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the
Internal revenue Code of 1986, as amended, and the regulations thereunder),
or (iii) is owned by United States or foreign financial institutions for
purposes of resale during the restricted period (as defined in U.S. Treasury
Regulations Section 1.163-5(c)(2)(i)(D)(7)); to the further effect that
United States or foreign financial institutions described in clause (iii)
above (whether or not also described in clause (i) or (ii)) have certified
that they have not acquired the Securities for purposes of resale directly or
indirectly to a United States person or to a person within the United States
or its possessions; and lastly to the effect that such principal amount of
the Securities is owned by persons that are not residents of or in Canada.
If the Securities are of the category contemplated in Section 230.903(c)(3)
or Regulation S under the Securities Act of 1933, as amended (the "Act") then
this is also to certify with respect to such principal amount of Securities
set forth above that, except as set forth below, we have received in writing,
by tested telex or by electronic transmission, from our Member Organizations
entitled to a portion of such principal amount, certifications with respect
to such portion, substantially to the effect set forth in the Agency
Agreement.
We further certify (i) that we are not making available herewith for exchange
(or, if relevant, exercise of any rights or collection of any interest) any
portion of the temporary global Security excepted in such certifications and
(ii) that as of the date hereof we have not received any notification from
any of our Member Organizations to the effect that the statements made by
such Member Organizations with respect to any portion of the part submitted
herewith for exchange (or, if relevant, exercise of any rights or collection
of any interest) are no longer true and cannot be relied upon as at the date
hereof.
We understand that this certificate is required in connection with certain
tax laws and, if applicable, certain securities laws of the United States and
Canada. In connection therewith, if administrative or legal proceedings are
commenced or threatened in connection with which this certification is or
would be relevant, we irrevocably authorize you to produce this certification
to any interested party in such proceedings.
DATED this
<PAGE>
A-11
[Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear
System] [Cedel Bank, societe anonyme]
By:
------------------------------------
Authorized Signatory
* To be dated no earlier than (i) the payment date or (ii) the Exchange
Date (where the certificate relates to the exchange of the temporary
Global Convertible Debenture for an interest in the definitive Global
Convertible Debenture).
<PAGE>
A-12
ATTACHMENT II
BENZ ENERGY LTD.
U.S.$30,000,000
9%, CONVERTIBLE DEBENTURE, SERIES 1 DUE MARCH 31, 2003
(THE "SECURITIES")
This is to certify that as of the date hereof, and except as set forth below,
the Securities held by you for our account (i) are owned by person(s) that
are not citizens or residents of the United States, domestic partnerships,
domestic corporations or any estate or trust the income of which is subject
to United states Federal income taxation regardless of its source ("United
States person(s)"), (ii) are owned by United States person(s) that (a) are
foreign branches of United States financial institutions (as defined in U.S.
Treasury Regulations Section 1.165-12(c)(1)(v)) ("financial institutions")
purchasing for their own account or for resale, or (b) acquired the
Securities through foreign branches of United States financial institutions
and who hold the Securities through such United States financial institutions
on the date hereof (and in either case (a) or (b), each such United States
financial institution hereby agrees, on its own behalf or through its agent,
that you may advise the Issuer or the Issuer's agent that it will comply with
the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder), or (iii) are owned
by United States or foreign financial institution(s) for purposes of resale
during the restricted periods (as defined in U.S. Treasury Regulations
Section 1.163-5(c)(2)(i)(D)(7), and in addition if the owner of the
Securities is a United States or foreign financial institution described in
clause (i) or (ii) this is to further certify that such financial institution
has not acquired the Securities for the purposes of resale directly or
indirectly to a United States person or to a person within the United States
or its possessions; and lastly to the effect that such principal amount of
the Securities is owned by persons that are not residents of or in Canada.
If the Securities are of the category contemplated in Section 230.903(c)(3)
of Regulation S under the Securities Act of 1933, as amended (the "Act") then
this is also to certify that, except as set forth below (i) in the case of
debt securities, the Securities are beneficially owned by (a) non-U.S.
person(s) or (b) U.S. person(s) who purchased the Securities in transactions
which did not require registration under the Act; or (ii) in the case of
equity securities, the Securities are owned by (x) non-U.S. person(s) and
such person(s) are not acquiring the Securities for the account or benefit of
U.S. person(s) or (y) U.S. person(s) who purchased the Securities in a
transaction which did not require registration under the Act. If this
certification is being delivered in connection with the exercise of warrant
pursuant to Section 230.902(m) of Regulation S under the Act, then this is
further to certify that, except as set forth below, the Securities are being
exercised by and on behalf of non-U.S. person(s). As used in this paragraph
the term "U.S. person" has the meaning given to it by Regulation S under the
Act.
As used herein, "United States" means the United States of America including
the States and District of Columbia); and its "possessions" include Puerto
Rico, the U.S. Virgin Islands, Guam, America Samoa, Wake Island and the
Northern Mariana Islands.
We undertake to advise you promptly by tested telex, on or prior to the date
on which you intend to submit your certification relating to the Securities
held by you for our account in accordance with your documented procedures if
any applicable statement herein is not correct on such date, and in the
absence of any such modification it may be assumed that this certification
applies as of such date.
This certification excepts and does not relate to U.S.$- of such interest in
the above Securities in respect of which we are not able to certify and as to
which we understand exchange and delivery of definitive Securities (or, if
relevant, exercise of any rights or collection of any interest) cannot be
made until we do so certify.
<PAGE>
A-13
We understand that this certification is required in connection with certain
tax laws and, if applicable, certain securities laws of the United States and
Canada. In connection therewith, if administrative or legal proceedings are
commenced or threatened in connection with which this certification is or
would be relevant, we irrevocably authorize you to produce this certification
to any interested party in such proceedings.
DATED this
By:
-----------------------------------
Qualified Account Holder
* To be dated no earlier than the fifteenth day before (a) the payment
date or (b) the Exchange Date (where the certificate relates to the
exchange of the temporary Global Convertible Debentures for definitive
Convertible Debentures).
<PAGE>
A-14
SCHEDULE TO THE TEMPORARY GLOBAL CONVERTIBLE DEBENTURE
PART I
EXCHANGES FOR DEFINITIVE CONVERTIBLE DEBENTURES
AND CANCELLATION
The following cancellations of a part of the aggregate principal amount of
this temporary Global Convertible Debenture have been made:
<TABLE>
<CAPTION>
Date of cancellation Part of the Remaining Notation made by
aggregate principal principal amount of or on behalf of the
amount the Principal Principal Paying
of this Global Paying Agent Agent
Convertible
Debenture
cancelled
<S> <C> <C> <C>
U.S.$ U.S.$
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
- --------------------- --------------------- -------------------- ----------------
</TABLE>
<PAGE>
A-15
PART II
PAYMENTS
The following payments in respect of the Convertible Debentures represented
by this temporary Global Convertible Debenture have been made:
<TABLE>
<CAPTION>
Date of payment Amount of Interest Amount of Remaining Notation made by
principal paid Principal amount of or on behalf of the
this Global Principal Paying
Convertible Agent
Debenture
following payment
<S> <C> <C> <C> <C>
U.S.$ U.S.$ U.S.$
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
- --------------------- ------------------- --------------------- -------------------- ----------------
</TABLE>
<PAGE>
A-16
- -------------------------------------------------------------------------------
EXHIBIT 1B
FACE OF CONVERTIBLE DEBENTURE SERIES 1
- -------------------------------------------------------------------------------
Denomination US $-
ISIN XS0085723723
Certificate No. -
- -------------------------------------------------------------------------------
BENZ ENERGY LTD.
US$30,000,000
9% Convertible Debentures, Series 1 due March 31, 2003
Benz Energy Ltd. (the "Issuer") for value received, hereby promises to pay to
the bearer on March 31, 2003 or on such earlier date as the principal sum
hereunder mentioned may become repayable in accordance with the terms and
conditions endorsed hereon the principal sum of
[FIVE THOUSAND UNITED STATES DOLLARS (U.S.$5,000)/TEN THOUSAND UNITED STATES
DOLLARS (U.S.$10,000)/FIFTY THOUSAND UNITED STATES DOLLARS (U.S.$50,000)]
together with interest thereon at the rate of 9% per annum from March 25,
1998, payable in lawful money of the United States, after as well as before
maturity, default and judgement with interest on amounts in default at the
same rate, semi-annually in arrears on March 31 and September 30 in each
year, the first such payment to be made on September 30, 1998. This
Convertible Debenture is issued subject to and with the benefits of a trust
indenture made March 25, 1998 (the "Indenture") between the Issuer and
Montreal Trust Company of Canada (the "Trustee"), as trustee, a paying and
conversion agency agreement made as of March 25, 1998 (the "Agency
Agreement") among the Issuer, the Trustee, Midland Bank plc (the "Principal
Paying Agent") and Kredietbank S.A. Luxembourgeoise and Swiss Bank
Corporation (each a "Paying Agent") and the Terms and Conditions endorsed
hereon.
Neither this Convertible Debenture Series 1 nor any of the Coupons
appertaining hereto shall become valid or enforceable for any purpose unless
and until this Convertible Debenture has been authenticated by or on behalf
of the Principal Paying Agent.
IN WITNESS WHEREOF the Issuer has caused this Convertible Debenture Series 1
and the coupons appertaining thereto to be executed by the facsimile
signature of the President of the Issuer.
BENZ ENERGY LTD.
By:
-------------------------------
President
<PAGE>
A-17
Dated 25 March, 1998
Issued in -
CERTIFICATE OF AUTHENTICATION
This is one of the Convertible Debentures Series 1 described in the Indenture
referred to above.
By or on behalf of Midland Bank plc
(without recourse, warranty or liability)
By:
-------------------------------
Authorized Signatory
<PAGE>
A-18
- --------------------------------------------------------------------------------
COUPON
(On face)
BENZ ENERGY LTD.
US $30,000,000
9% Convertible Debentures, Series 1 due March 31, 2003
<TABLE>
<CAPTION>
<S> <C>
This Coupon is payable to bearer, subject to the terms Coupon for
and conditions endorsed on the Convertible Debenture US[233.01/$466.02/$2,330.13]
Series 1 to which this Coupon relates. [$225.00/$450.00/$2,250.00]
Due on [MARCH 31/SEPTEMBER 30]
</TABLE>
By:
--------------------------
President
- --------------------------------------------------------------------------------
Denomination US $-
ISIN XS0085723723
Certificate No. -
- --------------------------------------------------------------------------------
<PAGE>
A-19
- --------------------------------------------------------------------------------
(On Reverse)
CONVERSION FORM
TO: BENZ ENERGY LTD.
MONTREAL TRUST COMPANY OF CANADA
MIDLAND BANK plc
The undersigned holder of the within Convertible Debenture hereby irrevocably
elects to convert such Convertible Debenture in respect of US $
principal amount thereof to Common Shares of Benz Energy Ltd. in accordance with
the terms of the Indenture referred to in the Convertible Debenture and directs
that the Common Shares issuable and deliverable upon the conversion be issued
and delivered to the person indicated below.
* If less than the full principal amount of the within Debenture is to be
converted, indicate in the space provided the principal amount (which
must be US $5,000 or integral multiples thereof) to be converted.
Dated:
------------------------------ ------------------------------
SIGNATURE OF HOLDER
Name:
------------------------------
------------------------------
(Address)
<PAGE>
A-20
- --------------------------------------------------------------------------------
(On Reverse)
TRUSTEE
Montreal Trust Company of Canada 710,
530 - 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
PRINCIPAL PAYING AGENT AND PRINCIPAL CONVERSION AGENT
Midland Bank plc
Mariner House
Pepys Street
London EC3N 4DA
PAYING AGENTS AND CONVERSION AGENTS
Midland Bank plc Kredietbank S.A. Luxembourgeoise Swiss Bank Corporation
Mariner House 43 Boulevard Royal P.O. Box 8010
Pepys Street L - 2955 Luxembourg Zurich
London EC3N 4DA Switerland
REPLACEMENT AGENT
Kredietbank S.A. Luxembourgeoise
43 Boulevard Royal
L - 2955 Luxembourg
and/or such other or further Trustee, Principal Paying Agent, Principal
Conversion Agent, Paying Agents, Conversion Agents and Replacement Agent and/or
specified offices as may from time to time be appointed by the Issuer.
<PAGE>
A-21
TERMS AND CONDITIONS OF THE CONVERTIBLE DEBENTURES
This Convertible Debentures Series 1 is one of the securities of Benz Energy
Ltd. (the "Issuer") issued or issuable in one or more series pursuant to an
indenture made March 25, 1998 (the "Indenture") between the Issuer and Montreal
Trust Company of Canada (the "Trustee"), and which includes the form of the
Convertible Debentures Series 1 and of the interest coupons appertaining to the
Convertible Debentures Series 1 (the "Coupons"). The statements in these Terms
and Conditions include summaries of, and are subject to, the detailed provisions
of and definitions in the Indenture. All capitalized terms used and not
otherwise defined herein shall have the respective meanings set forth in the
Indenture. Copies of the Indenture and of a paying and conversion agency
agreement dated March 25, 1998 (the "Agency Agreement") made between the Issuer,
the Trustee, Midland Bank plc, as principal paying, conversion and
authenticating agent (the "Principal Paying Agent," "Principal Conversion Agent"
and "Authenticating Agent," respectively, which expressions shall include any
successors) and Kredietbank S.A. Luxembourgeoise and Swiss Bank Corporation, as
paying and conversion agents (together with the Principal Paying Agent, the
"Paying Agents" and together with the Principal Conversion Agent, the
"Conversion Agents," respectively, which expression shall include any additional
or successor paying agents or conversion agents, as the case may be) are
available for inspection during normal business hours by the holders of the
Convertible Debentures Series 1 (the "Debentureholders") and the holders of the
Coupons appertaining thereto (the "Couponholders"), at the specified office of
the Trustee, and at the specified office of each of the Paying Agents. The
Debentureholders and Couponholders will be deemed to have notice of, and will be
deemed to have taken such Convertible Debentures Series 1 and Coupons subject
to, all of the provisions of the Indenture and the Agency Agreement.
1. FORM, DENOMINATION AND TITLE
(a) The definitive Convertible Debentures Series 1 are issued in
bearer form, serially numbered, with Coupons attached, in
denominations of U.S.$5,000, U.S.$10,000 and U.S.$50,000.
(b) Title to the Convertible Debentures Series 1 and Coupons
passes by delivery. The Issuer, the Trustee and any Paying
Agents may deem and treat any Debentureholder or Couponholder
as the absolute owner thereof (whether or not such Convertible
Debentures or Coupon shall be overdue and notwithstanding any
notation of ownership or writing thereon or any notice of any
previous loss or theft thereof) for the purpose of making
payments in relation thereto and for all other purposes.
2. STATUS
The Convertible Debentures Series 1 are direct, unconditional, unsecured and
unsubordinated obligations of the Issuer and rank and will at all times rank
PARI PASSU amongst themselves and with all other series of Convertible
Debentures issued under the Indenture and at least PARI PASSU with all other
unsecured obligations (other than in respect of statutorily preferred creditors)
of the Issuer from time to time outstanding.
3. MATURITY, INTEREST AND CURRENCY OF DENOMINATION
The Convertible Debentures shall mature on March 31, 2003 (the "Maturity Date")
and shall bear interest at 9% per annum from their date of issue, payable in
lawful money of the United States after as well as before maturity, default and
judgment, with interest on amounts in default at the same rate, semi-annually in
arrears on March 31 and September 30, in each year, the first of such payments
to be made on September 30, 1998. Interest in respect of a period of less than
one year will be calculated on the basis of the actual number of calendar days
in such year and the number of days elapsed. The first interest payment on
September 30, 1998, will be in respect of the period from (and including) March
25, 1998 to (but excluding) September 30, 1998, in amount equal to U.S.$466.02
per U.S.$10,000 of principal amount of Convertible Debentures.
<PAGE>
A-22
4. INTEREST ACCRUED
The Convertible Debentures Series 1 shall cease to bear interest (i) from their
date of redemption unless, upon due presentation, payment of the principal in
respect of the Convertible Debentures Series 1 is improperly withheld or refused
or unless a default is otherwise made in respect of such payment, in which event
interest shall continue to accrue as provided in the Indenture, or (ii) where
the right to convert the Convertible Debentures Series 1 shall have been
exercised in accordance with the provisions of the Indenture; or (iii)
respectively, from the interest payment date last proceeding the day of
conversion of the Convertible Debentures Series 1, or if the Convertible
Debentures Series 1 are converted prior to the first interest payment date, from
the date of issue.
5. PAYMENT OF PRINCIPAL, INTEREST
(a) Payment of principal in respect of each Convertible Debenture
Series 1 shall only be made against presentation and surrender
(or, in the case of part payment only, endorsement) of the
relevant Convertible Debentures Series 1 at the specified
office of any of the Paying Agents. Payments of interest due
on the Convertible Debentures Series 1 on an interest payment
date shall only be made against presentation and surrender
(or, in the case of part payment only, endorsement) of the
relevant Coupons at the specified office of any of the Paying
Agents. All payments of principal or interest shall be made in
U.S. dollars. Such payments will be made by transfer to a U.S.
dollar account maintained by the payee with a bank outside of
the United States or by a U.S. dollar cheque mailed to an
address, or delivered, outside the United States, subject in
all cases to any fiscal or other local laws or regulations
applicable thereto.
(b) If, at any time, payments in U.S. dollars cannot, in the
opinion of the Issuer or of the Paying Agents, be so made,
payments will be made in U.S. dollars in such other manner as
may be approved by the Issuer and the Paying Agents, subject
as aforesaid in paragraph (a) above. In the event that payment
cannot be made as provided in paragraph (a) above, notice of
the alternative manner of payment will be given to the
Debentureholders in accordance with Condition 15 below.
(c) If the due date for payment of any amount of principal or
interest in respect of a Convertible Debenture Series 1 is not
at any place of payment a business day, then the holder
thereof will not be entitled to payment at the relevant place
of payment of the amount due until the next following business
day at the relevant place of payment and will not be entitled
to any further interest or other payment in respect of any
such delay. In this paragraph, "business day" means any day on
which banks are open for business in Toronto, London, New York
and the relevant place of payment or (in the case of payment
by transfer to a U.S. dollar account as referred to in
paragraph (a) above) on which dealings in foreign currencies
may be carried on in each of Toronto, London, New York and
such place of payment.
6. REDEMPTION, PURCHASE AND CANCELLATION
Unless previously redeemed, purchased, exercised or cancelled, the Convertible
Debentures Series 1 will be redeemed at their principal amount on March 31,
2003. Each Convertible Debenture Series 1 must be presented for redemption
together with all unmatured Coupons relating to such Convertible Debentures
Series 1, failing which the full amount of any missing unmatured Coupon (or, in
the case of payment not being made in full, that proportion of the full amount
of the missing unmatured Coupons which the amounts so paid bears to the total
amount due) will be deducted from the amount due for payment. Each amount so
deducted shall be paid in the manner mentioned above against presentation and
surrender (or, in the case of part payment only, endorsement) of such missing
Coupon at any time before the expiry of six years after the date of redemption
of the Convertible Debenture Series 1 or, if later, five years after the date on
which such Coupon would have become due, but not thereafter.
<PAGE>
A-23
Provided that no Event of Default has occurred and is continuing, the Issuer may
at any time purchase all or any of the Convertible Debentures Series 1 at any
price in the open market, by invitation for tenders or by private contract.
Convertible Debentures Series 1 so purchased shall be delivered to the Trustee
and cancelled by it and may not be reissued or re-sold, and except as otherwise
provided in the Indenture, no Convertible Debentures Series 1 shall be issued in
substitution therefor.
7. UNCLAIMED AMOUNTS
All monies paid by the Issuer to the Principal Paying Agent for the payment of
principal or interest on any Convertible Debenture Series 1 which remain
unclaimed at the end of two years after the principal on such Convertible
Debenture Series 1 will have become due and payable shall be repaid to the
Issuer and the holder of such Convertible Debenture Series 1 or any Coupon
appertaining thereto or thereafter shall have only the rights of a creditor of
the Issuer as described in the Indenture or such rights as may be otherwise
prescribed by applicable law.
8. ROUNDING AMOUNTS
When making payments to holders of Convertible Debentures Series 1 or holders of
Coupons, fractions of US$0.01 shall be rounded down to the nearest whole cent.
9. CONVERSION
The Convertible Debentures Series 1 are convertible at the option of the holder
into common shares of the Issuer, as constituted on the date of issue, (the
"Common Shares"), at any time prior to the close of business on March 27, 2003,
at a conversion price of Cdn.$1.70 per Common Share, subject to adjustment in
accordance with the Indenture (the "Conversion Price"). Notwithstanding the
foregoing, if a Convertible Debenture Series 1 is called for redemption by the
Issuer, the right of the holder to convert the Convertible Debenture Series 1
shall expire at the close of business on the second business day immediately
prior to the date of redemption.
The Conversion Price otherwise applicable hereunder shall be converted to U.S.
dollars based upon the Exchange Rate as of the last day in the calendar quarter
preceding the date of conversion, where "Exchange Rate" means, on any date, for
any conversion of U.S. dollars into Canadian dollars, or VICE VERSA, the
applicable spot buying rate for Canadian dollars or United States 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.
If the holder of Convertible Debentures Series 1 elects to convert the
Convertible Debentures Series 1 prior to the date of the third semi-annual
coupon with respect thereto, the holder shall receive on such conversion a
premium on the number of Common Shares to be issued on such conversion
determined based upon the aggregate principal amount of Convertible Debentures
Series 1 to be converted by multiplying .05 by the number of Common Shares to be
so issued and rounding down to the nearest whole number.
The holder of a Convertible Debenture Series 1 desiring to convert such
Convertible Debenture Series 1 in whole or in part into Common Shares shall
surrender such Convertible Debenture Series 1 to the specified office of any of
the Conversion Agents, together with the Conversion Form on the back of such
Convertible Debenture Series 1 or any other written notice in a form
satisfactory to the Conversion Agent, in either case duly executed by the holder
or his executors or administrators or other legal representatives or his or
their attorney duly appointed by an instrument in writing in form and executed
in a manner satisfactory to the Conversion Agent, exercising his right to
convert such Convertible Debenture Series 1 in accordance with the Indenture and
the Agency Agreement.
Any part, being US$5,000 or an integral multiple thereof, of a Convertible
Debenture Series 1 of a denomination in excess of US$5,000 may be converted.
Certificates for Common Shares issued on conversion will be delivered by mail
<PAGE>
A-24
free of charge (but uninsured and at the risk of the person entitled thereto)
within 14 days of the date of conversion. If only a part of the Convertible
Debentures Series 1 held by a holder is converted, after the Convertible
Debentures cease to be represented by a Global Debenture, definitive Convertible
Debentures Series 1 for the unconverted principal balance, in denominations of
U.S.$5,000, U.S.$10,000 and U.S.$50,000, as applicable, with unmatured Coupons
attached, will be available at the offices of the Paying and Conversion Agents
(including the Paying and Conversion Agent in Luxembourg).
The Indenture provides for the adjustment of the Conversion Price upon the
following events:
(a) The subdivision or consolidation of the outstanding Common
Shares;
(b) the issue of any Common Shares to holders of Common Shares by
way of stock dividends, other than an issue of Common Shares
to holders of Common Shares who have elected to receive
dividends in shares in lieu of receiving cash dividends paid
in the ordinary course;
(c) the issue of rights, options or warrants to all or
substantially all of the holders of Common Shares entitling
them to acquire Common Shares or securities convertible into
Common Shares (unless the rights, options or warrants are
exercisable within a period of 45 days from their issue at a
price equal to or greater than 95% of the Current Market Price
of the Common Shares); and
(d) the distribution to all or substantially all of the holders of
Common Shares of any other class or of 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).
There will be no adjustment of the Conversion Price in respect of any event
described in (b), (c) or (d) above if the holders of the Convertible Debentures
are allowed to participate as though they had converted their Convertible
Debentures prior to the applicable record date or effective date.
The Issuer will give at least ten days notice to holders of Convertible
Debentures of the record date for any of the above events other than a
subdivision or consolidation of the Common Share. Except as stated above, no
adjustment will be made in the Conversion Price as a result of the issuance of
Common Shares at less than the then Current Market Price or Conversion Price.
The Current Market Price per Common Share at any date shall be the weighted
average price per share for Common Shares for 20 consecutive trading days
commencing not more than 30 trading days and ending not less than five trading
days before such date on the principal stock exchange in Canada on which the
Common Shares are traded. The weighted average price shall be determined by
dividing the aggregate sale price of all Common Shares so sold. The Issuer will
not be required to make adjustments in the Conversion Price unless the
cumulative effect of such adjustments would change the Conversion Price then in
effect by at least 1%. Any adjustment not so made will be carried forward and
taken into account in any subsequent adjustment.
The Indenture requires the Issuer to deliver an officers' certificate specifying
the nature of the event requiring any adjustment or readjustment as specified
above and the adjustment necessitated thereby. Such officers' certificate will
be available at the specified offices of any of the Paying or Conversion Agents.
10. REQUIRED CONVERSION
The Issuer may, at any time after September 30, 1999 and prior to maturity, by
notice in writing given to the holders thereof, require that all outstanding
Convertible Debentures Series 1 be converted into Common Shares if the weighted
average trading price of the Common Shares on the principal stock exchange in
Canada on which the Common Shares are traded during a 20 consecutive trading day
period ending not more than five days prior to the giving of such notice is not
less than 140% of the Conversion Price then in effect.
<PAGE>
A-25
11. REDEMPTION
The Convertible Debentures Series 1 are redeemable, in whole or in part, at the
option of the Issuer at any time after March 31, 2002 and prior to maturity at
100% of the principal amount thereof to be redeemed, together with accrued and
unpaid interest. At the Maturity Date, 100% of the principal amount of the
Convertible Debentures Series 1 will be repaid together with accrued and unpaid
interest.
12. MEETINGS OF DEBENTUREHOLDERS AND MODIFICATION
The Indenture contains provisions for convening meetings of the Debentureholders
to consider any matter affecting their interests, including the modification by
Extraordinary Resolution of these Terms and Conditions or the provisions of the
Indenture.
The Indenture provides that modifications and alterations thereto and to the
Convertible Debentures issued thereunder may be made if authorized by an
Extraordinary Resolution. Such a resolution must be passed by the affirmative
vote of the holders of not less than 66 2/3% of the principal amount of the
Debentures (or in the case of a serial meeting, where the rights of the
holders of Debentures of one or more series are affected differently than the
rights of the holders of any other series, of the principal amount of the
Debentures of the series so affected) issued under the Indenture represented
at a meeting at which holders of more than 25% of the principal amount of the
Debentures (or Debentures of a particular series, in the case of a serial
meeting) then outstanding are present in person or by proxy; provided,
however, that if a meeting or serial meeting is adjourned because not more
than 25% of the principal amount of such Debentures is present in person or
by proxy then at the adjourned meeting an extraordinary resolution may be
passed by the affirmative vote of the holders of not less than 66 2/3% of the
principal amount of the Debentures represented at the meeting or serial
meeting, as the case may be. The term Extraordinary Resolution shall also
include an instrument signed by the holders of not less than 66 2/3% of the
outstanding Debentures or the Debentures of a particular series, as the case
may be. An Extraordinary Resolution passed at any meeting of the
Debentureholders will be binding on all Debentureholders, whether or not they
are present at the meeting, and on all the Couponholders.
The Indenture also permits the Issuer and the Trustee, without the consent of
holders of Convertible Debentures, to enter into indentures supplemental to the
Indenture for certain purposes, including without limitation (i) making
provisions not inconsistent with the Indenture as may be necessary of desirable
with respect to matters or questions arising under the Indenture which do not
affect the substance thereof and which in the opinion of the Trustee, it may be
expedient to make, provided that the Trustee shall be of the opinion that such
provisions and modifications will not be prejudicial to the interests of the
Debentureholders, (ii) providing for the issue, as permitted by the Indenture,
of Debentures of any one or more series, (iii) making any modification of any of
the provisions of the Indenture or the Convertible Debentures which is of a
formal, minor or technical nature, (iv) making any additions to, deletions from
or alteration of the provisions of the Indenture which, in the opinion of the
Trustee, are not materially prejudicial to the interests of the Debentureholders
and which are necessary or advisable in order to incorporate, reflect or comply
with legislation applicable to indentures, (v) correcting or rectifying any
ambiguities, defective provisions, errors or omissions in the Indenture,
provided that, in the opinion of the Trustee, the rights of the Trustee and the
Debentureholders are in no way prejudiced thereby and (vi) any other purpose not
inconsistent with the terms of the Indenture provided that, in the opinion of
the Trustee, the rights of the Trustee and of the Debentureholders are in no way
prejudiced thereby.
13. EVENTS OF DEFAULT
If an Event of Default described in clause (a) or (b) below with respect to
Debentures of any series at the time outstanding occurs and is continuing, then
in every such case the Trustee or the Holders of not less than 25% in principal
amount of the outstanding Debentures of that series may declare the principal
amount of all the Debentures of that series to be due and payable immediately,
by a notice in writing to the Issuer (and to the Trustee if given by Holders),
and upon any such declaration such principal amount (or specified portion
thereof) shall become immediately
<PAGE>
A-26
due and payable. If an Event of Default described in clause (c), (d), (e), (f),
(g), (h) or (i) below occurs and is continuing, then in every such case the
Trustee or the Holders of not less than 25% in principal amount of all the
Debentures then outstanding may declare the principal amount of all the
outstanding Debentures to be due and payable immediately, by a notice in writing
to the Issuer (and to the Trustee if given by the Holders) and upon any such
declaration such principal amount (or specified portion thereof) shall become
immediately due and payable.
"Event of Default" means any one of the following events (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of and administrative or governmental
body):
(a) default in the payment of any interest upon any Debenture, or
any related Coupon, when such interest or Coupon becomes due
and payable, and continuance of such default for a period of 7
days; or
(b) default in the payment of the principal of (or premium, if
any, on) any Debenture, as and when it shall become due and
payable at its Maturity, upon redemption, by declaration or
otherwise; or
(c) default in the performance, or breach, of any covenant or
warranty of the Issuer in the Indenture (other than a covenant
or warranty a default in performance of which or breach of
which is elsewhere in this section specifically dealt with or
which has expressly been included in the Indenture solely for
the benefit of one or more series of Debentures other than
that series), and continuance of such default or breach for a
period of 30 days after there has been given, by registered or
certified mail, to the Issuer by the Trustee or to the Issuer
and the Trustee by the Holders of at least 25% in principal
amount of all outstanding Debentures a written notice
specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default"
hereunder; or
(d) the entry of a decree or order by a court having jurisdiction
in the premises adjudging the Issuer or any Material
Subsidiary a bankrupt or insolvent under any bankruptcy,
insolvency or analogous laws or appointing a receiver,
liquidator, assignee, trustee, sequestrator, rehabilitator (or
other similar official) of the Issuer or any Material
Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their
respective affairs, and the continuance of any such decree or
order unstayed and in effect for a period of 90 consecutive
days; or
(e) the institution by the Issuer or any Material Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the
consent by it to the institution of bankruptcy or insolvency
proceedings against it under any bankruptcy, insolvency or
analogous laws, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator, rehabilitator (or other
similar official) of the Issuer or any Material Subsidiary or
of any substantial part of their respective properties, or the
making by the Issuer or any Material Subsidiary of an
assignment for the benefit of creditors, or the admission by
the Issuer or any Material Subsidiary in writing of its
inability to pay its debts generally as they become due; or
(f) if (i) any other Debt of the Issuer or any Material Subsidiary
becomes due and payable prior to its Stated Maturity by reason
of an event of default (howsoever defined) or (ii) any such
Debt of the Issuer or any Material Subsidiary is not paid when
due or, as the case may be, within any applicable grace period
or (iii) the Issuer or any Material Subsidiary fails to pay
when due (or, as the case may be, within any applicable grace
period) any amount payable by it under any present or future
guarantee for, or indemnity in respect of, any Indebtedness of
any Person or (iv) any security given by the Issuer or any
Material Subsidiary for any Indebtedness of any Person or any
guarantee or indemnity of Debt of any Person by the Issuer or
any Material Subsidiary becomes enforceable by reason of
default in relation thereto and steps are taken to enforce
such security save in any such case where there is a bona fide
dispute as to whether the relevant Debt or any such guarantee
or indemnity
<PAGE>
A-27
as aforesaid shall be due and payable (following any
applicable grace period), PROVIDED that in each such case the
Debt exceeds in the aggregate U.S.$1,500,000 and in each such
case such event continues unremedied for a period of 30
calendar days (or such longer period as the Trustee may in its
sole discretion consent to in writing upon receipt of written
notice from the Issuer); or
(g) if there is any final judgment or judgments for the payment of
money exceeding in the aggregate U.S.$1,500,000 outstanding
against the Issuer or any Material Subsidiary which has been
outstanding for more than 60 calendar days from the date of
its entry and shall not have otherwise been discharged in full
or stayed by appeal, bond or otherwise; or
(h) if the Issuer or any Material Subsidiary shall generally fail
to pay its Debts as such Debts come due (except Debts which
the Issuer or such Material Subsidiary, as the case may be,
may contest in good faith generally) or 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); or
(i) if a warranty, representation, or other statement made by or
on behalf of the Issuer contained in the Indenture, the
Debentures or any certificate or other agreement furnished in
compliance with such documents is false in any material
respect when made and (except where the Trustee shall have
certified to the Issuer that it considers such falsity to be
incapable of remedy, in which case no such notice or
continuation as is hereinafter mentioned will be required)
such falsity continues for a period of 30 calendar days (or
such longer period as the Trustee may in its absolute
discretion permit) next following the service by the Trustee
on the Issuer of notice requiring the same to be remedied.
14. REPLACEMENT OF CONVERTIBLE DEBENTURES SERIES 1 AND COUPONS
If any Convertible Debenture or Coupon shall at any time become mutilated,
defaced, destroyed, stolen or lost, it may be replaced at the cost of the
claimant at the specified office of the Replacement Agent or the Trustee upon
provision of such evidence, indemnity, security or otherwise as the Issuer
determines satisfactory. Mutilated or defaced Convertible Debentures Series 1 or
Coupons must be surrendered before replacements will be issued.
15. NOTICES
In addition to notice to the holders of Convertible Debentures Series 1 as
provided in the Indenture, all notices to holders of Convertible Debentures
Series 1 shall be published in the Financial Times, or such other leading daily
financial newspaper with general circulation in Europe as the Trustee may
approve, and a daily leading newspaper with general circulation in Luxembourg,
which is expected to be the Luxembourg Wort, for so long as the Convertible
Debenture Series 1 are listed on the Luxembourg Stock Exchange.
16. TAXATION
Payments of interest on the Convertible Debentures will be made subject to the
deduction of applicable Canadian withholding tax.
The Issuer will, subject to certain exceptions and limitations set forth below,
pay, as additional interest, such additional amounts (the "Additional Amounts")
to the holder of any Convertible Debenture as may be necessary in order that
every net payment of the principal or interest on such Convertible Debenture,
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 Canada (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
<PAGE>
A-28
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 Canada (or any political subdivision thereof) otherwise
than by the mere holding of the Convertible Debenture or the receipt of payments
made under or with respect to the Convertible Debenture.
In addition, the Issuer will indemnify and hold harmless each holder of a
Convertible Debenture (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 Canada and paid by
the holder as a result of payments made under or with respect to the Convertible
Debentures. Any payment made pursuant to this paragraph shall be considered an
Additional Amount.
If, at any time, either of the Trustee and the Principal Paying Agent is
required by law to make any deduction or withholding from any sum payable by it
hereunder (or if thereafter there is any change in the rates at which or the
manner in which such deductions or withholdings are calculated), the Issuer
shall promptly notify the Trustee and the Principal Paying Agent and shall
deliver to the Trustee and the Principal Paying Agent, within thirty days after
it has made such payment to the applicable authority, an original receipt (or a
certified copy thereof) issued by such authority evidencing the payment to such
authority of all amounts so required to be deducted or withheld in respect of
each Convertible Debenture.
If the Issuer becomes generally subject at any time to any taxing jurisdiction
other than or in addition to Canada, references in these Conditions to Canada
shall be read and construed as reference to Canada and/or to such other
jurisdiction.
Any reference in these Conditions to interest in respect of the Convertible
Debentures shall be deemed also to refer to any Additional Amounts which may be
payable under this Condition.
17. CERTAIN COVENANTS
(a) The Issuer will, so long as the Convertible Debentures are
outstanding, maintain Tangible Assets equal to or greater than
140% of Long Term Debt at all times including after redemption
of any redeemable preference shares of the Issuer or any
Subsidiary. This ratio shall be calculated no later than 135
days following the end of each of the Issuer's fiscal years,
and shall be based upon the Issuer's annual audited financial
statements, as adjusted for Tangible Assets, and the
Independent Reserve Reports.
(b) The Issuer and its Subsidiaries will not:
(i) have outstanding more than U.S.$12,000,000 under the
EnCap Credit Facility for the period commencing 30
days from the date hereof; and
(ii) use any of the net proceeds from the issuance of the
Convertible Debentures Series 1 to reduce the
Issuer's or its Subsidiaries' existing indebtedness;
provided, however that the Issuer may use net
proceeds in an amount not to exceed U.S.$6,000,000 to
reduce the amount outstanding under the EnCap Credit
Facility to an amount not less than U.S.$12,000,000.
18. INDEMNIFICATION OF THE TRUSTEE
The Indenture contains provisions for the indemnification of the Trustee and for
its relief from responsibility, including provisions relieving it from taking
action unless indemnified to its satisfaction.
<PAGE>
A-29
19. AGENTS
The Issuer shall have the right, subject to the prior approval of the Trustee,
at any time to vary or terminate the appointment of any Paying Agent, Conversion
Agent or Replacement Agent and to appoint additional or other Paying Agents,
Conversion Agents or Replacement Agents, provided that, for so long as the
Convertible Debentures Series 1 are listed on the Luxembourg Stock Exchange, it
will at all times maintain at least one Paying Agent, one Conversion Agent and
one Replacement Agent in Luxembourg and one Paying Agent and one Conversion
Agent having a specified office in one other European city approved by the
Trustee. Notice of any termination or appointment and of any changes in
specified offices will be given to the holders of the Convertible Debentures
Series 1 promptly in accordance with the terms hereof and of the Indenture.
20. GOVERNING LAW AND JURISDICTION
The Indenture and the Convertible Debentures Series 1 are governed by, and shall
be construed in accordance with, the laws of the Province of Ontario and the
laws of Canada applicable thereto.
TRUSTEE
Montreal Trust Company of Canada 710,
530 - 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
LISTING AGENT
Kredietbank S.A. Luxembourgeoise
43 Boulevard Royal
L-2955 Luxembourg
COMMON DEPOSITORY AND
PRINCIPAL PAYING AND CONVERSION AGENT
Midland Bank plc
Mariner House
Pepys Street
London EC3N 4DA
<PAGE>
A-30
PAYING AGENTS AND CONVERSION AGENTS
Midland Bank plc Kredietbank S.A. Luxembourgeoise Swiss Bank Corporation
Mariner House 43 Boulevard Royal P.O. Box 8010
Pepys Street L - 2955 Luxembourg Zurich
London EC3N 4DA Switerland
REPLACEMENT AGENT
Kredietbank S.A. Luxembourgeoise
43 Boulevard Royal
L - 2955 Luxembourg
<PAGE>
DATED AS OF APRIL __,1999
BENZ ENERGY LTD.
AND
MONTREAL TRUST COMPANY OF CANADA
SECOND SUPPLEMENTAL INDENTURE
<PAGE>
THIS SECOND SUPPLEMENTAL TRUST INDENTURE made as of the __ day of April, 1999
BETWEEN:
BENZ ENERGY LTD., a corporation continued under the laws of the Yukon
Territories having its registered office in the City of Whitehorse in
the Yukon Territories
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated under
the laws of Canada and having an office in the City of Calgary in the
Province of Alberta
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS the Corporation and the Trustee entered into a Trust Indenture dated
as of March 25, 1998, as supplemented by that certain First Supplemental
Trust Indenture dated as of April 8, 1998 (collectively, the "Trust
Indenture"); and
WHEREAS the Corporation created and issued Debentures as provided under the
terms of the Trust Indenture; and
WHEREAS the Corporation desires to become domesticated in the State of
Delaware and in connection therewith has requested that the Trust Indenture
be amended in anticipation of such migration; and
WHEREAS the Corporation and the Trustee now desire to amend the Trust
Indenture in certain respects to reflect amendments that have been approved
by one or more Extraordinary Resolutions passed by Debentureholders in
accordance with the terms of Article 9 of the Trust Indenture, those
amendments are more fully set forth below; and
WHEREAS the Corporation and the Trustee now desire to amend the Terms and
Conditions of 9% Convertible Debentures, Series 1 issued in accordance with
the terms of the Trust Indenture in certain respects to reflect amendments
that have been approved by the Series 1 Debentureholders pursuant to an
Extraordinary Resolution passed in accordance with the terms of Article 9 of
the Trust Indenture at a meeting held on April ___, 1999, those amendments
are more fully set forth below.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this SECOND SUPPLEMENTAL INDENTURE and intending to be legally
bound, the undersigned agree as follows:
1. AMENDMENT TO TRUST INDENTURE. The Trust Indenture shall remain in full
force and effect subject to the following amendments"
1.1 The definition of Affiliate in Article 1.1 of the Trust Indenture is
hereby amended by deleting the phrase "BUSINESS CORPORATIONS ACT
(Yukon)" and inserting therefor the following:
"General Corporation Law of the State of Delaware"
1.2 Article 1.1 of the Trust Indenture is hereby amended by deleting the
definition of "Counsel" and inserting therefor the following:
"COUNSEL" means a barrister or solicitor or attorney or firm of
barristers and solicitors or firm of attorneys retained by the Trustee
or retained by the Corporation and acceptable to the Trustee
1.3 Article 1.1 of the Trust Indenture is hereby amended by deleting the
definition of "Long Term Debt" and inserting therefor the following:
"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, and shall include any amounts outstanding under the Bank
One Credit Facility and the EnCap Credit Facility plus (ii) the nominal
amount of any preferred stock issued by the Corporation and its
Subsidiaries;
1.4 Article 1.1 of the Trust Indenture is hereby amended by deleting the
definition of "Taxes" and inserting therefor the following:
"TAXES" means all taxes of any kind or nature whatsoever including,
without limitation, all federal, provincial, municipal and local taxes,
income taxes, capital taxes, levies, imposts, stamp taxes, royalties,
duties, charges to tax, value added taxes, commodity taxes, goods and
services taxes, excise taxes, business taxes, property taxes and
withholding taxes charged, levied, collected, withheld or assessed by
any relevant authority within any jurisdiction in Canada or the United
States having power to tax together with any penalties, fines,
additions to tax and interest thereon and any instalments in respect
thereof and, for greater certainty, does not include taxes charged,
levied, collected, withheld or assessed by an authority outside Canada
or the United States;
1.5 The first sentence of Article 4.3(a) of the Trust Indenture is hereby
amended by deleting the phrase "shall be adjusted by multiplying the
Conversion Price then in effect by a fraction the
2
<PAGE>
numerator of which is the number of Common Shares outstanding
immediately following such event" and inserting therefor the following:
"shall be adjusted by multiplying the Conversion Price then in effect
by a fraction the numerator of which is the number of Common Shares
outstanding immediately prior to such event and the denominator of
which is the number of Common Shares outstanding immediately following
such event"
1.6 Article 4.3(c) of the Trust Indenture is hereby amended by deleting the
phrase "a number of Common Shares equal to the number of additional
Common Shares offered for subscription or purchase (or the aggregate
Conversion or Exchange Price of the convertible securities so offered)
by such Current Market Price per Common Shares, and of which the
denominator" and inserting therefor the following:
"a number of Common Shares equal to the number of additional Common
Shares that the aggregate of the proceeds to be realized from the
issuance of the rights or warrants so offered (or 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"
1.7 Article 4.4 of the Trust Indenture is hereby amended by deleting the
phrase "lawful money of Canada" and inserting therefor the following:
"Dollars".
1.8 Article 4.6 of the Trust Indenture is hereby deleted and the following
is inserted therefor:
4.6 TAXES AND CHARGES ON CONVERSION
The Corporation will from time to time promptly pay or make provision
satisfactory to the Trustee for the payment of any and all taxes and
charges which may be imposed by the laws of Canada or any province
thereof or the laws of the United States or any State or other taxing
authority thereof (except income tax, withholding tax, security
transfer tax, if any, or taxes or levies which are in substance of the
same nature as any of the foregoing) which shall be payable with
respect to the issuance and/or delivery to the holders of Convertible
Debentures, upon the exercise of their right to conversion, of Common
Shares of the Corporation pursuant to the terms of the Convertible
Debentures and of this Indenture.
1.9 Article 4.11 of the Trust Indenture is hereby amended by deleting
paragraph (d) and inserting therefor the following:
(d) "CURRENT MARKET PRICE" per Common Share on any date shall be
the weighted average price per Common Share for 20 consecutive
trading days commencing not more than 30 trading days and
ending not less than five trading days before such date
3
<PAGE>
on the principal stock exchange on which the Common Shares are
traded (if the Common Shares are traded on exchanges in Canada
and the United States, then the price from the United States
Exchange shall be used). The weighted average price shall be
determined by dividing the aggregate sale price of all Common
Shares sold on the said exchange, as the case may be, during
the said 20 consecutive trading days by the total number of
Common Shares so sold;
1.10 Article 5.9 of the Trust Indenture is hereby deleted and the following
is inserted therefor:
5.9 LONG TERM DEBT AND TANGIBLE ASSETS
For the Corporation's fiscal years ending December 31, 1998 and 1999,
the Corporation will, so long as any Debenture is outstanding, maintain
Tangible Assets equal to or greater than 100% of Long Term Debt at all
times including after redemption of any redeemable preference shares of
the Corporation or any Subsidiary. For each of the Corporation's fiscal
years ending after December 31 1999, the Corporation will, so long as
any Debenture is outstanding, maintain Tangible Assets equal to or
greater than 140% of Long Term Debt at all times including after
redemption of any redeemable preference shares of the Corporation or
any Subsidiary. This ratio shall be calculated no later than the 135th
day following the end of each of the Corporation'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. For purposes of this Article, the definition of (i)
"Long Term Debt" shall not include obligations related solely to the
sale, purchase or delivery of hydrocarbons in respect of production
payments (whether volumetric or dollar denominated) or net profits
interests conveyed in transfers to third parties; and (ii) "Tangible
Assets" shall not include the value of any hydrocarbons which have been
conveyed as part of such production payment or net profits interest.
1.11 Article 5.10(a) of the Trust Indenture is hereby deleted.
1.12 Article 5.16 of the Trust Indenture is hereby deleted and the following
is inserted therefor:
5.16 WITHHOLDING AND REPORTING REQUIREMENTS
To the extent permitted by law, the Corporation will provide to the
Trustee, the Paying Agent or to any Debenture Holder such statements,
certificates or other documentation concerning the organization or
operations of the Corporation as may be reasonably necessary to
establish any exceptions or exemptions from income tax withholding and
reporting requirements of any taxing authority within Canada or the
United States.
1.13 Article 5.17 of the Trust Indenture is hereby deleted and the following
is inserted therefor:
5.17 MAINTENANCE OF LISTINGS FOR COMMON SHARES AND DEBENTURES
4
<PAGE>
While any Convertible Debenture remains outstanding, the Corporation
will maintain a listing for its common shares on a nationally
recognized stock exchange in Canada or the United States and, while any
Convertible Debenture Series 1 is outstanding, will use its best
efforts to maintain a listing for the Convertible Debentures Series 1
on the Luxembourg Stock Exchange or such alternative stock exchange as
the Trustee may approve. For purposes of this Trust Indenture, a
nationally recognized United States stock exchange shall include the
bulletin board maintained by Nasdaq.
1.14 Article 7.3 of the Trust Indenture is hereby amended by deleting the
phrase "of Canada" and inserting therefor the following:
"of the United States"
1.15 The first grammatical paragraph of Article 8.1 of the Trust Indenture
is hereby deleted and the following is inserted therefor:
The Corporation shall not enter into any transaction, whether by way of
amalgamation, merger, reconstruction, reorganization, consolidation,
transfer, sale, lease or otherwise, whereby all or substantially all of
its undertaking, property and assets would become the property of any
other Person or, in the case of any such amalgamation, of the
continuing corporation resulting therefrom, but may do so if:
1.16 Article 8.1 of the Trust Indenture is hereby amended by deleting
paragraph (a) and inserting therefor the following:
(a) such other Person or continuing corporation is a corporation
(the "Successor Corporation") incorporated under the laws of
Canada or any province thereof or any state of the United
States;
1.17 Article 9.1 of the Trust Indenture is hereby amended by deleting the
phrase "Calgary" and inserting therefor the following:
"Houston, Texas".
1.18 Article 10.4 of the Trust Indenture is hereby amended by deleting the
first grammatical paragraph and inserting therefor the following:
If the Trustee determines that mail service is or is threatened to be
interrupted at the time when the Trustee is required or elects to give
any notice to the Holder of Registered Debentures hereunder, the
Trustee shall, notwithstanding the provisions hereof, give such notice
by means of publication in (i) The Globe and Mall, national edition, or
any other English language daily newspaper or newspapers of general
circulation in Canada and in a French language dally newspaper of
general circulation in the Province of Quebec; and (ii)
5
<PAGE>
the Houston Chronicle or any successor newspaper, in all cases once in
each of two successive weeks, and any notice so published shall be
deemed to have been given on the latest date on which the first
publication takes place.
1.19 Article 11.8 of the Trust indenture is hereby amended by deleting the
phrase "chartered bank of Canada" and inserting therefor the following:
Bank chartered in the United States and subject to regulation by the
Federal Deposit Insurance Corporation.
2. AMENDMENTS TO THE TERMS AND CONDITIONS OF THE 9% CONVERTIBLE
DEBENTURES, SERIES 1.
Attached hereto as Exhibit A are Amendments to the Terms and Conditions
of 9% Convertible Debentures, Series 1 (the "Series 1 Convertible
Debentures"), which amendments have been approved by the holders of the
Series 1 Convertible Debentures.
3. AMENDMENTS TO THE TERMS AND CONDITIONS OF THE 9% CONVERTIBLE
DEBENTURES, SERIES 2.
Attached hereto as Exhibit B are Amendments to the Terms and Conditions
of 9% Convertible Debentures, Series 2 (the "Series 2 Convertible
Debentures"), which amendments have been approved by the holders of the
Series 2 Convertible Debentures.
4. AMENDMENTS TO THE TERMS AND CONDITIONS OF THE 9% CONVERTIBLE
DEBENTURES, SERIES 3.
Attached hereto as Exhibit C are the Amendments to the Terms and
Conditions of 9% Convertible Debentures, Series 3 (the "Series 3
Convertible Debentures"), which amendments have been approved by the
holders of the Series 3 Convertible Debentures.
5. CONDITIONAL AMENDMENT TO THE TRUST INDENTURE.
The amendments to the Trust Indenture set forth in Article 1 above are
conditioned upon the receipt by the Corporation and Trustee of
appropriate evidence of approval from the Holders of any other Series
of Debentures that is required to approve amendments to the Trust
Indenture. The execution of this Supplement by the Corporation and the
Trustee shall be evidence of the satisfaction of this requirement. The
amendments to the Terms and Conditions of the respective Series to the
Trust Indenture set forth on the Exhibits attached shall become
effective upon appropriate approval of the holders of such Series.
6. COUNTERPARTS AND FORMAL DATE
This Supplemental Indenture may be executed in several counterparts,
each of which when so executed shall be deemed to be an original, and
such counterparts together shall constitute one and the same instrument
and notwithstanding their date of execution shall be deemed to
6
<PAGE>
bear date as of the ____ day of April, 1999. The execution of this
First Supplemental Indenture has been authorized pursuant to the terms
of an Extraordinary Resolution approved by the Holders of the Series 1
9% Convertible Debentures at a meeting of such Holders on April ___,
1999.
7. GOVERNING LAW
This Supplemental Indenture shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of
Canada applicable therein and shall be treated in all respects as
Ontario contracts.
8. LANGUAGE OF SUPPLEMENTAL INDENTURE
The parties hereto have requested that this document be drafted in the
English language.
Les parties ont demande que le present document soit redige en langue
anglaise.
IN WITNESS WHEREOF the parties hereto have executed this Second
Supplemental Indenture under their respective corporate seals and the hands
of their proper officers duly authorized in that behalf on the date first
hereinabove written.
BENZ ENERGY LTD.
By: /s/ Robert S. Herlin, CFO & SVP
-------------------------------------
c/s
MONTREAL TRUST COMPANY OF CANADA
By:
-------------------------------------
c/s
By:
-------------------------------------
c/s
7
<PAGE>
DATED AS OF APRIL 8, 1998
BENZ ENERGY LTD.
AND
MONTREAL TRUST COMPANY OF CANADA
TRUSTEE
NOTE INDENTURE
PROVIDING FOR THE ISSUE OF NOTES IN SERIES
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
ARTICLE 1
INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Meaning of "outstanding" for Certain Purposes . . . . . . . . . . . . . .7
1.3 Interpretation Not Affected By Headings, etc. . . . . . . . . . . . . . .7
1.4 Statute References. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.5 Monetary Reference. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
1.6 Day Not a Business Day. . . . . . . . . . . . . . . . . . . . . . . . . .7
1.7 Invalidity of Provisions. . . . . . . . . . . . . . . . . . . . . . . . .8
1.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE 2
THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.1 No Fixed Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.2 Issuance in Series. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.3 Issuance of Special Notes Series A and B. . . . . . . . . . . . . . . . .9
2.4 Form of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
2.5 Execution of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
2.6 Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Concerning Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.8 Notes to Rank Equally . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.9 Registration of Notes . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.10 Payment of Principal and Interest in Respect of Registered Notes. . . . 11
2.11 Payment of Principal and Interest in Respect of Bearer Notes. . . . . . 12
2.12 Ownership of Registered Notes . . . . . . . . . . . . . . . . . . . . . 12
2.13 Negotiability and Ownership of Bearer Notes and Coupons . . . . . . . . 12
2.14 Exchange Of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.15 Replacement of Notes and Coupons. . . . . . . . . . . . . . . . . . . . 14
2.16 Interim Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.17 Option of Holder as to Place of Payment . . . . . . . . . . . . . . . . 14
2.18 Payment Agreements for Notes. . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 3
REDEMPTION AND PURCHASE FOR CANCELLATION OF THE NOTES . . . . . . . . . . . . 15
3.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2 Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Notes Due On Redemption Dates . . . . . . . . . . . . . . . . . . . . . 15
3.4 Deposit of Redemption Monies. . . . . . . . . . . . . . . . . . . . . . 15
3.5 Cancellation and Destruction of Notes and Coupons . . . . . . . . . . . 16
3.6 Surrender of Notes for Cancellation . . . . . . . . . . . . . . . . . . 16
3.7 Purchase of Notes for Cancellation . . . . . . . . . . . . . . . . . . 16
ARTICLE 4
PROVISIONS REGARDING SPECIAL NOTES. . . . . . . . . . . . . . . . . . . . . . 17
4.1 Exercise Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.2 Administration of Escrowed Subscription Funds . . . . . . . . . . . . . 17
ARTICLE 5
COVENANTS OF THE CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Payment of Principal, Premium, if any, and Interest . . . . . . . . . . 17
<PAGE>
ii
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5.2 Maintenance of Corporate Existence. . . . . . . . . . . . . . . . . . . 17
5.3 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.4 Trustee Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.5 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . 18
5.6 Money for Notes Payments to Be Held in Trust. . . . . . . . . . . . . . 18
5.7 Statement as to Compliance. . . . . . . . . . . . . . . . . . . . . . . 19
5.8 Additional Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.9 Long Term Debt and Tangible Assets. . . . . . . . . . . . . . . . . . . 20
5.10 Limitation upon Credit Facility and Repayments. . . . . . . . . . . . . 21
5.11 Waiver of Certain Covenants . . . . . . . . . . . . . . . . . . . . . . 21
5.12 Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . 21
5.13 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . 21
5.14 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.15 Restrictions on Charter Amendments. . . . . . . . . . . . . . . . . . . 22
5.16 Canadian Withholding and Reporting Requirements . . . . . . . . . . . . 22
5.17 Maintenance of Listings for Common Shares and Notes . . . . . . . . . . 22
5.18 Trustee May Perform Covenants . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 6
REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.2 Notice of Events of Default . . . . . . . . . . . . . . . . . . . . . . 24
6.3 Acceleration of Maturity; Rescission and Annulment. . . . . . . . . . . 24
6.4 Collection Of Indebtedness and Suits for Enforcement by Trustee . . . . 25
6.5 Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . 25
6.6 Trustee May Enforce Claims Without Possession of Notes. . . . . . . . . 26
6.7 Application of Money Collected. . . . . . . . . . . . . . . . . . . . . 26
6.8 Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.9 Restoration of Rights and Remedies. . . . . . . . . . . . . . . . . . . 27
6.10 Rights and Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . 27
6.11 Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . . . . 27
6.12 Control by Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.13 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . 28
6.14 Waiver of Stay or Extension . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 7
SATISFACTION AND DISCHARGE. . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.1 Cancellation and Destruction. . . . . . . . . . . . . . . . . . . . . . 29
7.2 Non-Presentation of Notes and Coupons . . . . . . . . . . . . . . . . . 29
7.3 Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.4 Trustee Unable to Apply Money or Notes. . . . . . . . . . . . . . . . . 30
7.5 Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 8
SUCCESSOR CORPORATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.1 Certain Requirements in Respect of Merger etc.. . . . . . . . . . . . . 30
8.2 Vesting of Powers in Successor. . . . . . . . . . . . . . . . . . . . . 31
ARTICLE 9
MEETINGS OF NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9.1 Right to Convene Meetings . . . . . . . . . . . . . . . . . . . . . . . 31
9.2 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.3 Chairman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
<PAGE>
iii
<S> <C>
9.4 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.5 Power to Adjourn. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.6 Show of Hands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.7 Poll. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.8 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.9 Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.10 Corporation and Trustee May Be Represented. . . . . . . . . . . . . . . 34
9.11 Powers Exercisable by Extraordinary Resolution. . . . . . . . . . . . . 34
9.12 Meaning of "Extraordinary Resolution" . . . . . . . . . . . . . . . . . 36
9.13 Powers Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.14 Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.15 Signed Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.16 Binding Effect of Resolutions . . . . . . . . . . . . . . . . . . . . . 37
9.17 Serial Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.18 Evidence of Rights of Noteholders . . . . . . . . . . . . . . . . . . . 38
ARTICLE 10
NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.1 Notice to the Corporation . . . . . . . . . . . . . . . . . . . . . . . 39
10.2 Notice to Noteholders . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.3 Notice to the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.4 Mail Service Interruption . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 11
CONCERNING THE TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.1 Trust Indenture Legislation . . . . . . . . . . . . . . . . . . . . . . 40
11.2 No Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . 40
11.3 Rights and Duties of Trustee. . . . . . . . . . . . . . . . . . . . . . 40
11.4 Evidence, Experts and Advisers. . . . . . . . . . . . . . . . . . . . . 41
11.5 Trustee May Deal in Notes . . . . . . . . . . . . . . . . . . . . . . . 41
11.6 Trustee Not Required to Give. . . . . . . . . . . . . . . . . . . . . . 41
11.7 Protection of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.8 Investment of Trust Moneys. . . . . . . . . . . . . . . . . . . . . . . 42
11.9 Action by Trustee to Protect Interests. . . . . . . . . . . . . . . . . 42
11.10 Replacement of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . 42
11.11 Acceptance of Trusts. . . . . . . . . . . . . . . . . . . . . . . . . . 42
11.12 Indemnification of Trustee. . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE 12
SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.1 Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . 43
12.2 Supplemental Indentures with Consent of Holders . . . . . . . . . . . . 44
ARTICLE 13
EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13.1 Counterparts and Formal Date. . . . . . . . . . . . . . . . . . . . . . 45
13.2 Language of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
SCHEDULE A - Special Notes, Series A
SCHEDULE B - Special Notes, Series B
<PAGE>
THIS NOTE INDENTURE made as of the 8th day of April, 1998
BETWEEN:
BENZ ENERGY LTD., a corporation continued under the laws
of the Yukon Territories having its registered office
in the City of Whitehorse in the Yukon Territories
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
MONTREAL TRUST COMPANY OF CANADA, a trust company
incorporated under the laws of Canada and having an
office in the City of Calgary in the Province of Alberta
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS the Corporation considers it necessary for its corporate purposes to
create and issue Notes in the manner provided herein; and
WHEREAS the Corporation is duly authorized to create and issue Notes to be
issued as provided herein; and
WHEREAS all necessary resolutions of the directors of the Corporation have
been duly passed and confirmed and other proceedings taken to make this Note
Indenture a valid and binding indenture in accordance with its terms; and
WHEREAS the foregoing recitals are made as representations and statements of
fact by the Corporation and not by the Trustee;
NOW THEREFORE THIS INDENTURE WITNESSETH and it is hereby covenanted, agreed
and declared as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Note Indenture, unless there is something in the subject matter or
context inconsistent therewith:
"AFFILIATE" has the meaning ascribed thereto in the BUSINESS
CORPORATIONS ACT (Yukon);
"AGENT" means Dominick & Dominick Securities Inc.;
"AUTHORIZED NEWSPAPER" means a newspaper, in the English language or
in an official language of the country of publication, customarily
published on each Business Day, whether or not published on Saturdays,
Sundays, or holidays, and of general circulation in each place in
connection with which the term is used or in the financial community
of each such place. Where successive publications are required to be
made in Authorized Newspapers, the successive publications may be made
in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day;
<PAGE>
-2-
"BANK ONE CREDIT FACILITY" means Texstar Petroleum, Inc.'s line of
credit with Bank One, Texas N.A. in effect at the date hereof and as
it may be increased, decreased, supplanted or amended from time to
time hereafter;
"BEARER NOTES" means Notes issued hereunder payable to bearer with
Coupons attached;
"BUSINESS DAY" means any day, other than Saturday, Sunday or any
statutory holiday in both the City of Toronto and any other relevant
place or places where any action is required or permitted to be
performed hereunder;
"CAPITALIZED LEASE OBLIGATION" means the amount of the liability under
any capital lease that, in accordance with Generally Accepted
Accounting Principles, is required to be capitalized and reflected as
a liability on the balance sheet of the relevant Person;
"CERTIFICATE OF THE CORPORATION" means a certificate signed in the
name of the Corporation by the Chairman, the President or a Vice
President and by the Secretary, the Treasurer, an Assistant Secretary
or an Assistant Treasurer or Controller of the Corporation, and may
consist of one or more instruments so executed;
"COMMON DEPOSITORY" means any common depositary appointed in respect
of any series of Notes, including any nominee of or successor thereto;
"CONVERTIBLE DEBENTURES" means, with respect to a particular series of
Special Notes, the series of Convertible Debentures of the Corporation
issuable upon the exercise or deemed exercise of such Special Notes,
which Convertible Debentures are issued pursuant to the Trust
Indenture;
"CORPORATION" includes any successor corporation to or of the party of
the first part which shall have complied with the provisions of
Article 8;
"COUNSEL" means a barrister or solicitor or firm of barristers and
solicitors retained by the Trustee or retained by the Corporation and
acceptable to the Trustee;
"COUPONS" means the interest coupons attached or appertaining to
Bearer Notes;
"DEBT" means of any Person means and includes all present and future
obligations of such Person, which shall include all obligations (i)
which in accordance with Generally Accepted Accounting Principles
shall be classified upon a balance sheet of such Person as liabilities
of such Person, (ii) for borrowed money, (iii) which have been
incurred in connection with the acquisition of Property (including,
without limitation, all obligations of such Person evidenced by any
debenture, bond, note, commercial paper or other similar security, but
excluding, in any case, obligations arising from the endorsement in
the ordinary course of business of negotiable instruments for deposit
or collection), (iv) secured by any Lien existing on Property owned by
such Person, even though such Person has not assumed or become liable
for the payment of such obligations, (v) 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, (vi) which are Capitalized Lease Obligations, (vii)
for all Guaranties, whether or not reflected in the balance sheet of
such Person and (viii) 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 (i) 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 (ii) 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;
<PAGE>
-3-
"DIRECTOR" means a director of the Corporation for the time being and
"Directors" means the board of directors of the Corporation or,
whenever duly empowered, the executive committee (if any) of the board
of directors of the Corporation for the time being, and reference to
action by the Directors means action by the directors as a board or
action by the executive committee of the board as a committee;
"EFFECTIVE DATE" means, with respect to a particular series of Special
Notes, the "Effective Date" as defined in the terms and conditions
attached to such Special Notes pursuant to this Indenture;
"ENCAP CREDIT FACILITY" means Texstar Petroleum, Inc.'s credit
facility with EnCap Energy Capital Fund III, LP in effect at the date
hereof and as it may be increased, decreased, supplanted or amended
from time to time hereafter;
"ESCROWED SUBSCRIPTION FUNDS" means, with respect to a particular
series of Special Notes, the "Escrowed Subscription Funds" as defined
in the terms and conditions attached to such Special Notes to this
Indenture;
"EVENT OF DEFAULT" has the meaning attributed to such term in section
6.1;
"EXERCISE DATE" means, with respect to a particular series of Special
Notes, the "Exercise Date" as defined in the terms and conditions
attached to such Special Notes pursuant to this Indenture;
"EXPIRY TIME" means, with respect to a particular series of Special
Notes, the "Expiry Time" as defined in the terms and conditions
attached to such Special Notes pursuant to this Indenture;
"EXTRAORDINARY RESOLUTION" has the meaning attributed to such term in
sections 9.12 and 9.15;
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means generally accepted
accounting principles in Canada and the United States, as applicable,
from time to time as applied by the Corporation and its Subsidiaries
in preparation of its financial statements;
"GLOBAL NOTE" means any global note representing any series of Notes
which has been duly executed by the Corporation, authenticated or
certified by the Trustee or its agent, and deposited with a Common
Depository;
"GUARANTY" means all obligations of any Person (other than
endorsements in the ordinary course of business of negotiable
instruments for deposit or collection) of such Person guaranteeing or
in effect guaranteeing any Debt, dividend or other obligation, of any
other Person (the "primary obligor") in any manner, whether directly
or indirectly, including without limitation all obligations incurred
through an agreement, contingent or otherwise, by such Person: (i) to
purchase such Debt or obligation or any Property or assets
constituting security therefor, or (ii) to advance or supply funds (1)
for the purchase or payment of such Debt or obligation, or (2) to
enable the recipient of such funds to maintain certain financial
conditions (e.g. agreed amount of working capital) under loan or
similar documents, or (iii) to lease Property or to purchase
securities or other Property or services primarily for the purpose of
assuring the owner of such Debt or obligation of the ability of the
primary obligor to make payment of the Debt or obligation, or (iv)
otherwise to assure the owner of the Debt or obligation of the primary
obligor against loss in respect thereof. For the purposes of all
computations made under this Indenture, a Guaranty in respect of any
Debt shall be deemed to be Debt equal to the principal amount and
accrued interest of such Debt which has been guaranteed, and a
Guaranty in respect of any other obligation or liability or any
dividend shall be deemed to be Debt equal to the maximum aggregate
amount of such obligation, liability or dividend.
"HYDROCARBON INTERESTS" means all rights, titles, interests and
estates in and to oil and gas leases, oil, gas and mineral leases, oil
and gas concession agreements, production sharing agreements,
association contracts and similar agreements, or other liquid or
gaseous hydrocarbon leases, mineral fee interests, overriding royalty
and royalty interests, net profit interests and production payment
interests, or which may arise under
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operating agreements, unit agreements or other contract rights,
including any reserved or residual interests of whatever nature and
without regard to whether such rights cover or exist with respect to
lands located within or without the United States.
"HYDROCARBONS" means oil, gas, casing head gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined therefrom and all other minerals.
"INDEPENDENT RESERVE REPORT" means one or more independent reservoir
engineering reports or other independent third party valuations of the
Corporation's and its Subsidiaries' Oil and Gas Properties or any
portion thereof which are presented to the Trustee by the Corporation
which are used in determining the Tangible Assets, each of which
reports shall be dated as of the end of the Corporation's most recent
fiscal year or as of a later date, at the Corporation's option;
"INDENTURE LEGISLATION" has the meaning attributed to such term in
section 11.1;
"INTEREST PAYMENT DATE" when used with respect to any Note, means the
Stated Maturity of an instalment of interest on such Note;
"LIEN" means any mortgage, charge, pledge, lien, security interest or
encumbrance of any kind whatsoever, including any interest in Property
securing an obligation owed to, or a claim by, a Person other than the
owner of the Property, whether such interest is based on the common
law, statute or contract, and including but not limited to the
security interest lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations,
exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property. For the purposes of this Indenture,
the Corporation or its Subsidiary shall be deemed to be the owner of
any Property which it has acquired or holds subject to a conditional
sale agreement, financing lease or other arrangement pursuant to which
title to the Property has been retained by or vested in some other
Person for security purposes;
"LONG TERM DEBT" has the meaning specified in the Corporation's and
its Subsidiaries' audited financial statements or their audited
consolidated financial statements, as the case may be, and shall
include any amounts outstanding under the Bank One Credit Facility and
the EnCap Credit Facility;
"MARKETABLE SECURITIES" means any security of any Person listed,
admitted to trading or quoted on any nationally recognized stock
exchange or quotation system in Canada or the United States, or any
other market or quotation system approved by the Trustee;
"MATERIAL SUBSIDIARY" means a Subsidiary of a Person which as of the
last audited consolidated financial statements of the Person
constituted more than 15% of the consolidated assets of the Person or
15% of the consolidated revenue of the Person for the 12 months then
ended;
"MATURITY" when used with respect to any Note, means the date on which
the principal of such Note or an instalment of principal becomes due
and payable as therein or herein provided, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption,
notice of option to elect repayment or otherwise;
"NOTE CERTIFICATE" means a certificate issued to evidence Notes;
"NOTES" means Notes issued hereunder, including the Special Notes
Series A, Special Notes Series B and Special Notes Series C;
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"NOTEHOLDERS" or "HOLDERS" means, with respect to Registered Notes,
the Persons for the time being entered in the registers hereinafter
mentioned as holders thereof and, with respect to Bearer Notes, means
the Persons who are the possessors of such Notes;
"NOTEHOLDERS' REQUEST" means an instrument signed in one or more
counterparts by the Holders of not less than 25% in principal amount
of the outstanding Notes requesting the Trustee to take the action or
proceeding specified therein;
"OIL AND GAS PROPERTIES" means Hydrocarbon Interests; any Properties
now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and
declarations of pooled units and the units created thereby (including
without limitation all units created under orders, regulations and
rules of any governmental body or agency having jurisdiction) which
may affect all or any portion of the Hydrocarbon Interests; all
operating agreements, contracts and other agreements which relate to
any of the Hydrocarbon Interests or the production, sale, purchase,
exchange or processing of Hydrocarbons from or attributable to such
Hydrocarbon Interests; all Hydrocarbons in and under and which may be
produced and saved or attributable to the Hydrocarbon Interests, the
lands covered thereby and all oil in tanks and all rents, issues,
profits, proceeds, products, revenues and other income from or
attributable to the Hydrocarbon Interests; all tenements,
hereditaments, appurtenances and Properties in anywise appertaining,
belonging, affixed or incidental to the Hydrocarbon Interests,
Properties, rights, titles, interests and estates described or
referred to above, including any and all Property, real or personal,
now owned or hereafter acquired and situated upon, used, held for use
or useful in connection with the operating, working or development of
any of such Hydrocarbon Interests (excluding drilling rigs, automotive
equipment or other personal property which may be on such premises for
the purpose of drilling a well or for other similar temporary uses)
and including any and all oil wells, gas wells, injection wells or
other wells, buildings, structures, fuel separators, liquid extraction
plants, plant compressors, pumps, pumping units, field gathering
systems, tanks and tank batteries, fixtures, valves, fittings,
machinery and parts, engines, boilers, meters, apparatus, equipment,
appliances, tools, implements, cables, wires, towers, casing, tubing
and rods, surface leases, rights-of-way, easements and servitudes
together with all additions, substitutions, replacement, accessions
and attachments to any and all of the foregoing;
"PAYING AGENT" means any Person (including the Corporation acting as
Paying Agent) authorized by the Corporation to pay the principal of
(or premium, if any) or interest on any Notes on behalf of the
Corporation;
"PERSON" means any individual, partnership, limited partnership, joint
venture, syndicate, sole proprietorship, company or corporation with
or without share capital, unincorporated association, trust, trustee,
executor, administrator or other legal personal representative,
government or governmental authority or entity, however designated or
constituted;
"PLACE OF PAYMENT" means, when used with respect to the Notes of or
within any series, the place or places where the principal of (and
premium, if any), and interest on such Notes are payable as specified,
as contemplated by sections 2.2 and 5.5;
"PROPERTY" or "PROPERTIES" means any interest in any kind of property
or asset, whether real, personal or mixed, or tangible or intangible,
and including any Oil and Gas Property;
"REGISTERED NOTES" means Notes issued hereunder payable as to
principal and interest to the person in whose name such Notes are
registered;
"SPECIAL NOTES" means the Special Notes Series A and the Special Notes
Series B;
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"SPECIAL NOTES SERIES A" means the Special Notes Series A issued
hereunder and in accordance with Schedule "A";
"SPECIAL NOTES SERIES B" means the Special Notes Series B issued
hereunder and in accordance with Schedule "B";
"STATED MATURITY" when used with respect to any Note or any instalment
of principal thereof or interest thereon, means the date specified in
such Note or a Coupon representing such instalment of interest as the
fixed date on which the principal of such Note or such instalment of
principal or interest is due and payable;
"SUBSIDIARY" means any corporation more than 50% of the outstanding
voting shares of which are owned, directly or indirectly, by the
Corporation or by one or more Subsidiaries, or by the Corporation and
one or more Subsidiaries. The term "voting shares" means shares having
general voting power under ordinary circumstances to elect at least a
majority of the board of directors (irrespective of whether or not
shares of any other class or classes shall have or might have voting
power by reason of the happening of any contingency);
"SUCCESSOR CORPORATION" has the meaning attributed to such term in
section 8.1;
"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;
(ii) cash held by the Corporation or its Subsidiaries;
(iii) the fair market value of Marketable Securities held by the
Corporation or its Subsidiaries; and
(iv) the net book value of Oil and Gas Properties that do not
constitute Proved Reserves, 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;
"TAXES" means all taxes of any kind or nature whatsoever including,
without limitation, all federal, provincial, municipal and local
taxes, income taxes, capital taxes, levies, imposts, stamp taxes,
royalties, duties, charges to tax, value added taxes, commodity taxes,
goods and services taxes, excise taxes, business taxes, property taxes
and withholding taxes charged, levied, collected, withheld or assessed
by any relevant authority within any jurisdiction in Canada having
power to tax together with any penalties, fines, additions to tax and
interest thereon and any instalments in respect thereof and, for
greater certainty, does not include taxes charged, levied, collected,
withheld or assessed by an authority outside Canada;
"THIS INDENTURE", "THIS NOTE INDENTURE", "HERETO", "HEREBY",
"HEREUNDER", "HEREOF", "HEREIN" and similar expressions refer to this
indenture and not to any particular Article, section, subsection,
paragraph, clause, subdivision or other portion hereto and include any
and every schedule and supplemental indenture; and "supplemental
indenture" and "indenture supplemental hereto" include any and every
instrument supplemental or ancillary hereto or in implement hereof;
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"TRUST INDENTURE" means the Trust Indenture dated as of March 25, 1998
between the Corporation and the Trustee providing for the issue of
debentures in series;
"TRUSTEE" means the party of the second part and its successors for the
time being in the trusts hereby created; and
"WRITTEN ORDER OF THE CORPORATION" and "WRITTEN REQUEST OF THE
CORPORATION" mean, respectively, an order or a request signed in the name
of the Corporation by the Chairman, the President or a Vice-President and
by the Secretary, the Treasurer, an Assistant Secretary or an Assistant
Treasurer or Controller of the Corporation, and may consist of one or
more instruments so executed.
Words importing the singular include the plural and vice versa and words
importing the masculine gender include the feminine gender and vice versa.
1.2 MEANING OF "OUTSTANDING" FOR CERTAIN PURPOSES
Every Note certified and delivered by or on behalf of the Trustee hereunder
shall be deemed to be outstanding until it shall be cancelled or delivered to
the Trustee for cancellation, or a new Note shall be issued in substitution
therefor under section 2.14 or 2.15, or moneys for the payment thereof shall
be set aside under Article 6, provided that:
(a) where a new Note has been issued in substitution for a Note which
has been lost, stolen or destroyed, only one of such Notes shall
be counted for the purpose of determining the aggregate principal
amount of Notes outstanding;
(b) for the purposes of any provision of this Indenture entitling
Holders of outstanding Notes to vote, sign consents, requests or
other instruments or take other action under this Indenture, Notes
owned directly or indirectly, legally or equitably, by the
Corporation, any Subsidiary or any Affiliate shall be disregarded,
except that:
(i) for the purpose of determining whether the Trustee shall be
protected in relying on any such vote, consent, request or
other instrument or other action, only Notes of which the
Trustee has notice that they are so owned shall be so
disregarded; and
(ii) Notes so owned which have been pledged in good faith other
than to the Corporation, a Subsidiary or an Affiliate shall
not be so disregarded if the pledgee shall establish to the
satisfaction of the Trustee the pledgee's right to vote
such Notes in the pledgee's discretion free from the
control of the Corporation, a Subsidiary or an Affiliate.
1.3 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Indenture into Articles, sections, subsections and
paragraphs, the provision of a table of contents and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Indenture.
1.4 STATUTE REFERENCES
Unless the context otherwise requires, any reference in this Indenture to a
statute shall be deemed to be a reference to such statute as amended,
re-enacted or replaced from time to time.
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1.5 MONETARY REFERENCE
Unless the context otherwise requires, any reference in this Indenture to
"Dollars", "dollars" or the sign shall be deemed to be a reference to lawful
money of the United States.
1.6 DAY NOT A BUSINESS DAY
In the event that any day on or before which any action is required to be
taken hereunder is not a Business Day, then such action shall be required to
be taken on or before the requisite time on the first Business Day thereafter.
1.7 INVALIDITY OF PROVISIONS
Each of the provisions contained in this Indenture or the Notes is distinct
and severable and a declaration of invalidity or unenforceability of any such
provision by a court of competent jurisdiction shall not affect the validity
or enforceability of any other provision hereof or thereof.
1.8 GOVERNING LAW
This Indenture and the Notes shall be governed by and construed in accordance
with the laws of the Province of Ontario and the laws of Canada applicable
therein and shall be treated in all respects as Ontario contracts.
ARTICLE 2
THE NOTES
2.1 NO FIXED LIMITATION
The aggregate principal amount of Notes which may be issued under this
Indenture is unlimited but Notes may be issued hereunder only upon the terms
and subject to the conditions herein provided.
2.2 ISSUANCE IN SERIES
The Notes may be issued in one or more series, subject to compliance with the
provisions and conditions hereinafter set forth. Subject to the provisions
hereof, the Notes of each such series shall bear such date or dates, and
mature on such date or dates, shall bear interest at such rate or rates, may
be issued in such denominations, may be issued in global or definitive form,
may be issued in bearer or registered form, may be redeemable before maturity
in such manner and subject to payment of such premium, or without premium,
may be payable as to principal, interest and premium, if any (calculated in
such manner or with reference to such index, formula or other method), at
such place or places and in such currency or currencies, may provide for such
sinking fund, if any, may contain such provisions for the interchange or
transfer of Notes of different denominations and forms, may have attached
thereto and/or issued therewith warrants entitling the Holders to subscribe
for or purchase shares or other securities of the Corporation upon such
terms, may give the Holders thereof the right to convert the same into shares
or other securities of the Corporation upon such terms and may contain such
other provisions, not inconsistent with the provisions of this Indenture, as
may be determined by resolution of the Directors passed at or prior to the
time of issue thereof and expressed in an indenture supplemental hereto
providing for the issuance of the Notes of such series and (to such extent as
the Directors may deem appropriate) in the Notes of such series. At the
option of the Corporation the maximum principal amount of Notes of any series
may be limited, such limitation to be expressed in the supplemental indenture
providing for the issuance of the Notes of such series and/or in the Notes of
such series.
Whenever any series of Notes has been authorized they may be from time to
time executed by the Corporation and delivered to the Trustee, and shall be
certified by the Trustee or its designated agent and delivered by the Trustee
or its designated agent to or to the order of the Corporation upon receipt by
the Trustee of:
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(a) a certified resolution of the Directors authorizing issuance and
requesting certification and delivery of a specified principal
amount of Notes of such subsequent series;
(b) a Written Order of the Corporation for the certification and
delivery of such Notes specifying the principal amount of the
Notes so to be certified and delivered;
(c) an opinion of Counsel in favour of the Trustee to the effect that
all legal requirements in connection with the issue of such Notes
have been complied with;
(d) a Certificate of the Corporation that, so far as is known to the
persons signing the same, it is not in default in the performance
of any of its covenants herein contained and that it has complied
with the requirements of this Indenture in connection with the
issue of the Notes; and
(e) such Certificate of the Corporation, if any, as may be required by
any provision hereof or of Indenture Legislation in connection
with the issue, certification and delivery of the Notes.
2.3 ISSUANCE OF SPECIAL NOTES SERIES A AND B
Notwithstanding that a supplemental indenture will provide for the issuance
of the Notes in series pursuant to section 2.2 above, the following series of
Special Notes in the aggregate principal amount of up to US$12,500,000 are
hereby created and the terms and conditions attached to such Special Notes
are provided for in the following Schedules hereto:
(a) 9% Special Notes, Series A - Schedule A
(b) 9% Special Notes, Series B - Schedule B
2.4 FORM OF NOTES
The Notes of any series may be of different denominations and forms (either
Bearer Notes or Registered Notes or both), may be issued in global or
definitive form and may contain such variations of tenor and effect, not
inconsistent with the provisions of this Indenture, as are incidental to such
differences of denomination and form including variations in the provisions
for the exchange of Notes of different denominations or forms and in the
provisions for the registration or transfer of Notes and any series of Notes
may consist of Notes having different dates of issue, different dates of
maturity, different rates of interest and/or different redemption prices, if
any, and/or different sinking fund provisions, if any, and/or partly of Notes
carrying the benefit of a sinking fund and partly of Notes with no sinking
fund provided therefor.
All series of Notes which may at any time be issued hereunder and the
Coupons, if any, appertaining thereto and the certificate of the Trustee
endorsed on such Notes may be in such form or forms as the Directors shall by
resolution determine at the time of the first issue of any series or part of
a series of such Notes and as shall be approved by the Trustee whose approval
shall be conclusively evidenced by the certification thereof.
The Notes of any series may be engraved, lithographed, printed, mimeographed
or typewritten, or partly in one form and partly in another, as the
Corporation may determine; provided that if the Notes of any series are
issued in mimeographed or typewritten form, the Corporation, on demand of any
Holder or Holders thereof, shall make available within a reasonable time
after such demand, without expense to such Holder or Holders, engraved,
lithographed or printed Notes in exchange therefor.
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2.5 EXECUTION OF NOTES
The Notes shall be signed (either manually or by facsimile signature) by any
one of the Chairman, the President, a Vice President, the Secretary, the
Treasurer, an Assistant Secretary or an Assistant Treasurer or Controller of
the Corporation. A facsimile signature upon any of the Notes shall for all
purposes of this Indenture be deemed to be the signature of the individual
whose signature it purports to be and to have been signed at the time such
facsimile signature is reproduced. Notwithstanding that any individual whose
signature (either manual or in facsimile) may appear on the Notes is not, at
the date of this Indenture or at the date of the Notes or at the date of the
certifying and delivery thereof the Chairman, the President, a Vice
President, the Secretary, the Treasurer, an Assistant Secretary or an
Assistant Treasurer or Controller, as the case may be, of the Corporation,
such Notes shall be valid and binding upon the Corporation and entitled to
the benefits of this Indenture.
2.6 CERTIFICATION
No Note shall be issued or, if issued, shall be obligatory or shall entitle
the Holder thereof to the benefits of this Indenture until it has been
certified by or on behalf of the Trustee substantially in the form approved
by the Trustee, whose approval shall be conclusively evidenced by the
certification thereof. Such certificate on any Note shall be conclusive
evidence that such Note is duly issued and is a valid obligation of the
Corporation.
The certificate of the Trustee on any Note shall not be construed as a
representation or warranty by the Trustee as to the validity of this
Indenture or of the Notes (except the due certification thereof) and the
Trustee shall in no respect be liable or answerable for the use made of the
Notes or any of them or the proceeds thereof.
2.7 CONCERNING INTEREST
(a) Any Coupons which have matured at the date of delivery by the
Trustee of any Bearer Note shall be detached from the same and
cancelled before delivery, unless such Bearer Note is being
issued in exchange or in substitution for another Bearer Note
and such matured Coupons represent unpaid interest to which the
Holder of such exchanged or substituted Note is entitled.
(b) Every Registered Note of any series issued prior to the first
Interest Payment Date for such series in exchange or
substitution for, or upon the transfer of, the whole or any
part of one or more other Notes of the same series, bearing the
same rate of interest and having the same Interest Payment Date
and Stated Maturity, shall be dated as of the date from which
interest is payable on such other Note or Notes and every
Registered Note issued after the first Interest Payment Date
for such series in exchange or substitution for, or upon the
transfer of, the whole or any part of one or more other Notes
of the same series bearing the same rate of interest and having
the same Interest Payment Dates and Stated Maturity, shall be
dated as of the Interest Payment Date next preceding the date
of certification thereof to which interest has been paid on the
Notes of such series, unless the date of certification is an
Interest Payment Date to which interest has been paid, in which
case it shall be dated as of the date of certification. Every
Registered Note shall bear interest from its date. Nevertheless
in the case of any Registered Note issued originally, or upon
exchange, substitution, transfer or otherwise, if the dating of
such Note as of the actual date of certification would result
in the Holder either losing or gaining interest, the Trustee
shall date such Note such date, other than the actual date of
certification, as will prevent any such loss or gain, and such
Note shall bear interest in accordance with the foregoing
provisions of this section 2.7.
2.8 NOTES TO RANK EQUALLY
The Notes may be issued in such amounts, to such Persons, on such terms not
inconsistent with the provisions of this Indenture, and either at par or at a
discount or at a premium as the Directors may determine. The Notes shall be
direct obligations of the Corporation, shall rank pan passu without
discrimination, preference or priority with one another
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and with other unsecured and unsubordinated indebtedness for borrowed money
of the Corporation. Each Note as soon as issued shall, subject to the terms
hereof, be equally and rateably entitled to the benefits hereof as if all the
Notes had been issued and negotiated simultaneously.
2.9 REGISTRATION OF NOTES
(a) The Corporation shall cause to be kept by and at the principal
office of the Trustee in the city of Calgary a central register
and, in such other place or places by the Trustee or by such
other registrar or registrars, if any, as the Corporation with
the approval of the Trustee may designate, branch registers in
which shall be entered the names and latest known addresses of
the Holders of Registered Notes and the other particulars, as
prescribed by law, of the Notes held by them respectively and
of all transfers of Registered Notes. Such registration shall
be noted on the Notes by the Trustee or other registrar. No
transfer of a Registered Note shall be effective as against the
Corporation unless made on one of the appropriate registers by
the Holder of such Registered Note or his executors or
administrators or other legal representatives or his or their
attorney duly appointed by an instrument in form and execution
satisfactory to the Trustee and upon compliance with such
requirements as the Trustee or other registrar may prescribe,
and unless such transfer shall have been duly noted on such
Note by the Trustee or other registrar.
(b) The registers referred to in this section shall at all
reasonable times be open for inspection by the Corporation, the
Trustee and any Noteholder.
(c) The Holder of a Registered Note may at any time and from time to
time have such Note transferred at any of the places at which a
register is kept pursuant to the provisions of this section in
accordance with such reasonable regulations as the Trustee may
prescribe. The Holder of a Registered Note may at any time and
from time to time have the registration of such Note transferred
from the register in which the registration thereof appears to
another register maintained in another place authorized for that
purpose under the provisions of this Indenture upon payment of a
reasonable fee to be fixed by the Trustee.
(d) Neither the Corporation nor the Trustee nor any registrar shall be
required to transfetor exchange any Registered Notes on any
Interest Payment Date or during the 15 Business Days immediately
preceding any Interest Payment Date.
(e) None of the Trustee, any registrar for any of the Registered Notes
and the Corporation shall be charged with notice of or be bound to
see to the execution of any trust, whether express, implied or
constructive, in respect of any Registered Note and may transfer
any Registered Note on the direction of the Holder thereof,
whether named as trustee or otherwise, as though that Person were
the beneficial owner thereof.
(f) Except in the case of the central register required to be kept at
the city of Calgary, the Corporation shall have power at any time
to close any branch register and in that event it shall transfer
the records thereof to another existing register or to a new
register and thereafter such Notes shall be deemed to be
registered on such existing or new register, as the case may be.
In the event that the register in any place is closed and the
records transferred to a register in another place, notice of such
change shall be given to the Holders of the Registered Notes
registered in the register so closed and the particulars of such
change shall be recorded in the central register required to be
kept in the city of Calgary.
(g) Every registrar shall, when requested to do so by the Corporation
or the Trustee, furnish the Corporation or the Trustee, as the
case may be, with a list of the names and addresses of the Holders
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of Registered Notes showing the principal amounts and serial
numbers of such Notes held by each Holder.
2.10 PAYMENT OF PRINCIPAL AND INTEREST IN RESPECT OF REGISTERED NOTES
(a) As the interest on Registered Notes of any series becomes due
(except interest payable at Maturity which may be paid upon
presentation and surrender of such Notes for payment), the
Corporation, at least three days prior to each date on which
interest on such Notes becomes due, shall forward or cause to be
forwarded by first class mail, postage prepaid, (or in the event
of mail service interruption by such other means as the Trustee
and the Corporation shall determine to be appropriate) to the
Holder for the time being at his address appearing on the
appropriate register hereinbefore mentioned a cheque for such
interest (less any tax required by law to be deducted) payable to
the order of such Holder and negotiable at par at each of the
places at which interest upon such Registered Notes is payable.
The forwarding of such cheque shall satisfy and discharge the
liability for the interest on such Registered Notes to the extent
of the sum represented thereby (plus the amount of any tax
deducted as aforesaid) unless such cheque is not paid on
presentation. In the event of the non-receipt of such cheque by
the Holder or the loss or destruction thereof, the Corporation,
upon being furnished with evidence of such non-receipt, loss or
destruction and an indemnity reasonably satisfactory to it, shall
issue or cause to be issued to such Holder a replacement cheque
for the amount of such cheque.
(b) Where Registered Notes are registered in more than one name, the
principal and interest from time to time payable in respect
thereof shall be paid by cheque payable to the order of all such
Holders, unless the Corporation has received written instructions
from them to the contrary, and the receipt of any one of such
Holders therefor shall be a valid discharge to the Trustee, any
registrar of Notes and the Corporation.
2.11 PAYMENT OF PRINCIPAL AND INTEREST IN RESPECT OF BEARER NOTES
(a) Interest payments in respect of Bearer Notes of any series shall
be made (less any tax required by law to be deducted) against
presentation and surrender of the appropriate Coupons at the place
or places specified with respect to such series.
(b) Any payment of principal in respect of a Bearer Note shall be made
against presentation and surrender of such Bearer Note, together
with all unmatured Coupons (if any) appertaining thereto, failing
which the amount of the missing unmatured Coupons will be deducted
from the principal amount due for payment, at the place or places
specified with respect to such series. Amounts of principal so
deducted will be paid against surrender of the relevant missing
Coupons within a period of six years from the date upon which such
amount would otherwise have been payable.
(c) Interest payable in respect of any interest payment which is in
default shall be paid to the Holder of the Coupon representing
such interest payment and interest payable in respect of any other
amount in default shall be paid to the Holder of the Bearer Note
in respect of which such payment is due.
2.12 OWNERSHIP OF REGISTERED NOTES
(a) The Person in whose name any Registered Note shall be registered
shall be deemed to be the owner thereof for all purposes of this
Indenture and payment of or on account of the principal of and
interest on such Registered Note shall be made only to or upon the
order in writing of the Holder thereof and such payment shall be a
complete discharge to the Trustee, any registrar of Notes, the
Corporation and any Paying Agent for the amounts so paid.
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(b) The Holder for the time being of any Registered Note shall be
entitled to the principal, interest and premium, if any, evidenced
by such Registered Note, free from all equities or rights of
set-off or counterclaim between the Corporation and the original
or any intermediate Holder thereof (except any equities of which
the Corporation is required to take notice by law) and all Persons
may act accordingly and a transferee of a Registered Note shall,
after the appropriate form of transfer is lodged with the Trustee
or other registrar of Notes and upon compliance with all other
conditions in that behalf required by this Indenture or by any
conditions contained in such Registered Note or by law, be
entitled to be entered on the appropriate register or on any one
of the appropriate registers as the owner of such Registered Note
free from all equities or rights of set-off or counterclaim
between the Corporation and his transferor or any previous Holder
thereof, save in respect of equities of which the Corporation is
required to take notice by law.
2.L3 NEGOTIABILITY AND OWNERSHIP OF BEARER NOTES AND COUPONS
(a) Bearer Notes and Coupons shall be negotiable and title thereto
shall pass by delivery.
(b) Except as may be ordered by a court of competent jurisdiction or
as required by law, the Corporation and the Trustee may deem and
treat the bearer of any Bearer Note or Coupon as the absolute
owner thereof for all purposes and none of the Corporation, the
Trustee or any Paying Agent shall be affected by any notice to the
contrary.
(c) The Holder of any Bearer Note and the bearer of any Coupon shall
be entitled to the principal, interest or premium, if any,
evidenced by such instrument free from all equities or rights of
set-off or counterclaim between the Corporation and the original
or any intermediate or subsequent Holder or bearer thereof(except
any equities of which the Corporation is required to take notice
of by law) and all persons may act accordingly and the receipt of
any such Holder or bearer for any such principal or interest shall
be a complete discharge to the Corporation and the Trustee for the
same and none of the Corporation, the Trustee or any Paying Agent
shall be bound to inquire into the title of any such Holder or
bearer.
2.14 EXCHANGE OF NOTES
(a) Bearer Notes may be exchanged for Registered Notes and Registered
Notes may be exchanged for Bearer Notes (provided, in either case,
that such Notes are issuable), and Notes of any denomination may
be exchanged for Notes of any other authorized denomination or
denominations, any such exchange to be for Notes of an equivalent
aggregate principal amount of Notes of the same series, carrying
the same rate of interest and having the same Stated Maturity and
the same redemption and sinking fund provisions, if any. Exchanges
of Notes may be made at the principal offices of the Trustee in
the city of Calgary. Any Notes tendered for exchange shall be
surrendered to the Trustee and shall be cancelled. The Corporation
shall execute, and the Trustee shall certify, all Notes necessary
to carry out such exchanges.
(b) Except as otherwise provided herein, upon any exchange of Bearer
Notes for Registered Notes or Registered Notes for Bearer Notes or
Notes of any denomination for Notes of any other authorized
denominations and upon any transfer of Registered Notes, the
Trustee or other registrar of Notes may make a sufficient charge
to reimburse it for any stamp tax, security transfer tax or other
governmental charge required to be paid, and in addition a
reasonable charge for its services for each Note exchanged or
transferred, and payment of such charges shall be made by the
party requesting such exchange or transfer as a condition
precedent thereto.
(c) Notwithstanding the foregoing, no charge (other than for insurance
on any Notes forwarded by mail) shall be made by the Trustee, any
registrar of Notes or the Corporation (i) for any exchange,
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registration or transfer of any Note applied for within a period
of 30 days from the date hereof; or (ii) for any exchange, after
such period, of Notes for Notes in lesser denominations; or (iii)
for Convertible Debentures, provided that the Notes surrendered
for exchange shall not have been issued as a result of any
previous exchange, other than an exchange pursuant to clause (i)
of this subsection or section 3.7.
(d) Bearer Notes surrendered for exchange shall be accompanied by all
unmatured Coupons appertaining thereto and Bearer Notes issued on
an exchange shall have detached therefrom and cancelled all
Coupons appertaining thereto which have matured and in respect of
which the interest has been paid. Each Note delivered under this
Indenture in exchange for or in lieu of any other Note shall carry
the rights to principal and interest accrued and unpaid, and to
accrue, which were carried by such other Note.
(e) Neither the Corporation, the Trustee nor any other registrar of
Notes shall be required to make exchanges of Notes on any Interest
Payment Date or during the 15 Business Days immediately preceding
any Interest Payment Date.
2.15 REPLACEMENT OF NOTES AND COUPONS
If any of the Notes or Coupons shall become mutilated or be lost, stolen or
destroyed and in the absence of notice that such Notes have been acquired by a
bona fide purchaser within the meaning of the BUSINESS CORPORATIONS ACT (Yukon),
the Corporation in its discretion may issue, and thereupon the Trustee shall
certify and deliver, a new Note or Coupon upon surrender and cancellation of the
mutilated Note or Coupon, or, in the case of a lost, stolen or destroyed Note or
Coupon, in lieu of and in substitution for the same, and the substituted Note or
Coupon shall be in a form approved by the Trustee and shall be entitled to the
benefits of this Indenture equally with all other Notes or Coupons issued or to
be issued hereunder. Each Note delivered under this Indenture in exchange for
or in lieu of any other Note shall carry the rights to principal and interest
accrued and unpaid, and to accrue, which were carried by such other Note. In
case of loss, theft or destruction the applicant for a new Note or Coupon shall
furnish to the Corporation and to the Trustee such evidence of such loss, theft
or destruction as shall be satisfactory to them in their discretion and shall
also furnish an indemnity in amount and form satisfactory to them in their
discretion. The applicant shall pay all expenses incidental to the issuance of
any such new Note or Coupon.
2.16 INTERIM NOTES
Pending delivery to the Trustee of definitive Notes of any series or part of a
series, the Corporation may execute in lieu thereof (but subject to the same
provisions, conditions and limitations), and the Trustee may certify, interim
printed, mimeographed or typewritten Notes, in such form and in such
denominations as may be approved by the Trustee and the Chairman, the President
or a Vice President of the Corporation (whose certification or signature, either
manual or in facsimile, as the case may be, on any such interim Notes shall be
conclusive evidence of such approval) entitling the Holders thereof to
definitive Notes of such series or part of a series in any authorized
denominations when the same are ready for delivery, without expense to such
Holders, but the total amount of interim Notes of any series or part of a series
so issued shall not exceed the aggregate principal amount of Notes of such
series or part of a series for the time being authorized. Forthwith after the
issuance of any such interim Notes the Corporation shall cause to be prepared
the appropriate definitive Notes for delivery to the Holders of such interim
Notes.
Interim Notes which have been duly issued shall, until exchanged for definitive
Notes, entitle the Holders thereof to rank for all purposes as Noteholders and
otherwise in respect of this Indenture to the same extent and in the same manner
as though such exchange had actually been made. When exchanged for definitive
Notes such interim Notes shall forthwith be cancelled by the Trustee. Any
interest paid upon interim Notes shall be noted thereon by the Paying Agent at
the time of payment unless paid by cheque to the Holders thereof.
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2.17 OPTION OF HOLDER AS TO PLACE OF PAYMENT
Except as otherwise provided herein, all sums which may at any time become
payable, whether at Maturity, upon retraction of Escrowed Subscription Funds,
on a declaration by the Trustee pursuant to section 6.3 or on redemption or
otherwise, on account of any Note or Coupon or any principal, interest or
premium shall be payable at the option of the Holder or the bearer thereof at
any of the places at which the principal of and interest or premium (if any)
on such Note or Coupon are payable.
2.18 PAYMENT AGREEMENTS FOR NOTES
Notwithstanding anything contained herein, the Corporation may enter into an
agreement with the Holder of a Registered Note or with the Person for whom
such Holder is acting as nominee providing for the payment to such Holder of
the principal of and interest or premium (if any) on such Note at a place or
places other than the place or places specified herein or any supplemental
indenture and in such Note as the place or places for such payment. Any
payment of the principal of and interest or premium (if any) on any such
Registered Note at such other place or places pursuant to such agreement
shall, notwithstanding any other provision of this Indenture or any
supplemental indenture, be valid and binding on the Corporation, the Trustee
and the Holders of Notes.
ARTICLE 3
REDEMPTION AND PURCHASE FOR CANCELLATION OF THE NOTES
3.1 GENERAL
The Corporation, when not in default hereunder, shall have the right at its
option to redeem, either in whole at any time or in part from time to time
before Maturity, Notes issued hereunder of any series or part of a series
which by their terms are made so redeemable at such rate or rates of premium,
if any, and at such date or dates and on such terms and conditions as shall
have been determined at the time of the issue of such Notes and as shall be
expressed in this Indenture and/or in the Notes and/or in the supplemental
indenture authorizing or providing for the issue thereof.
"Premium" as used in this Article 3 with reference to any Note shall mean the
excess of the then applicable redemption price of such Note (excluding
interest) over the principal amount of such Note.
3.2 NOTICE OF REDEMPTION
Notice of intention to redeem any Note shall be given by or on behalf of the
Corporation to the Holders of the Note which are to be redeemed, not more
than 60 days nor less than 30 days prior to the date fixed for redemption, in
the manner provided in section 10.2 hereof. Every notice of redemption shall
designate the series and Stated Maturity of the Notes so called for
redemption, and unless all of the Notes or all of the Notes of a series or
all of the Notes of one Stated Maturity so designated for the time being
outstanding are to be redeemed, state the designating numbers of the Notes so
called for redemption and in case a Note is to be redeemed in part only that
part of the principal amount thereof so to be redeemed, and shall specify the
redemption date, the redemption price and the place or places of payment and
shall state that all interest thereon shall cease from and after the said
date.
3.3 NOTES DUE ON REDEMPTION DATES
Notice having been given as aforesaid, all the Notes so called for redemption
shall thereupon become due and payable at the redemption price, on the
redemption date specified in such notice, at any of the places where the
principal of such Notes is expressed to be payable in the same manner and
with the same effect as if it were the Stated Maturity specified in such
Notes respectively, anything therein or herein to the contrary
notwithstanding, and from and after such redemption date, if the moneys
necessary to redeem such Notes shall have been deposited as provided in
section
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3.4 and the Trustee shall have been furnished with affidavits or
other proof satisfactory to it as to the publication and/or mailing of such
notices, interest on the said Notes shall cease and Coupons for interest to
accrue after such redemption date on said Notes shall become and be void.
In case any question shall arise whether any notice has been given as above
provided and such deposit made, such question shall be decided by the Trustee
whose decision shall be final and binding upon all parties in interest.
3.4 DEPOSIT OF REDEMPTION MONIES
Such redemption shall be provided for by the Corporation irrevocably
depositing with the Trustee or any Paying Agent to the order of the Trustee
in trust for the Holders of the Notes called for redemption, before the
redemption date specified in such notice, such sums as may be sufficient to
pay the redemption price of such Notes including accrued interest and
premium, if any, on the Notes so called for redemption to the date fixed for
redemption. The Corporation shall also deposit with the Trustee if required
by it a sum sufficient to pay any charges or expenses which may be incurred
by the Trustee in connection with such redemption. From the sums so deposited
the Trustee shall pay or cause to be paid to the Holders of such Notes so
called for redemption, upon surrender of such Notes with all unmatured
Coupons, if any, appertaining thereto (or without such surrender if the
registered Holder of the Notes to be redeemed or the person for whom such
registered Holder is acting as nominee has entered into an agreement with the
Corporation to that effect) the principal, interest and premium, if any, to
which they are respectively entitled on redemption. Provided that in the case
of Bearer Notes the accrued interest as represented by Coupons matured prior
to, or on, the redemption date shall continue to be payable (but without
interest thereon, unless the Corporation shall make default in the payment
thereof upon demand) to the respective bearers of such Coupons upon
presentation and surrender thereof.
3.5 CANCELLATION AND DESTRUCTION OF NOTES AND COUPONS
All Notes surrendered for cancellation upon any redemption under this
Article, together with the unmatured Coupons, if any, thereto appertaining,
shall forthwith be delivered to the Trustee and shall be cancelled by it and
no Notes shall be issued in substitution therefor.
All Notes and Coupons which shall have been delivered to and cancelled by the
Trustee shall be destroyed by the Trustee and if required by the Corporation
the Trustee shall furnish to it a destruction certificate setting out the
designating numbers and denominations of the Notes so destroyed.
3.6 SURRENDER OF NOTES FOR CANCELLATION
If the principal moneys of Notes issued hereunder shall become payable by
redemption or otherwise before the Stated Maturity thereof; the person
presenting such Note for payment must surrender the same for cancellation
together with all unmatured Coupons, if any, appertaining thereto, the
Corporation nevertheless paying the interest accrued and unpaid thereon if
the date fixed for payment be not an Interest Payment Date.
3.7 PURCHASE OF NOTES FOR CANCELLATION
At any time when the Corporation is not in default hereunder it may purchase
all or any of the Notes in the market (which shall include purchase from or
through an investment dealer or a firm holding membership on a recognized
stock exchange) or by invitation for tenders or by private contract and, in
each case, at any price. All Notes so purchased, together with the unmatured
Coupons (if any) appertaining thereto, shall forthwith be delivered to the
Trustee and shall be cancelled by it and, except as hereinafter provided, no
Notes shall be issued in substitution therefor.
If and upon an invitation for tenders, more Notes are tendered at the same
lowest price that the Corporation is prepared to accept, the Notes to be
purchased by the Corporation shall be selected by the Trustee by lot, or in
such other manner
<PAGE>
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as the Trustee may consider equitable, from the Notes tendered by each
Noteholder who tendered at such lowest price. For this purpose the Trustee
may make, and from time to time amend, regulations with respect to the manner
in which Notes may be so selected and regulations so made shall be valid and
binding upon all Noteholders, notwithstanding the fact that, as a result
thereof, one or more of such Notes become subject to purchase in part only.
The Holder of any Note of which a part only is purchased, upon surrender of
such Note for payment, shall be entitled to receive, without expense to such
Holder, one or more new Notes for the unpurchased part so surrendered and the
Trustee shall certify and deliver such new Note or Notes upon receipt of the
Note so surrendered.
ARTICLE 4
PROVISIONS REGARDING SPECIAL NOTES
4.1 EXERCISE OFFICES
In connection with the exchange of Note Certificates and exercise of Special
Notes and compliance with such other terms and conditions hereof as may be
required, the offices at which Note Certificates may be surrendered for
exchange or transfer or at which Special Notes may be exercised for
Convertible Debentures ("Exercise Office") shall be as specified in respect
of each series of Notes. The Corporation may from time to time designate
alternate or additional places as the Exercise Offices and shall give notice
to the Trustee of any change of the Exercise Offices.
4.2 ADMINISTRATION OF ESCROWED SUBSCRIPTION FUNDS
All Escrowed Subscription Funds shall be held at or administered through the
principal office of the Trustee at Calgary, Alberta. The Trustee shall not be
entitled to deal with the Escrowed Subscription Funds except in accordance
with the terms of this Indenture. In the event that the Trustee determines
the necessity for the approval by the Noteholders of any matter, an
extraordinary resolution of the Noteholders shall provide sufficient
authority upon which the Trustee may act and the Trustee shall not be
responsible for any loss occasioned by so doing.
ARTICLE 5
COVENANTS OF THE CORPORATION
5.1 PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST
The Corporation covenants and agrees for the benefit of the Noteholders and
the holders of any Coupons of each series of Notes that it will duly and
punctually pay the principal of (and premium, if any) and interest on the
Notes of that series in accordance with the terms of the Notes, any Coupons
appertaining thereto and this Indenture. Unless otherwise specified as
contemplated by section 2.2 with respect to any series of Notes, any interest
due on Bearer Notes on or before Maturity shall be payable only upon
presentation and surrender of the several Coupons for such interest
instalments as are evidenced thereby as they severally mature.
5.2 MAINTENANCE OF CORPORATE EXISTENCE
Except as herein otherwise expressly provided, the Corporation will at all
times maintain, preserve and keep in full force and effect its corporate
existence, rights (charter and statutory) and franchises and the Corporation
will carry on and conduct or will cause to be carried on and conducted its
business and the business of its Subsidiaries in a proper and efficient
manner and will keep or cause to be kept proper books of account and make or
cause to be made therein true and accurate entries of all its dealings and
transactions in relation to its business and the business of its
Subsidiaries, as the case may be, all in accordance with Generally Accepted
Accounting Principles, and at all reasonable times it will furnish or cause
to be furnished to the Trustee or its duly authorized agent or attorney such
information relating to its business and that of its Subsidiaries as the
Trustee may reasonable require and such books of account shall at all
reasonable times be open for inspection by the Trustee or such agent or
attorney.
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5.3 FINANCIAL STATEMENTS
The Corporation will furnish to the Trustee a copy of all financial statements,
whether annual or interim, of the Corporation and the report, if any, of the
Corporation's auditors thereon and of all annual and other regular periodic
reports of the Corporation furnished to its shareholders at the same time as
they are furnished to such shareholders. The Corporation will cause the
consolidated financial statements of the Corporation and its Subsidiaries to be
prepared in accordance with Generally Accepted Accounting Principles.
5.4 TRUSTEE REMUNERATION
That the Corporation will pay the Trustee reasonable remuneration for its
services as Trustee hereunder and will repay to the Trustee on demand all moneys
which shall have been paid by the Trustee in and about the execution of the
trusts hereby created with interest at 6% per annum from 30 days after the date
of the invoice from the Trustee to the Corporation in respect of such
expenditure until repayment, and such moneys and the interest thereon, including
the Trustee's remuneration, shall be payable out of any funds coming into the
possession of the Trustee in priority to any of the Notes or interest thereon.
The said remuneration shall continue to be payable until the trusts hereof be
finally wound up and whether or not the trusts of this Indenture shall be in the
course of administration by or under the direction of the court.
5.5 MAINTENANCE OF OFFICE OR AGENCY
If the Notes of a series are issuable only as Registered Notes, the Corporation
will maintain in each Place of Payment for such Notes an office or agency where
Notes of that series may be presented or surrendered for payment, where Notes of
that series may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Corporation in respect of the Notes of
that series and this Indenture may be served.
If Notes of a series are issuable as Bearer Notes, the Corporation will
maintain:
(a) in the city of Calgary, an office or agency where any Registered
Notes of that series may be presented or surrendered for payment,
where any Registered Notes of that series may be surrendered for
registration of transfer, where Notes of that series may be
surrendered for exchange, where notices and demands to or upon the
Corporation in respect of the Notes of that series and this
Indenture may be served and where Bearer Notes ofthat series and
related Coupons may be presented or surrendered for payment in the
circumstances described in the following paragraph (and not
otherwise);
(b) subject to any laws or regulations applicable thereto, in a Place
of Payment for that series which is located outside Canada, an
office or agency where Notes of that series and relatedCoupons may
be presented or surrendered for payment; provided, however, that,
if the Notes of that series are listed on any stock exchange
located outside Canada and such stock exchange shall so require,
the Corporation will maintain a Paying Agent for the Notes of that
series in any required city located outside Canada so long as the
Notes of that series are listed on such exchange; and
(c) subject to any laws or regulations applicable thereto, in a Place
of Payment for that series located outside Canada, an office or
agency where any Registered Notes of that series may be
surrendered for registration of transfer, where Notes of that
series may be surrendered for exchange and where notices and
demands to or upon the Corporation in respect of the Notes of that
series and this Indenture may be served. The Corporation will
give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time
the Corporation shall fail to maintain any such required office or
agency or shall fail to furnish the Trustee with the address
thereof; such presentations, surrenders, notices and demands may
be made or served at the principal office of the Trustee in the
city of Calgary, except that Bearer Notes of that series and the
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related Coupons may be presented and surrendered for payment at
the offices specified in the Note, and the Corporation hereby
appoints the same as its agent to receive such respective
presentations, surrenders, notices and demands.
The Corporation may also from time to time designate one or more other
offices or agencies where the Notes of one or more series may be presented or
surrendered for any or all such purposes and may from time to time rescind
such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Corporation of its obligation to maintain an
office or agency in accordance with the requirements set forth above for
Notes of any series for such purposes. The Corporation will give prompt
written notice to the Trustee of any such designation or rescission and of
any change in the location of any such other office or agency. Unless
otherwise specified with respect to any Notes as contemplated by section 2.2
with respect to a series of Notes, the Corporation hereby designates as a
Place of Payment for each series of Notes the principal office of the Trustee
in the city of Calgary, and initially appoints the Trustee at its principal
office as Paying Agent in such city and as its agent to receive all such
presentations, surrenders, notices and demands.
5.6 MONEY FOR NOTES PAYMENTS TO BE HELD IN TRUST
If the Corporation shall at any time act as its own Paying Agent with respect
to any series of Notes and any related Coupons, it will, on or before each
due date of the principal of (and premium, if any) or interest on any of the
Notes of that series, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum in the currency in which the Notes of such
series are payable (except as otherwise specified pursuant to section 2.2 for
the Notes of such series) sufficient to pay the principal (and premium, if
any) or interest so becoming due until such sums shall be paid to such
Persons or otherwise disposed of as herein provided and will promptly notify
the Trustee of its action or failure to so act.
Whenever the Corporation shall have one or more Paying Agents for any series
of Notes and any related Coupons, it will, prior to or on each due date of
the principal of (and premium, if any) or interest on any Notes ofthat series,
deposit with a Paying Agent a sum (in the currency described in the preceding
paragraph) sufficient to pay the principal (and premium, if any) or interest
so becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying
Agent is the Trustee) the Corporation will promptly notify the Trustee of its
action or failure to so act.
The Corporation will cause each Paying Agent (other than the Trustee) for any
series of Notes to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this section, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of (and
premium, if any) and interest on securities of such series (where
such sums have been paid to it by the Corporation or by any other
obligor on the Notes) in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any default by the Corporation (or any
other obligor upon the securities of such series) in the making of
any payment of principal of (or premium, if any) or interest on
the Notes of such series; and
(c) at any time during the continuance of such default, upon the
written request of the Trustee, forthwith pay to the Trustee all
sums so held in trust by such Paying Agent.
The Corporation may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Written
Order of the Corporation direct any Paying Agent to pay, to the Trustee all sums
held in trust by the Corporation or such Paying Agent, such sum to be held by
the Trustee upon the same trusts as
<PAGE>
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those upon which sums were held by the Corporation or such Paying Agent; and,
upon such payment by any Paying Agent to the Trustee, such Paying Agent shall
be released from all further liability with respect to such sums.
Except as provided in the Notes of any series, any money deposited with the
Trustee or any Paying Agent, or then held by the Corporation, in trust for the
payment of the principal of (and premium, if any) or interest on any Note of any
series and remaining unclaimed for two years after such principal (and premium,
if any) or interest have become due and payable shall be paid to the Corporation
on Written Request of the Corporation, or (if then held by the Corporation)
shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Corporation for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Corporation as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Corporation cause to be published once, in an Authorized
Newspaper, notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Corporation.
5.7 STATEMENT AS TO COMPLIANCE
The Corporation covenants that, on or before December 31, 1998, and on or before
December 31 in each subsequent year and at any other time if requested by the
Trustee, the Corporation will furnish to the Trustee a Certificate of the
Corporation stating that the Corporation has performed its obligations under and
complied with all covenants, conditions and other requirements contained in this
Indenture, non-compliance with which would, with the giving of notice or the
lapse of time or both, constitute an Event of Default hereunder or, if such is
not the case, specifying the covenant, condition or other requirement which has
not been complied with and giving particulars of such non-compliance and the
action, if any, the Corporation proposes to take with respect thereto. If the
officer signing the Certificate of the Corporation knows of such an Event of
Default, whether then existing or occurring during such preceding fiscal year,
the Certificate of the Corporation shall describe such Event of Default and its
status with particularity. The Corporation shall also promptly notify the
Trustee if the Company's fiscal year is changed so that the end thereof is on
any date other than the then current fiscal year end date. For purposes of this
section, such compliance shall be determined without regard to any period of
grace granted by the Trustee or requirement of notice under this Indenture. The
Corporation will deliver to the Trustee, forthwith upon becoming aware of any
default in the performance or observance of any covenant, agreement or condition
contained in this Indenture, or any Event of Default, a Certificate of the
Corporation specifying with particularity such Event of Default and further
stating what action the Corporation has taken or is taking or proposes to take
with respect thereto.
5.8 ADDITIONAL AMOUNTS
If any Notes of a series provide for the payment of additional amounts to any
Holder in respect of any tax, assessment or governmental charge ("Additional
Amounts"), the Corporation will pay to the Holder of any Note of such series or
any Coupon appertaining thereto such Additional Amounts as may be specified as
contemplated by section 2.2. Whenever in this Indenture there is mentioned, in
any context, the payment of the principal of or any premium or interest on, or
in respect of, any Note of a series or payment of any related Coupon or the net
proceeds received on the sale or exchange of any Note of a series, such mention
shall be deemed to include mention of the payment of Additional Amounts provided
for by the terms of such series established pursuant to section 2.2 to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof pursuant to such terms and express mention of the payment of
Additional Amounts (if applicable) in any provisions hereof shall not be
construed as excluding Additional Amounts in those provisions hereof where such
express mention is not made.
Except as otherwise specified as contemplated by section 2.2, if the Notes of a
series provide for the payment of Additional Amounts, at least 10 days prior to
the first Interest Payment Date with respect to that series of Notes (or if the
Notes of that series will not bear interest prior to Maturity, the first day on
which a payment of principal and any premium is made), and at least 10 days
prior to each date of payment of principal and any premium or interest if there
has been any change with respect to the matters set forth in the below-mentioned
Certificate of the
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Corporation, the Corporation will furnish the Trustee and the Corporation's
principal Paying Agent or Paying Agents, if other than the Trustee, with a
Certificate of the Corporation instructing the Trustee and such Paying Agent
or Paying Agents whether such payment of principal of and any premium of
interest on the Notes of that series shall be made to the Holders of Notes of
that series or any related Coupons without withholding for or on account of
any tax, assessment or other governmental charge described in the Notes of
the series. If any such withholding shall be required, then such Certificate
of the Corporation shall specify by country the amount, if any, required to
be withheld on such payments to such Holders of Notes of that series or
related Coupons and the Corporation will pay to the Trustee or such Paying
Agent the Additional Amounts required by the terms of such Notes. In the
event that the Trustee or any Paying Agent, as the case may be, shall not so
receive the above-mentioned certificate, then the Trustee or such Paying
Agent shall be entitled to (i) assume that no such withholding or deduction
is required with respect to any payment of principal or interest with respect
to any Notes of a series or related Coupons until it shall have received a
certificate advising otherwise and (ii) to make all payments of principal and
interest with respect to the Notes of a series or related Coupons without
withholding or deductions until otherwise advised. The Corporation covenants
to indemnify the Trustee and any Paying Agent for, and to hold them harmless
against, any loss, liability or expense reasonably incurred without
negligence or bad faith on their part arising out of or in connection with
actions taken or omitted by any of them in reliance on any Certificate of the
Corporation furnished pursuant to this section.
5.9 LONG TERM DEBT AND TANGIBLE ASSETS
The Corporation will, so long as any Special Notes are outstanding, maintain
Tangible Assets equal to or greater than 140% of Long Term Debt at all times
including after redemption of any redeemable preference shares of the
Corporation or any Subsidiary. This ratio shall be calculated no later than
the 135th day following the end of each of the Corporation'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.
5.10 LIMITATION UPON CREDIT FACILITY AND REPAYMENTS
The Corporation will not, so long as any Special Notes are outstanding:
(a) have outstanding more than US.$12,000,000 under the EnCap Credit
Facility for the period commencing 30 days from the date hereof;
and
(b) use any of the net proceeds from the issuance of the Notes to
reduce the Corporation's existing indebtedness.
5.11 WAIVER OF CERTAIN COVENANTS
The Corporation may omit in any particular instances to comply with any term,
provision or condition set forth in section 5.10, if the Holders of Notes
outstanding, by Extraordinary Resolution, waive such compliance in such
instances with such term, provision or condition, but no such waiver shall
extend to or affect such term, provision or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the
obligations of the Corporation and the duties of the Trustee in respect of
any such term, provision or condition shall remain in full force and effect.
5.12 PAYMENT OF TAXES AND OTHER CLAIMS
The Corporation will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (a) all taxes, assessments and governmental
charges levied or imposed upon the Corporation or any Subsidiary or upon the
income, profits or property of the Corporation or any Subsidiary and (b) all
lawful claims for labour, materials and supplies which, if unpaid, might by law
become a Lien upon the property of the Corporation or any Subsidiary; PROVIDED,
HOWEVER, that the Corporation shall not be required to pay or discharge or cause
to be paid or discharged
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any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings.
5.13 MAINTENANCE OF PROPERTIES
The Corporation will cause all properties owned by the Corporation or any
Subsidiary or used or held for use in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order (ordinary wear and tear excepted) and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Corporation may be necessary so that the business carried on in connection
therewith may be conducted at all times; PROVIDED, HOWEVER, that nothing in this
section shall prevent the Corporation from discontinuing the maintenance of any
of such properties if such discontinuance is, in the judgment of the
Corporation, desirable in the conduct of its business or the business of any
Subsidiary and not disadvantageous in any material respect to the Noteholders.
5.14 INSURANCE
The Corporation will at all times keep all of the Corporation's and its
Subsidiaries' properties which are of an insurable nature insured with insurers,
believed by the Corporation to be responsible, against loss or damage to the
extent that property ofsimilar character is usually so insured by corporations
similarly situated and owning like properties in similar geographic areas in
which the Corporation or each such Subsidiary operates; provided that such
insurance is generally available at commercially reasonable rates, and provided
further that the Corporation or such Subsidiary may self-insure directly or
through captive insurers or insurance cooperatives, to the extent that the
Corporation determines that such practice is consistent with prudent business
practices. Such insurance shall be in such amount, on such terms, in such forms
and for such periods as are customary for similarly situated Persons in the
Corporation's industry or in insurance markets available to the Corporation.
5.15 RESTRICTIONS ON CHARTER AMENDMENTS
The Corporation will not amend its Memorandum and Articles of Association except
as required by law or except to the extent that such amendment would not have a
material adverse effect on (a) the ability of the Corporation to perform its
obligations under this Indenture or the Notes or (b) the rights of the
Noteholders, except that neither (i) increases in the number of common shares
and issuance thereof with related securities, nor (ii) designations of preferred
stock of the Company, modifications of the terms of such designations and
issuance thereof with related securities, nor (iii) modification or expansion of
the indemnity provisions provided by the Corporation to its directors and
officers, nor (iv) change of the Corporation's registered agent shall be deemed
an amendment hereunder.
5.16 CANADIAN WITHHOLDING AND REPORTING REQUIREMENTS
To the extent permitted by law, the Corporation will provide to the Trustee, the
Paying Agent or to any Noteholder such statements, certificates or other
documentation concerning the organization or operations of the Corporation as
may be reasonably necessary to establish any exceptions or exemptions from
Canadian federal income tax withholding and reporting requirements.
5.17 MAINTENANCE OF LISTINGS FOR COMMON SHARES AND NOTES
While any Note remains outstanding, the Corporation will maintain a listing for
its common shares on a nationally recognized stock exchange in Canada or the
United States.
5.18 TRUSTEE MAY PERFORM COVENANTS
If the Corporation shall fail to perform any of its covenants contained herein,
the Trustee may in its discretion, but (subject to section 6.3) need not, notify
the Noteholders of such failure or may itself perform any of such covenants
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capable of being performed by it and, if any such covenant requires the payment
of money, it may make such payment with its own funds, or with money borrowed by
it for such purpose, but shall be under no obligation to perform such covenants
or to make any such payments with its own funds or with money borrowed by it;
and all sums so paid shall be payable by the Corporation in accordance with the
provisions of section 5.4. No such performance by the Trustee of any covenant
contained herein or payment by the Corporation of any sums advanced or borrowed
by the Trustee pursuant to the foregoing provisions shall be deemed to relieve
the Corporation from any default hereunder.
ARTICLE 6
REMEDIES
6.1 EVENTS OF DEFAULT
"Event of Default", wherever used herein with respect to Notes of any series,
means any one of the following events (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of and administrative or governmental body):
(a) default in the payment of any interest upon any Note of that
series, or any related Coupon, when such interest or Coupon
becomes due and payable, and continuance of such default for a
period of 7 days; or
(b) default in the payment of the principal of (or premium, if any,
on) any Note of that series as and when it shall become due and
payable at its Maturity, upon redemption, by declaration or
otherwise; or
(c) default in the performance, or breach, of any covenant or warranty
of the Corporation in this Indenture (other than a covenant or
warranty a default in performance of which or breach of which is
elsewhere in this section specifically dealt with or which has
expressly been included in this Indenture solely for the benefit
of one or more series of Notes other than that series), and
continuance of such default or breach for a period of 60 days
after there has been given, by registered or certified mail, to
the Corporation by the Trustee Orto the Corporation and the
Trustee by the Holders of at least 25% in principal amount of all
outstanding Notes a written notice specifying such default or
breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or
(d) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Corporation or any Material Subsidiary
a bankrupt or insolvent under any bankruptcy, insolvency or
analogous laws or appointing a receiver, liquidator, assignee,
trustee, sequestrator, rehabilitator (or other similar official)
of the Corporation or any Material Subsidiary or of any
substantial part of their respective properties, or ordering the
winding up or liquidation of their respective affairs, and the
continuance of any such decree or order unstayed and in effect for
a period of 90 consecutive days; or
(e) the institution by the Corporation or any Material Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the
consent by it to the institution of bankruptcy or insolvency
proceedings against it under any bankruptcy, insolvency or
analogous laws, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator, rehabilitator (or other similar
official) of the Corporation or any Material Subsidiary or of any
substantial part of their respective properties, or the making by
the Corporation or any Material Subsidiary of an assignment for
the benefit of creditors, or the admission by the Corporation
orany Material Subsidiary in writing of its inability to pay its
debts generally as they become due; or
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(f) if (i) any other Debt of the Corporation or any Material
Subsidiary becomes due and payable prior to its Stated Maturity by
reason of an event of default (howsoever defined) or (ii) any such
Debt of the Corporation or any Material Subsidiary is not paid
when due or, as the case may be, within any applicable grace
period or (iii) the Corporation or any Material Subsidiary fails
to pay when due (or, as the case may be, within any applicable
grace period) any amount payable by it under any present or future
guarantee for, or indemnity in respect of, any Indebtedness of any
Person or (iv) any security given by the Corporation or any
Material Subsidiary for any Indebtedness of any Person or any
guarantee or indemnity of Debt of any Person by the Corporation or
any Material Subsidiary becomes enforceable by reason of default
in relation thereto and steps are taken to enforce such security
save in any such case where there is a bona fide dispute as to
whether the relevant Debt or any such guarantee or indemnity as
aforesaid shall be due and payable (following any applicable grace
period), PROVIDED that in each such case the Debt exceeds in the
aggregate U.S.$1,500,000 and in each such case such event
continues unremedied for a period of 30 calendar days (or such
longer period as the Trustee may in its sole discretion consent to
in writing upon receipt of written notice from the Company); or
(g) if there is any final judgment or judgments for the payment of
money exceeding in the aggregate US$1,500,000 outstanding against
the Corporation or any Material Subsidiary which has been
outstanding for more than 60 calendar days from the date of its
entry and shall not have otherwise been discharged in full or
stayed by appeal, bond or otherwise; or
(h) if the Issuer or any Material Subsidiary shall generally fail to
pay its Debts as such Debts come due (except Debts which the
Issuer or such Material Subsidiary, as the case may be, may
contest in good faith generally) or 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); or
(i) if a warranty, representation, or other statement made by or on
behalf of the Issuer contained in this Indenture, the Debentures
or any certificate or other agreement furnished in compliance with
such documents is false in any material respect when made and
(except where the Trustee shall have certified to the Issuer that
it considers such falsity to be incapable of remedy, in which case
no such notice or continuation as is hereinafter mentioned will be
required) such falsity continues for a period of 30 calendar days
(or such longer period as the Trustee may in its absolute
discretion permit) next following the service by the Trustee on
the Issuer of notice requiring the same to be remedied;
(j) or any other Event of Default provided with respect to Notes of
that series.
6.2 NOTICE OF EVENTS OF DEFAULT
The Corporation shall, within 30 days after it becomes aware that an Event of
Default has occurred, notify the Trustee of the occurrence of such Event of
Default and upon receipt of such notice and if the Event of Default is
continuing the Trustee shall, within 30 days after it becomes aware of the
occurrence of such Event of Default, give notice thereof to the Noteholders,
provided that, notwithstanding the foregoing, the Trustee shall not be
required to give such notice if the Trustee in good faith shall have decided
that the withholding of such notice is in the best interests of the
Noteholders and shall have so advised the Corporation in writing. Where
notice of the occurrence of an Event of Default has been given and the Event
of Default is thereafter cured, notice that the Event of Default is no longer
continuing shall be given by the Trustee to the Noteholders within 30 days
after the Trustee becomes aware that the Event of Default has been cured.
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6.3 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT
If an Event of Default described in clause (a), (b) or (j) of section 6.1 with
respect to Notes of any series at the time outstanding occurs and is continuing,
then in every such case the Trustee or the Holders of not less than 25% in
principal amount of the outstanding Notes of that series may declare the
principal amount of all the Notes of that series to be due and payable
immediately, by a notice in writing to the Corporation (and to the Trustee if
given by Holders), and upon any such declaration such principal amount (or
specified portion thereof) shall become immediately due and payable. If an
Event of Default described in clause (c), (d), (e), (f), (g), (h) or (i) of
section 6.1 occurs and is continuing, then in every such case the Trustee or the
Holders of not less than 25% in principal amount of all the Notes then
outstanding may declare the principal amount of all the outstanding Notes to be
due and payable immediately, by a notice in writing to the Corporation (and to
the Trustee if given by the Holders) and upon any such declaration such
principal amount (or specified portion thereof) shall become immediately due and
payable.
At any time after such a declaration of acceleration with respect to Notes of
any series (or of all series, as the case may be) has been made and before a
judgment or decree for payment of the money due has been obtained by the Trustee
as hereinafter in this Article provided, the Holders of the outstanding Notes of
that series (or of all series, as the case may be), by Extraordinary Resolution,
may rescind and annul such declaration and its consequences if:
(a) the Corporation has paid or deposited with the Trustee a sum
sufficient to pay in the currency in which the Notes of such
series are payable (except as otherwise specified pursuant to
section 2.2 for the Notes of such series):
(i) all overdue interest on all outstanding Notes of that
series (or of all series, as the case may be) and any
related Coupons,
(ii) all unpaid principal of (and premium, if any, on) any
outstanding Notes of that series (or of all series, as the
case may be) which has become due otherwise than by such
declaration of acceleration, and interest on such unpaid
principal at the rate or rates prescribed therefor in such
Notes,
(iii) interest upon overdue interest at the rate or rates
prescribed therefor in such Notes, and
(iv) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any
sales, value-added or goods and services tax thereon; and
(b) all Events of Default with respect to Notes of that series (or of
all series, as the case may be), other than the non-payment of
amounts of principal of (or premium, if any) or interest on Notes
of that series (or of all series, as the case may be) which have
become due solely by such declaration of acceleration, have been
cured or waived as provided in section 6.14.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
6.4 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE
The Corporation covenants that if:
(a) default is made in the payment of any instalment of interest on
any Note and any related Coupon when such interest becomes due and
payable and such default continues for a period of 30 days or
(b) default is made in the payment of the principal of (or premium, if
any, on) any Note at the Maturity thereof,
<PAGE>
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then the Corporation will, upon demand of the Trustee, pay to the Trustee for
the benefit of the Holders of such Notes and Coupons the whole amount then due
and payable on such Notes and Coupons for principal (and premium, if any) and
interest, and interest on any overdue principal (and premium, if any) and on any
overdue interest, at the rate or rates prescribed therefor in such Notes, and,
in addition thereto, such further amount as shall be sufficient to cover the
costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Corporation fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name as trustee of an express trust, may institute ajudicial
proceeding for the collection of the sums so due and unpaid, may prosecute such
proceeding to judgment or final decree and may enforce the same against the
Corporation or any other obligor upon such Notes and collect the moneys adjudged
or decreed to be payable in the manner provided by law out of the property of
the Corporation or any other obligor upon such Notes, wherever situated.
If an Event of Default with respect to Notes of any series (or of all series, as
the case may be) occurs and is continuing, the Trustee may in its discretion
proceed to protect and enforce its rights and the rights of the Holders of Notes
of such series (or of all series, as the case may be) by such appropriate
judicial proceedings as the Trustee shall deem most effectual to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
6.5 TRUSTEE MAY FILE PROOFS OF CLAIM
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustments, composition or other
judicial proceeding relative to the Corporation or any other obligor upon the
Notes or the property of the Corporation or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Notes shall
then be due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand on the
Corporation for the payment of overdue principal, premium, if any or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(a) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the
Notes and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel
and any sales, value added or goods and services tax thereon) and
of the Holders allowed in such judicial proceedings, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claim and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under section 5.4.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
<PAGE>
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6.6 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES
All rights of action and claims under this Indenture or the Notes or Coupons may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or Coupons or the production thereof in any proceedings relating thereto,
and any such proceeding instituted by the Trustee shall be brought in its own
name as trustee of an express-trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and any sales,
value-added or goods and services tax thereon, be for the rateable benefit of
the Holders of the Notes and Coupons in respect of which such judgement has been
recovered.
6.7 APPLICATION OF MONEY COLLECTED
Any money collected by the Trustee pursuant to this Article shall be applied in
the following order, at the date or dates fixed by the Trustee and, in case of
the distribution of such money on account of principal (or premium, if any, on)
or interest, upon presentation of the Notes or Coupons, or both, as the case may
be, and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
First: To the payment of all amounts due the Trustee under section
5.4;
Second: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the
Notes and Coupons in respect of which or for the benefit of
which such money has been collected, rateably, without
preference or priority of any kind, according to the
amounts due and payable on such Notes and Coupons for
principal (and premium, if any) and interest, respectively;
and
Third: The balance, if any, to the Person or Persons entitled
thereto.
6.8 LIMITATION ON SUITS
No Holder of any Note of any series or any related Coupons shall have any right
to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default with respect to the Notes of that
series;
(b) the Holders of not less than 25% in principal amount of the
outstanding Notes of that series in the case of any Event of
Default described in clause (a), (b) or (j) of section 6.1, or, in
the case of any Event of Default described in clause (c), (d),
(e), (f), (g), (h) or (i) section 6.1, the Holders of not less
than 25% in principal amount of all outstanding Notes, shall have
made written request to the Trustee to institute proceedings in
respect of such Event of Default in its own name as Trustee
hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such
proceeding, and
(e) no direction inconsistent with such written request has been
given, by Extraordinary Resolution, to the Trustee during such 60
day period by the Holders of the outstanding Notes of that series
in the case of any Event of Default described in clause (a), (b)
or (j) of section 6.1, or, in the case of any
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Event of Default described in clause (c), (d), (e), (f), (g), (h)
or (i) of section 6.1, by the Holders of all outstanding Notes;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Notes of the same series, in the case of any Event of Default
described in clause (a), (b) or (j) of section 6.1 or of Holders of all Notes in
the case of an Event of Default described in clause (c), (d), (e), (f), (g), (h)
or (i) of section 6.1, or to obtain or to seek to obtain priority or preference
over any other of such Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and rateable benefit of
all Holders of Notes of the same series, in the case of any Event of Default
described in clause (a), (b) or (j) of section 6.1, or of Holders of all Notes
in the case of any Event of Default described in clause (c), (d), (e), (f), (g),
(h) or (i) of section 6.1.
6.9 RESTORATION OF RIGHTS AND REMEDIES
If the Trustee or any Holder has instituted any proceeding to enforce any right
or remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or to
such Holder, then and in every such case, subject to any determination in such
proceeding, the Corporation, the Trustee and the Holders of Notes and Coupons
shall be restored severally and respectively to their former positions hereunder
and thereafter all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
6.10 RIGHTS AND REMEDIES CUMULATIVE
No right or remedy herein conferred upon or reserved to the Trustee or to the
Holders of Notes or Coupons is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in additional to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
6.11 DELAY OR OMISSION NOT WAIVER
No delay or omission of the Trustee or of any Holder of any Notes or Coupons to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Indenture or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
6.12 CONTROL BY HOLDERS
With respect to the Notes of any series, the Holders of the outstanding Notes of
such series shall have the right, by Extraordinary Resolution, to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee relating
to or arising under clause (a), (b) or (j) of section 6.1, and, with respect to
all Notes, the Holders of all outstanding Notes shall have the right to direct,
by Extraordinary Resolution, the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee, or exercising any trust or power conferred on
the Trustee, not relating to or arising under clause (a), (b) or (j) of section
6.1, provided that in each case:
(a) such direction shall not be in conflict with any rule of law or
with this Indenture,
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
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(c) the Trustee need not take any action which might involve it in
personal liability or be unjustly prejudicial to the Holders of
Notes of such series not consenting.
6.13 WAIVER OF PAST DEFAULTS
Subject to section 6.3, the Holders of the outstanding Notes of any series may
on behalf of the Holders of all the Notes of such series, by Extraordinary
Resolution, waive any past default described in clause (a), (b) or (j) of
section 6.1 (or, in the case of a default described in clause (c), (d), (e),
(f), (g), (h) or (i) of section 6.1, the Holders of all outstanding Notes may,
by Extraordinary Resolution, waive any such past default), and its consequences,
except a default:
(a) in respect of the payment of the principal of (or premium, if any)
or interest of any Note or any related Coupon, or
(b) in respect of a covenant or provision hereof which under Article
12 cannot be modified or amended without the consent of the Holder
of each outstanding Note of such series affected.
Upon any such waiver, any such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right consequent thereon.
6.14 WAIVER OF STAY OR EXTENSION
The Corporation covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Corporation (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE 7
SATISFACTION AND DISCHARGE
7.1 CANCELLATION AND DESTRUCTION
All matured Notes and Coupons shall forthwith after payment thereof be delivered
to the Trustee and cancelled by it. All Notes and Coupons which are cancelled
or required to be cancelled under this or any other provision of this Indenture
shall be destroyed by the Trustee and, if required by the Corporation, the
Trustee shall furnish to the Corporation a destruction certificate setting out
the designating numbers and denominations of the Notes and Coupons so destroyed.
7.2 NON-PRESENTATION OF NOTES AND COUPONS
If the Holder of any Note or Coupon shall fail to present the same for payment
on the date on which the principal thereof and/or the interest thereon or
represented thereby becomes payable either at Maturity or otherwise or shall not
accept payment on account thereof and give such receipt therefor (if any) as the
Trustee may require:
(a) the Corporation shall be entitled to pay to the Trustee and direct
it to set aside; or
(b) in respect of moneys in the hands of the Trustee which may or
should be applied to the payment of the Notes, the Corporation
shall be entitled to direct the Trustee to set aside;
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the principal moneys and/or the interest, as the case may be, in trust to be
paid to the Holder of such Note or Coupon upon due presentation and surrender
thereof in accordance with the provisions of this Indenture; and thereupon the
principal moneys and/or the interest payable on or represented by each Note and
each Coupon in respect whereof such moneys have been set aside shall be deemed
to have been paid and thereafter such Notes and Coupons shall not be considered
as outstanding hereunder and the Holders thereof shall thereafter have no right
in respect thereof except that of receiving payment of the moneys so set aside
by the Trustee (without interest thereon) upon due presentation and surrender
thereof, subject always to the provisions of section 5.6 as they relate to the
repayment of unclaimed moneys. Any moneys so set aside may, and, if remaining
unclaimed for 60 days shall, be invested by the Trustee in accordance with
section 11.8.
7.3 DEFEASANCE
The Trustee shall, at the request and at the expense of the Corporation, execute
and deliver to the Corporation such deeds or other instruments as shall be
necessary to release the Corporation, subject to section 7.4, from its covenants
contained herein except those relating to the indemnification of the Trustee and
to the maintenance of an office or agency for the Notes as contemplated by
sections 5.4 and 5.5 upon:
(a) proof being given to the reasonable satisfaction of the Trustee
that the Corporation has deposited funds or made provision for
payment of the expenses of the Trustee, for payment of all
principal and interest and other amounts due or to become due on
the Notes (including amounts due or to become due with respect to
any series of Notes as a result of a provision contemplated by
section 2.2) and for the payment of Taxes arising with respect to
such deposited funds or other provision for payment (collectively,
the "Payments") pursuant to the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee; and
(b) delivery by the Corporation to the Trustee of an opinion of
Counsel, which opinion shall be satisfactory to the Trustee in its
sole discretion, that the Noteholders will not be subject to any
Taxes as a result of the Corporation's exercise of this defeasance
option and that they will be subject to Taxes, including those in
respect of income (including taxable capital gains), in the same
amount, in the same manner and at the same time or times as would
have been the case if such option had not been exercised.
The Corporation shall be deemed to have made such due provision for payment if,
and only if, it has deposited or caused to be deposited with the Trustee under
the terms of the irrevocable trust agreement, and solely for the benefit of the
Noteholders for the purpose stated therein, cash or securities issued or
guaranteed by the Government of Canada which will be sufficient, in the opinion
of an independent chartered accountant or investment dealer acceptable to the
Trustee, to provide for the Payments.
The Trustee shall hold in trust, all monies or securities deposited with it
pursuant to this section 7.3, and shall apply the deposited monies and the money
from such securities in accordance with this Indenture to the payment of
principal of, interest and premium, if any, on the Notes.
7.4 TRUSTEE UNABLE TO APPLY MONEY OR NOTES
If the Trustee is unable to apply any money or securities in accordance with
section 7.3 by reason of any legal proceeding or by reason of any order or
judgment of any Court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Corporation's obligations under this
Indenture and the Notes shall be revived and reinstated as though no deposit of
money or securities had occurred pursuant to section 7.3 until such time as the
Trustee is permitted to apply all such money or securities in accordance with
section 7.3; provided that if the Corporation has made any principal or interest
payments or paid any premium, if any, on the Notes because of the reinstatement
of its obligations, the Corporation shall be subrogated to the rights of the
Noteholders of such Notes to receive such payment from the money or securities
held by the Trustee. Notwithstanding the foregoing, upon proof
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being given to the reasonable satisfaction of the Trustee that all the Notes
of a particular series and the premium, if any, thereon, and interest
(including interest on amounts in default) thereon and other moneys payable
in respect thereof have been paid or satisfied or that, all the outstanding
Notes of a particular series having matured or having been duly called for
redemption, or the Trustee having been given irrevocable instructions by the
Corporation to publish within ninety (90) days notice of redemption of all
the outstanding Notes of a particular series, such payment and/or redemption
has been duly and effectually provided for by payment to the Trustee or
otherwise, and upon payment of all costs, charges and expenses properly
incurred by the Trustee in relation to the supplemental indenture providing
for the issue of such series of Notes and all interest thereon, or upon
provision satisfactory to the Trustee being made therefor, the Trustee shall
at the request and at the expense of the Corporation, execute and deliver to
the Corporation such deeds or other instruments as shall be requisite to
evidence the satisfaction and discharge of the supplemental indenture
providing for the issue of such series of Notes and to release the
Corporation from the covenants therein contained.
7.5 DISCHARGE
Upon proof being given to the reasonable satisfaction of the Trustee that all
the Notes and interest (including interest on amounts in default) thereon have
been paid or satisfied or that, all the outstanding Notes having matured, such
payment has been duly provided for by payment to the Trustee or otherwise, and
upon payment of all costs, charges and expenses properly incurred by the Trustee
in relation to this Indenture and all interest thereon and the remuneration of
the Trustee, or upon provision satisfactory to the Trustee being made therefor,
the Trustee shall, at the request and at the expense of the Corporation, execute
and deliver to the Corporation such deeds or other instruments as shall be
necessary to evidence the satisfaction and discharge of this Indenture and to
release the Corporation from its covenants contained herein except those
relating to the indemnification of the Trustee.
ARTICLE 8
SUCCESSOR CORPORATIONS
8.1 CERTAIN REQUIREMENTS IN RESPECT OF MERGER ETC.
The Corporation shall not enter into any transaction, whether by way of
amalgamation (except a vertical short-form amalgamation with one or more of its
wholly-owned Subsidiaries pursuant to the BUSINESS CORPORATIONS ACT (Yukon)),
merger, reconstruction, reorganization, consolidation, transfer, sale, lease or
otherwise, whereby all or substantially all of its undertaking, property and
assets would become the property of any other Person or, in the case of any such
amalgamation, of the continuing corporation resulting therefrom, but may do so
if:
(a) such other Person or continuing corporation is a corporation (the
"Successor Corporation.") incorporated under the laws of Canada or
any province thereof;
(b) the Successor Corporation shall execute, prior to or
contemporaneously with the completion of such transaction, such
indenture supplemental hereto and other instruments (if any) as
are satisfactory to the Trustee and in the opinion of Counsel are
necessary or advisable to evidence the assumption by the Successor
Corporation of the liability for the due and punctual payment of
all the Notes and the interest thereon and all other moneys
payable thereunder and the covenant of such Successor Corporation
to pay the same and its agreement to observe and perform all the
covenants and obligations of the Corporation under this Indenture;
(c) such transaction shall, to the satisfaction of the Trustee and in
the opinion of Counsel, be upon such terms as substantially to
preserve and not to impair any of the rights and powers of the
Trustee or of the Noteholders hereunder and upon such terms as are
not in any way prejudicial to the interests of the Noteholders;
and
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(d) no condition or event shall exist in respect of the Corporation or
the Successor Corporation, either at the time of such transaction
or immediately thereafter after giving full effect thereto, which
constitutes or would, after the giving of notice or the lapse of
time or both, constitute an Event of Default hereunder.
8.2 VESTING OF POWERS IN SUCCESSOR
Whenever the conditions of section 8.1 have been duly observed and performed,
the Trustee shall execute and deliver the supplemental indenture provided for in
Article 12 and thereupon:
(a) the Successor Corporation shall possess and from time to time may
exercise each and every right and power of the Corporation under
this Indenture in the name of the Corporation or otherwise, and
any act or proceeding by any provision of this Indenture required
to be done or performed by any Directors or officers of the
Corporation may be done and performed with like force and effect
by the like directors or officers of such Successor Corporation;
and
(b) the Corporation shall be released and discharged from liability
under this Indenture and the Trustee may execute any documents
which it may be advised are necessary or advisable for effecting
or evidencing such release and discharge.
ARTICLE 9
MEETINGS OF NOTEHOLDERS
9.1 RIGHT TO CONVENE MEETINGS
The Trustee may at any time and from time to time and shall, (i) on receipt of a
Written Request of the Corporation or a written request signed by the Holders of
not less than 25% in principal amount of the Notes of any series then
outstanding and upon being indemnified to its reasonable satisfaction by the
Corporation or by the Holders of the Notes of such series signing such request
against the costs which may be incurred in connection with the calling and
holding of such meeting, convene a meeting of the Holders of the Notes of such
series and, (ii) on receipt of a Written Request of the Corporation or a
Noteholders' Request and upon being indemnified to its reasonable satisfaction
by the Corporation or by the Noteholders against the costs which may be incurred
in connection with the calling and holding of such meeting, convene a meeting of
the Noteholders. If the Trustee fails within 30 days after receipt of such
written request and such indemnity to give notice convening a meeting, the
Corporation, such Noteholders or the Holders of the Notes of such series, as the
case may be, may convene such meeting. Every such meeting shall be held in the
city of Calgary or at such other place as may be approved or determined by the
Trustee.
9.2 NOTICE OF MEETINGS
At least 21 days' notice of any meeting of Noteholders or the Holders of the
Notes of a series shall be given to the Noteholders or the Holders of the Notes
of such series, as the case may be, in accordance with section 10.2 and a copy
thereof shall be sent by mail to the Trustee unless the meeting has been called
by it and to the Corporation unless the meeting has been called by it. Such
notice shall state the time when and the place where the meeting is to be held
and shall state briefly the general nature of the business to be transacted
thereat, but it shall not be necessary for any such notice to set out the terms
of any resolution to be proposed at the meeting or any of the provisions of this
Article.
9.3 CHAIRMAN
An individual, who need not be a Noteholder or a Holder of the Notes of such
series, as the case may be, nominated in writing by the Trustee shall be
chairman of the meeting and if no individual is so nominated or the individual
so nominated is unable or unwilling to act or if the individual so nominated is
not present within 15 minutes from the
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time fixed for the holding of the meeting, the Noteholders or the Holders of
the Notes of such series, as the case may be, present in person or by proxy
shall choose an individual present to be chairman.
9.4 QUORUM
At any meeting of the Noteholders or the Holders of any series of Notes, as the
case may be, other than a meeting convened for the purpose of considering a
resolution proposed to be passed as an Extraordinary Resolution, as to which the
provisions of section 9.11 shall be applicable, a quorum shall consist of
Holders present in person or by proxy and representing at least 25% in principal
amount of the outstanding Notes or Notes of such series, as the case may be. If
a quorum of the Noteholders or the Holders of Notes of such series, as the case
may be, shall not be present within 30 minutes from the time fixed for holding
any such meeting, the meeting, if convened by the Noteholders or the Holders of
Notes of such series or pursuant to a Noteholder's Request or the request of the
Holders of the Notes of a series, shall be dissolved; but in any other case the
meeting shall be adjourned to the same day in the next week (unless such day is
not a Business Day, in which case it shall be adjourned to the next following
Business Day) at the same time and place. At the adjourned meeting the
Noteholders or the Holders of Notes of such series, as the case may be, present
in person or by proxy shall form a quorum and may transact the business for
which the meeting was originally convened notwithstanding that they may not
represent 25% of the principal amount of the outstanding Notes or Notes of such
series.
9.5 POWER TO ADJOURN
The chairman of any meeting at which a quorum of the Noteholders or the Holders
of Notes of a series, as the case may be, is present may, with the consent of
the Holders of a majority in principal amount of the Notes or the Notes of such
series, as the case may be, represented thereat, adjourn any such meeting and no
notice of such adjournment need be given except such notice, if any, as the
meeting may prescribe.
9.6 SHOW OF HANDS
Every question submitted to a meeting shall be decided in the first place by a
majority of the votes given on a show of hands except that votes on
Extraordinary Resolutions shall be given in the manner hereinafter provided. At
such meeting, unless a poll is duly demanded as herein provided, a declaration
by the chairman that a resolution has been carried or carried unanimously or by
a particular majority or lost or not carried by a particular majority shall be
conclusive evidence of the fact.
9.7 POLL
On every Extraordinary Resolution, and on any other question submitted to a
meeting, when demanded by the chairman or by a Holder and/or proxies for Holders
holding at least 5% of the principal amount of the Notes or the Notes of a
series, as the case may be, represented thereat, a poll shall be taken in such
manner and either at once or after an adjournment as the chairman shall direct.
Questions other than Extraordinary Resolutions shall, if a poll is taken, be
decided by the votes of the Holders of a majority in principal amount of the
Notes or the Notes of such series, as the case may be, represented at the
meeting and voted on the poll.
9.8 VOTING
On a show of hands every Person who is present and entitled to vote, whether as
a Holder or as proxy, shall have one vote. On a poll each Holder present in
person or represented by a duly appointed proxy at the meeting of Noteholders or
the Holders of the Notes of a series shall be entitled to one vote in respect of
each $1,000 principal amount of Notes or Notes of such series, as the case may
be, of which he shall then be the Holder. A proxy need not be a Holder of Notes
of any series. In the case of joint registered Holders of a Note, any one of
them present in person or by proxy at the meeting may vote in the absence of the
other or others; but in case more than one of them are present in person or by
proxy, they shall vote together in respect of the Notes of which they are joint
registered Holders.
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9.9 REGULATIONS
The Trustee or the Corporation, with the approval of the Trustee, may from time
to time make and from time to time vary such regulations as it shall from time
to time think fit providing for:
(a) voting by proxy and the form of the instrument appointing a proxy
(which shall be in writing) and the manner in which the same shall
be executed and for the production of the authority of any Person
signing on behalf of a Holder;
(b) the issue of voting certificates:
(i) by any bank, trust company or other depositary approved by
the Trustee certifying that specified Bearer Notes have
been deposited with it by a named Person and will remain on
deposit until after the meeting of Noteholders or Holders
of Notes of a series, as the case may be, specified
therein;
(ii) by any bank, trust company, insurance company, governmental
department or agency approved by the Trustee certifying
that it is the Holder of specified Bearer Notes and will
continue to hold the same until after the meeting of
Noteholders or Holders of Notes of a series, as the case
may be, specified therein;
which voting certificates shall entitle the Persons named therein
to be present and vote at any such meeting and at any adjournment
thereof or to appoint a proxy or proxies to represent them at such
meeting and at any adjournment thereof in the same manner and with
the same effect as though the persons so named in such voting
certificates were the actual bearers of the Bearer Notes specified
therein;
(c) the deposit of voting certificates and/or instruments appointing
proxies at such place as the Trustee, the Corporation or the
Noteholders or the Holders of the Notes of a series, convening a
particular meeting, as the case may be, may in the notice
convening the meeting direct and the time, if any, before the
holding of the meeting or any adjournment thereof by which the
same shall be deposited; and
(d) the deposit of voting certificates and/or instruments appointing
proxies at some approved place or places other than the place at
which a particular meeting is to be held and enabling particulars
of such voting certificates and/or instruments appointing proxies
to be mailed, cabled, telegraphed, telecopied or sent by telex
before the meeting to the Corporation or to the Trustee at the
place where the same is to be held and for the voting of proxies
so deposited as though the instruments themselves were produced at
the meeting.
Any regulations so made shall be binding and effective and the votes given in
accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only Persons who shall be recognized at any meeting
as the Holders of any Notes, or as entitled to vote or be present at the meeting
in respect thereof, shall be persons who produce Bearer Notes or voting
certificates at the meeting and Holders of Registered Notes and persons whom
Holders of Registered Notes or voting certificates have duly appointed as their
proxies.
9.10 CORPORATION AND TRUSTEE MAY BE REPRESENTED
The Corporation and the Trustee, by their respective officers and directors, and
the legal advisers of the Corporation and the Trustee may attend any meeting of
the Noteholders or the Holders of Notes of any series, as the case may be, but
shall have no vote as such.
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9.11 POWERS EXERCISABLE BY EXTRAORDINARY RESOLUTION
In addition to the powers conferred upon them by any other provisions of this
Indenture or by law, a meeting of the Noteholders or a meeting of the Holders of
Notes of any series, as the case may be, shall have the following powers
exercisable from time to time by Extraordinary Resolution:
(a) in the case of a meeting of Noteholders, subject to the
requirement to obtain the consent of the Holder of each
outstanding Note affected thereby where so required in section
12.2, power to approve any change whatsoever in any of the
provisions of this Indenture or the Notes and any modification,
abrogation, alteration, compromise or arrangement of the rights of
the Noteholders and/or the Trustee against the Corporation or
against its undertaking, property and assets or any part thereof,
whether such rights arise under this Indenture or the Notes or
otherwise and, in the case of a meeting of the Holders of Notes of
such series, subject to the requirement to obtain the consent of
the Holder of each outstanding Note affected thereby where so
required in section 12.2, power to approve any change whatsoever
in any of the provisions of this Indenture specifically affecting
such series of Notes or the Notes of such series and any
modification, abrogation, alteration, compromise or arrangement of
the rights of the Holders of such series of Notes and/or the
Trustee against the Corporation or against its undertaking,
property and assets or any part thereof, whether such rights arise
under this Indenture or the Notes of such series or otherwise;
(b) in the case of a meeting of Noteholders, power to approve any
scheme for the reconstruction or reorganization of the Corporation
or for the consolidation, amalgamation or merger of the
Corporation with any other corporation or for the selling or
leasing of the undertaking, property and assets of the Corporation
or any part thereof(where such approval is required), provided
that no such approval shall be necessary in respect of any such
transaction if the provisions of Article 8 shall have been
complied with;
(c) in the case of a meeting of Noteholders, power to direct or
authorize the Trustee to exercise any power, right, remedy or
authority given to it by this Indenture or the Notes in any manner
specified in such Extraordinary Resolution or to refrain from
exercising any such power, right, remedy or authority or, in the
case of a meeting of the Holders of Notes of such series, power to
direct or authorize the Trustee to exercise any power, right,
remedy or authority given to it in respect of the Notes of such
series by this Indenture or the Notes of such series in any manner
specified in such Extraordinary Resolution or to refrain from
exercising any such power, right, remedy or authority;
(d) in the case of a meeting of Noteholders, power to waive and direct
the Trustee to waive any default or Event of Default hereunder
provided with respect to all outstanding Notes and/or cancel any
declaration made by the Trustee pursuant to section 6.3 either
unconditionally or upon any conditions specified in such
Extraordinary Resolution or, in the case of a meeting of the
Holders of Notes of such series, power to waive and direct the
Trustee to waive any default or Event of Default hereunder (or in
any supplemental indenture hereto creating such series) provided
with respect to Notes of such series and/or cancel any declaration
made by the Trustee pursuant to section 6.3 either unconditionally
or upon any conditions specified in such Extraordinary Resolution;
(e) power to direct any Noteholder or Holder of Notes of such series,
as the case may be, who, as such, has brought any action, suit or
proceeding to stay or discontinue or otherwise deal with the same
in the manner directed by such Extraordinary Resolution upon
payment, if the taking of such action, suit or proceeding shall
have been permitted by section 6.8, of the costs, charges and
expenses reasonably and properly incurred by such Noteholder or
Holder of Notes of such series, as the case may be, in connection
therewith;
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(f) power to restrain any Noteholder or Holder of Notes of such
series, as the case may be, from taking or instituting any suit,
action or proceeding for the purpose of enforcing payment of the
principal or interest of any Note or Note of such series, as the
case may be, or for the execution of any trust or power hereunder
or for any other remedy hereunder;
(g) power to appoint a committee to consult with the Trustee (and to
remove any committee so appointed) and to delegate to such
committee (subject to such limitations, if any, as may be
prescribed in such Extraordinary Resolution) all or any of the
powers which the Noteholders or the Holders of the Notes of such
series, as the case may be, may exercise by Extraordinary
Resolution under this section 9.11; the Extraordinary Resolution
making such appointment may provide for payment of the expenses
and disbursements of and compensation to such committee; such
committee shall consist of such number of individuals (who need
not be Noteholders or the Holders of the Notes of such series or
any series) as shall be prescribed in the Extraordinary Resolution
appointing it; subject to the Extraordinary Resolution appointing
it, every such committee may elect its chairman and may make
regulations respecting its quorum, the calling of its meetings,
the filling of vacancies occurring in its number, the manner in
which it may act and its procedure generally and such regulations
may provide that the committee may act at a meeting at which a
quorum is present or may act by resolution signed in one or more
counterparts by a majority of the members thereof or the number of
members thereof necessary to constitute a quorum, whichever is the
greater; all acts of any such committee within the authority
delegated to it shall be binding upon all Noteholders or the
Holders of the Notes of such series, as the case may be;
(h) power to agree to any compromise or arrangement with any creditor
or creditors or any class or classes of creditors, whether secured
or otherwise, and with holders of any shares or other securities
of the Corporation;
(i) power to authorize the distribution in specie of any shares,
bonds, debentures or other securities or obligations and/or cash
or other consideration received or the use or disposition of the
whole or any part of such shares, bonds, debentures or other
securities or obligations and/or cash or other consideration in
such manner and for such purpose as may be considered advisable
and specified in such Extraordinary Resolution;
(j) power to approve the exchange of the Notes or the Notes of such
series, as the case may be, for or the conversion thereof into
shares, bonds, debentures or other securities or obligations of
the Corporation or of any corporation formed or to be formed;
(k) in the case of a meeting of Noteholders, power to remove the
Trustee from office and to appoint a new Trustee or Trustees; and
(l) power to amend, alter or repeal any Extraordinary Resolution
previously passed or approved by the Noteholders or the Holders of
the Notes of such series, as the case may be, or by any committee
appointed pursuant to subsection 9.11(g).
9.12 MEANING OF "EXTRAORDINARY RESOLUTION"
(a) The expression "Extraordinary Resolution" when used in this
Indenture means, in respect of a meeting of Noteholders, subject
as hereinafter provided in this Article 9, a resolution proposed
to be passed as an Extraordinary Resolution at the meeting of
Noteholders duly convened for the purpose and held in accordance
with the provisions of this Article 9 at which the Holders of more
than 25% of the principal amount of the Notes then outstanding are
present in person or by proxy and passed by the favourable votes
of the Holders of not less than 66 2/3% of the principal amount of
Notes represented at the meeting and voted on a poll upon such
resolution and, in respect of a
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meeting of the Holders of Notes of any series, a resolution
proposed to be passed as an Extraordinary Resolution at the
meeting of the Holders of Notes of such series duly convened for
the purpose and held in accordance with the provisions of this
Article 9 at which the Holders of more than 25% of the principal
amount of the Notes of such series then outstanding are present in
person or by proxy and passed by the favourable votes of the
Holders of not less than 66 2/3% of the principal amount of the
Notes ofsuch series represented at the meeting and voted on a poll
upon such resolution.
(b) If at any meeting of the Holders of all outstanding Notes the
Holders of more than 25% of the principal amount of the Notes then
outstanding, or at a meeting of the Holders of Notes of any series
the Holders of more than 25% of the principal amount of the Notes
of such series then outstanding, are not present in person or by
proxy within 30 minutes after the time appointed for the meeting,
then the meeting, if convened by the Noteholders or the Holders of
Notes of such series or pursuant to a Noteholder's Request or a
written request signed by the Holders of not less than 25% in
principal amount of the Notes of such series, as the case may be,
shall be dissolved; but in any other case it shall be adjourned to
such date, being not less than 21 nor more than 60 days later, and
to such place and time as may be appointed by the chairman. Not
less than 10 days' notice shall be given of the time and place of
such adjourned meeting in the manner provided in Article 9. Such
notice shall state that at the adjourned meeting the Noteholders
or the Holders of Notes of such series, as the case may be,
present in person or by proxy shall form a quorum, but it shall
not be necessary to set forth the purposes for which the meeting
was originally called or any other particulars. At the adjourned
meeting the Noteholders or the Holders of the Notes of such
series, as the case may be, present in person or by proxy shall
form a quorum and may transact the business for which the meeting
was originally convened and a resolution proposed at such
adjourned meeting and passed in accordance with subsection 9.12(a)
shall be an Extraordinary Resolution within the meaning of this
Indenture, notwithstanding that the Holders of more than 25% of
the principal amount of the Notes then outstanding or the Notes of
such series then outstanding, as the case may be, are not present
in person or by proxy at such adjourned meeting.
(c) Votes on an Extraordinary Resolution shall always be given on a
poll and no demand for a poll on an Extraordinary Resolution shall
be necessary.
9.L3 POWERS CUMULATIVE
It is hereby declared and agreed that any one or more of the powers and/or any
combination of the powers in this Indenture stated to be exercisable by the
Noteholders or the Holders of Notes of any series by Extraordinary Resolution or
otherwise may be exercised from time to time and the exercise of any one or more
of such powers or any combination of powers from time to time shall not be
deemed to exhaust the right of the Noteholders or the Holders of the Notes of
such series, as the case may be, to exercise the same or any other such power or
powers or combination of powers thereafter from time to time.
9.14 MINUTES
Minutes of all resolutions and proceedings at every meeting of Noteholders or
the Holders of Notes of any series, as the case may be, shall be made and duly
entered in books to be provided for that purpose by the Trustee at the expense
of the Corporation, and any such minutes, if signed by the chairman of the
meeting at which such resolutions were passed or proceedings had, or by the
chairman of the next succeeding meeting of the Noteholders or the Holders of
Notes of such series, as the case may be, shall be prima facie evidence of the
matters therein stated and, until the contrary is proved, every such meeting, in
respect of the proceedings of which minutes shall have been made, shall be
deemed to have been duly held and convened, and all resolutions passed or
proceedings had thereat, to have been duly passed and had.
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9.15 SIGNED INSTRUMENTS
Any action which may be taken and any power which may be exercised by the
Noteholders or the Holders of Notes of any series, as the case may be, under
this Indenture may also be taken and exercised, in respect of an-action which
may be taken or power which may be exercised by the Noteholders, by the Holders
of not less than 66 2/3% of the principal amount of the outstanding Notes and,
in respect of an action which may be taken or power which may be exercised by
the Holders of Notes of a series, by the Holders of not less than 66 2/3% of the
principal amount of the outstanding Notes of such series by signed instrument
and the expression "Extraordinary Resolution" when used in this Indenture shall
include an instrument so signed. Notice of any Extraordinary Resolution passed
in accordance with this section 9.15 shall be given by the Trustee to the
Holders of Notes or the Holders of Notes of the series affected thereby, as the
case may be, within 30 days of the date on which such Extraordinary Resolution
was passed.
9.16 BINDING EFFECT OF RESOLUTIONS
Every resolution and every Extraordinary Resolution passed in accordance with
the provisions of this Article 9 at a meeting of Noteholders or Holders of the
Notes of any series, as the case may be, shall be binding upon all the
Noteholders or the Holders of Notes of such series, as the case may be, whether
present at or absent from such meeting, and every instrument signed by the
Noteholders or the Holders of the Notes of any series, as the case may be, in
accordance with section 9.15 shall be binding upon all the Noteholders; or the
Holders of the Notes of such series, as the case may be, whether signatories
thereto or not, and each and every Noteholder, or Holder of Notes of such
series, as the case may be, and the Trustee (subject to the provisions for its
indemnity herein contained) shall be bound to give effect to every such
resolution, Extraordinary Resolution and instrument.
9.17 SERIAL MEETING
(a) In addition to the power to convene a meeting of the Holders of
the Notes of any series as provided in section 9.1, if in the
opinion of the Trustee any business to be transacted at a meeting
of Noteholders, or any action to be taken or power to be exercised
by instrument in writing under section 9.15, especially affects
the rights of the Holders of Notes of one or more series in a
manner or to an extent differing from that in which it affects the
rights of the Holders of Notes of any other series, then:
(i) reference to such fact, indicating each series so
especially affected, shall be made in the notice of such
meeting and the meeting shall be and is herein called a
"serial meeting";
(ii) the Holders of Notes of a series so especially affected
shall not be bound by any action taken or power exercised
at a serial meeting unless in addition to the other
provisions of this Article:
(A) there are present in person or by proxy at the said
meeting Holders of at least 25% in principal amount
of the outstanding Notes of such series, subject to
the provisions of this Article as to adjourned
meetings; and
(B) the resolution is passed by the favourable votes of
the Holders of at least a majority (or in the case
of an Extraordinary Resolution not less than
66 2/3%), of the principal amount of Notes of such
series voted on the resolution;
(iii) the Holders, of Notes of a series so especially affected
shall not be bound by any action taken or power exercised
by instrument in writing by the Noteholders under section
9.15 unless in addition to the other provisions of this
Article such instrument is signed in one or more
counterparts by the Holders of 66 2/3% of the principal
amount of the outstanding Notes of such series.
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(b) Notwithstanding anything herein contained (but subject to
the provisions of any indenture, deed or instrument
supplemental or ancillary hereto), any covenant or other
provision contained herein or in any indenture supplemental
hereto which is expressed to be effective only so long as
any Notes of a particular series remain outstanding may be
modified by the required resolution or consent of the
Holders of the Notes of such series in the same manner as
if the Notes of such series were the only Notes outstanding
hereunder.
9.18 EVIDENCE OF RIGHTS OF NOTEHOLDERS
Any request, direction, notice, consent or other instrument which this Indenture
may require or permit to be signed or executed by the Noteholders or the Holders
of Notes of any series, as the case may be, may be in any number of concurrent
instruments of similar tenor and may be signed or executed by such Noteholders
or Holders of Notes of such series, as the case may be, in person or by attorney
duly appointed in writing. Proof of the execution of any such request,
direction, notice, consent or other instrument or of a writing appointing any
such attorney or (subject to the provisions of section 9.9 with regard to voting
at meetings of Noteholders or Holders of any series of Notes) of the holding by
any Person of Notes or Coupons shall be sufficient for any purpose of this
Indenture if made in the following manner:
(a) the fact and date of the execution by any Person of such request,
direction, notice, consent or other instrument or writing may be
proved by the certificate of any notary public, or other officer
authorized to take acknowledgments of deeds to be recorded at the
place where, such certificate is made, that the Person signing
such request, direction, notice, consent or other instrument or
writing acknowledged to him the execution thereof; or by an
affidavit of a witness of such execution or in any other manner
which the Trustee may consider adequate; and
(b) the fact of the holding by any Person executing such request,
direction, notice, consent or other instrument or writing of
Bearer Notes and the amounts, designations and numbers thereof and
the date of his holding the same may be proved by deposit of such
Bearer Notes with the Trustee or by a certificate executed by any
bank, trust company or other depositary satisfactory to the
Trustee certifying that on the date therein mentioned such Person
had on deposit with such depositary the Bearer Notes described in
such certificate and that, if applicable, such Bearer Notes will
remain so deposited until the expiration of the time specified in
such certificate.
The Trustee may, nevertheless, in its discretion require further proof in cases
where it considers further proof necessary or desirable or may accept such other
proof as it shall consider proper.
ARTICLE 10
NOTICES
10.1 NOTICE TO THE CORPORATION
Any notice to the Corporation under the provisions of this Indenture shall be
valid and effective if delivered personally to, or, subject to section 10.4, if
given by registered mail, postage prepaid, addressed to, the Corporation at 1000
Louisiana, Suite 1500, Houston, Texas, 77002, Attention: Secretary and shall be
deemed to have been given on the date of delivery or on the third Business Day
after such letter has been mailed, as the case may be. The Corporation may from
time to time notify the Trustee of a change in address which thereafter, until
changed by further notice, shall be the address of the Corporation for all
purposes of this Indenture.
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10.2 NOTICE TO NOTEHOLDERS
Except as otherwise expressly provided herein, all notices to be given hereunder
with respect to the Notes shall be valid and effective if; in the case of
Registered Notes, such notice is delivered personally or is sent by first class
mail, postage prepaid, addressed to the Holders of the Registered Notes at their
post office addresses appearing in any of the registers hereinbefore mentioned,
and, in the case of Bearer Notes, such notice is published in one or more daily
newspapers of general circulation published in the English language in the
respective cities in which the Corporation is for the time being required to
maintain a register for the Notes and in a daily newspaper or newspapers
published in such other place or places (if any) and in such other language or
languages (if any) as the Corporation or the Trustee may determine or as may be
specified in the terms and conditions relating to such series of Notes, once in
each of two successive weeks. Any notice so delivered, sent by mail or
published shall be deemed to have been given on the day upon which it is
delivered, mailed or the latest date on which the first publication in each of
such cities takes place, as the case may be. Any accidental error, omission or
failure in giving or in delivering, mailing or publishing any such notice or the
non-receipt of any such notice by any Noteholders or Holders shall not
invalidate or otherwise prejudicially affect any action or proceeding founded
thereon.
10.3 NOTICE TO THE TRUSTEE
Any notice to the Trustee under the provisions of this Indenture shall be valid
and effective if delivered personally to, or, subject to section 10.4, if given
by registered mail, postage prepaid, addressed to, the Trustee at Montreal Trust
Corporate Services, 710, 530 - 8th Avenue SW, Calgary, Alberta, T2P 3S8,
Attention: Manager, Corporate Trust Department and shall be deemed to have been
given on the date ofdelivery or on the third Business Day after such letter has
been posted, as the case may be. The Trustee may from time to time notify the
Corporation of a change in address which thereafter, until changed by further
notice, shall be the address of the Trustee for all purposes of this Indenture.
10.4 MAIL SERVICE INTERRUPTION
If the Trustee determines that mail service is or is threatened to be
interrupted at the time when the Trustee is required or elects to give any
notice to the Holder of Registered Notes hereunder, the Trustee shall,
notwithstanding the provisions hereof; give such notice by means of publication
in The Globe and Mail, national edition, or any other English language daily
newspaper or newspapers of general circulation in Canada, once in each of two
successive weeks, and any notice so published shall be deemed to have been given
on the latest date on which the first publication takes place.
If, by reason of any actual or threatened interruption of mail service due to
strike, lock-out or otherwise, any notice to be given to the Trustee or to the
Corporation would be unlikely to reach its destination in a timely manner, such
notice shall be valid and effective only if delivered personally in accordance
with sections 10.1 or 10.3, as the case may be.
ARTICLE 11
CONCERNING THE TRUSTEE
11.1 TRUST INDENTURE LEGISLATION
(a) In this Article 11, the term "Indenture Legislation" means the
provisions, if any, of the BUSINESS CORPORATIONS ACT (Canada), the
BUSINESS CORPORATIONS ACT (Yukon) and the BUSINESS CORPORATIONS
ACT (Ontario), and any other statute of Canada or a province
thereof; and of the regulations under any such statute, relating
to trust indentures and to the rights, duties and obligations of
trustees under trust indentures and of corporations issuing debt
obligations under trust indentures, to the extent that such
provisions are at the time in force and applicable to this
Indenture or the Corporation;
<PAGE>
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(b) If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with a mandatory requirement of Indenture
Legislation, such mandatory requirement shall prevail; and
(c) At all times in relation to this Indenture and any action to be
taken hereunder, the Corporation and the Trustee each shall
observe and comply with Indenture Legislation and the Corporation,
the Trustee and each Noteholder shall be entitled to the benefits
of Indenture Legislation.
11.2 NO CONFLICT OF INTEREST
The Trustee represents to the Corporation that at the date of the execution and
delivery of this Indenture there exists no material conflict of interest in the
role of the Trustee as a fiduciary hereunder. If at any time a material conflict
of interest exists in the Trustee's role as a fiduciary hereunder the Trustee
shall, within 90 days after ascertaining that such a material conflict of
interest exists, either eliminate the same or else resign from the trusts
hereunder by giving notice in writing to the Corporation at least 21 days prior
to such resignation and shall thereupon be discharged from all further duties
and liabilities hereunder.
11.3 RIGHTS AND DUTIES OF TRUSTEE
(a) In the exercise of the rights and duties prescribed or conferred
by the terms of this Indenture, the Trustee shall exercise that
degree of care, diligence and skill that a reasonably prudent
trustee would exercise in comparable circumstances;
(b) Subject only to subsection 11.3(a), the obligation of the Trustee
to commence or continue any act, action or proceeding for the
purpose of enforcing any rights of the Trustee or the Noteholders
hereunder shall be conditional upon the Noteholders furnishing,
when required by notice in writing by the Trustee, sufficient
funds to commence or continue such act, action or proceeding and
indemnity reasonably satisfactory to the Trustee to protect and
hold harmless the Trustee against the costs, charges and expenses
and liabilities to be incurred thereby and any loss and damage it
may suffer by reason thereof. None of the provisions contained in
this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur financial liability in the performance of
any of its duties or in the exercise of any of its rights or
powers unless indemnified as aforesaid.;
(c) The Trustee may, before commencing or at any time during the
continuance of any such act, action or proceeding, require the
Noteholders at whose instance it is acting to deposit with the
Trustee the Notes held by them, for which Notes the Trustee shall
issue receipts; and
(d) Every provision of this Indenture that by its terms relieves the
Trustee of liability or entitles it to rely upon any evidence
submitted to it is subject to the provisions of Indenture
Legislation, this section 11.3 and section 11.4.
11.4 EVIDENCE, EXPERTS AND ADVISERS
(a) In addition to the reports, certificates, opinions, statutory
declarations and other evidence required by this Indenture, the
Corporation shall furnish to the Trustee such additional evidence
of compliance with any provisions hereof, and in such form, as may
be prescribed by Indenture Legislation or as the Trustee may
reasonably require by written notice to the Corporation;
(b) In the exercise of its rights, duties and obligations, the Trustee
may, if it is acting in good faith, rely as to the truth of the
statements and the accuracy of the opinions expressed therein,
upon statutory declarations, opinions, reports, certificates or
other evidence referred to in subsection 11.4(a) provided that the
Trustee examines the same and determines that such evidence
complies with the applicable requirements of this Indenture and of
Indenture Legislation; and
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(c) The Trustee may employ or retain such counsel, auditors,
accountants, appraisers or other experts or advisers, whose
qualifications give authority to any opinion or report made by
them, as it may reasonably require for the purpose of discharging
its duties hereunder and shall not be responsible for any
misconduct on the part of any of them.
11.5 TRUSTEE MAY DEAL IN NOTES
Subject to section 11.3, the Trustee may buy, sell, lend upon and deal in the
Notes or other securities of the Corporation, either with the Corporation or
otherwise, and generally contract and enter into financial transactions with the
Corporation or otherwise, without being liable to account for any profits made
thereby.
11.6 TRUSTEE NOT REQUIRED TO GIVE
The Trustee shall not be required to give any bond or security in respect of the
execution of the trusts and powers of this Indenture or otherwise in respect of
this Indenture.
11.7 PROTECTION OF TRUSTEE
By way of supplement to the provisions of any law for the time being relating to
trustees, it is expressly declared and agreed as follows:
(a) the Trustee shall not be liable for or by reason of any statements
of fact or recitals in this Indenture or in the Notes or Coupons
(except the representation contained in section 11.2 and in the
certificate of the Trustee on the Notes) or required to verify the
same, but all such statements or recitals are and shall be deemed
to be made by the Corporation;
(b) nothing herein contained shall impose any obligation on the
Trustee to see to or to require evidence of the registration or
filing (or renewal thereof) of this Indenture or any instrument
ancillary or supplemental hereto;
(c) the Trustee shall not be bound to give notice to any Person or
Persons of the execution hereof; and
(d) the Trustee shall not incur any liability or responsibility
whatever or be in any way responsible for the consequence of any
breach on the part of the Corporation of any of the covenants
herein contained or of any acts of the agents of the Corporation.
11.8 INVESTMENT OF TRUST MONEYS
Unless otherwise provided in this Indenture, any moneys held by the Trustee,
which under the trusts of this Indenture may or ought to be invested or which
may be on deposit with the Trustee or which may be in the hands of the Trustee,
may be invested and reinvested in the name or under the control of the Trustee
in any of the debt securities in which trustees are by the laws of the Province
of Ontario authorized to invest at the time of investment maturing not later
than one year from such time. Pending such investment such moneys may be placed
by the Trustee on deposit in a chartered bank in Canada or with its own deposit
department. The Trustee shall allow interest at the current rate for similar
deposits on moneys remaining on deposit with it and, provided that the
Corporation is not in default hereunder, shall credit the Corporation with
interest received on moneys deposited with other depositories and on all moneys
invested as provided in this section 11.8.
The Trustee shall be accountable only for reasonable diligence in the investment
of moneys under this section 11.8 and the Trustee shall not be liable for any
loss or losses realized on such investments, negligence, wilful acts or defaults
only excepted.
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11.9 ACTION BY TRUSTEE TO PROTECT INTERESTS
The Trustee shall have the power to institute and maintain all and any such
actions, suits or proceedings as it may consider necessary or expedient to
preserve, protect or enforce its interests and the interests of the Holders of
the Notes.
11.10 REPLACEMENT OF TRUSTEE
The Trustee may resign from the trusts hereunder and thereupon be discharged
from all further duties and liabilities hereunder by giving to the Corporation
three months' notice in writing or such shorter notice as the Corporation may
accept as sufficient. The Noteholders by Extraordinary Resolution shall have
power at any time to remove the Trustee and to appoint a new trustee hereunder.
In the event of the Trustee resigning or being removed as aforesaid or being
dissolved, becoming bankrupt, going into liquidation or otherwise becoming
incapable of acting hereunder, the Corporation shall forthwith appoint a new
trustee hereunder unless a new trustee has already been appointed by the
Noteholders; failing such appointment by the Corporation, the retiring trustee
hereunder or any Noteholder may apply to a Judge of the Ontario High Court, on
such notice as such Judge may direct, for the appointment of a new trustee
hereunder; but any trustee so appointed by the Corporation or by the Court shall
be subject to removal as aforesaid by the Noteholders. Any new trustee hereunder
appointed under any provision of this section 11.10 shall be acorporation
authorized and qualified to carry on the business of a trust company in the
Province of Ontario and every other jurisdiction where such authorization or
qualification is necessary to enable it to act as a trustee hereunder and shall
certify that it will not have any material conflict of interest upon becoming
trustee hereunder. On any new appointment the new trustee shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named herein as Trustee.
Any corporation into which the Trustee may be merged or with which it may be
consolidated or amalgamated, or any corporation resulting from any merger,
consolidation or amalgamation to which the Trustee shall be a party, shall be
the successor Trustee under this Indenture without the necessity of the
execution of any instrument or any further act.
11.11 ACCEPTANCE OF TRUSTS
The Trustee accepts the trusts in this Indenture declared and provided for and
agrees to perform the same upon the terms and conditions herein set forth and in
trust for the various Persons who shall from time to time be Noteholders,
subject the terms and conditions herein set forth.
11.12 INDEMNIFICATION OF TRUSTEE
Except for its gross negligence or wilful misconduct: (a) the Trustee shall not
be liable for any act done or step taken or omitted by it in good faith, or for
any mistake of fact or law; and (b) the Company agrees to indemnify and save
harmless the Trustee from and against all claims, demands, action, suits or
other proceedings by whomsoever made, prosecuted or brought and from all loss,
costs, damages and expenses in any manner based upon, occasioned by or
attributable to any act of the Trustee in the execution of its duties hereunder.
It is understood and agreed that this indemnification shall survive the
termination of this Indenture.
ARTICLE 12
SUPPLEMENTAL INDENTURES
12.1 SUPPLEMENTAL INDENTURES
From time to time the Trustee and, when authorized by a resolution of the
Directors, the Corporation may and they shall, when required by this Indenture,
execute, acknowledge and deliver by their proper officers deeds or indentures
supplemental hereto, which thereafter shall form part hereof; for any one or
more of the following purposes:
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(a) establishing the terms of any series of Notes and the forms and
denominations in which they may be issued as provided in Article
2;
(b) adding to the provisions hereof such additional covenants of the
Corporation, enforcement provisions and other provisions for the
protection of the Holders of the Notes and/or providing for events
of default in addition to those herein specified;
(c) making such provisions not inconsistent with this Indenture as may
be necessary or desirable with respect to matters or questions
arising hereunder, including the making of any modifications in
the form of the Notes and/or Coupons which do not affect the
substance thereof and which, in the opinion of the Trustee, it may
be expedient to make, provided that the Trustee shall be of the
opinion that such provisions and modifications will not be
prejudicial to the interests of the Noteholders;
(d) providing for the issue as permitted hereby, of Notes of any one
or more series on or after the date of this Indenture;
(e) evidencing the succession, or successive successions, of other
corporations to the Corporation and the covenants of and
obligations assumed by any such successor in accordance with the
provisions of this Indenture;
(f) giving effect to any Extraordinary Resolution passed as provided
in Article 9;
(g) making any modification of any of the provisions of this Indenture
or the Notes which is of a formal, minor or technical nature;
(h) making any additions to, deletions from or alterations of the
provisions of this Indenture (including any of the terms and
conditions of the Notes) which, in the opinion of the Trustee, are
not materially prejudicial to the interests of the Noteholders and
which are necessary or advisable in order to incorporate, reflect
or comply with Indenture Legislation;
(i) adding to or altering the provisions hereof in respect of the
transfer of Notes, including provision for the exchange of Notes
of different denominations, and making any modification in the
form of the Notes which does not affect the substance thereof and
which, in the opinion of the Trustee, is not materially
prejudicial to the interests of the Noteholders;
(j) correcting or rectifying any ambiguities, defective provisions,
errors or omissions herein, provided that, in the opinion of the
Trustee, the rights of the Trustee and the Noteholders are in no
way prejudiced thereby; and
(k) any other purpose not inconsistent with the terms of this
Indenture provided that, in the opinion of the Trustee, the rights
of the Trustee and of the Noteholders are in no way prejudiced
thereby.
12.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS
With the consent of the Holders of the outstanding Notes affected by such
supplemental indenture, given by Extraordinary Resolution, the Corporation, when
authorized by or pursuant to a resolution of the Directors, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Notes under this Indenture; provided, however, that no such
supplemental indenture shall, without the consent of the Holder of each
outstanding Note affected thereby:
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(a) change the Stated Maturity of the principal of; or any instalment
of interest on, any Note, or reduce the principal amount thereof
or the rate of interest thereon or any premium payable upon the
redemption thereof; or change any obligation of the Corporation to
pay Additional Amounts contemplated by section 5.8 (except as
contemplated by section 8.1(b) and permitted by section 12.1), or
adversely affect any right of repayment at the option of any
Holder of any Note or change any Place of Payment where, or the
currency in which, any Note or any premium or the interest thereon
is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption or repayment at the option
of the Holder, on or after the redemption date or repayment date,
as the case may be), or
(b) reduce the percentage in principal amount of the outstanding Notes
of any series, the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is
required for any waiver of compliance with certain provisions of
this Indenture or certain defaults hereunder and their
consequences provided for in this Indenture, or reduce the
requirements of section 9.4 for quorum or voting, or
(c) modify any of the provisions of this section, section 5.11 or
section 6.13, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified
or waived without the consent of the Holder of each outstanding
Note affected thereby.
A supplemental indenture which changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Notes, or which modifies the rights
of the Holders of Notes of such series with respect to such covenant or other
provision, shall be deemed not to affect the rights under this Indenture of the
Holders of Notes of any other series.
It shall not be necessary for any consent of Holders under this section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such action shall approve the substance thereof.
ARTICLE 13
EXECUTION
13.1 COUNTERPARTS AND FORMAL DATE
This Indenture may be executed in several counterparts, each of which when so
executed shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument and the same instrument and
notwithstanding their date of execution shall be deemed to bear date as of the
8th day of April, 1998.
13.2 LANGUAGE OF INDENTURE
The parties hereto have requested that this document be drafted m the English
language.
Les parties ont demande que le present document soit redige en langue anglaise.
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IN WITNESS WHEREOF the parties hereto have executed this Indenture under their
respective corporate seals and the hands of their proper officers duly
authorized in that behalf.
BENZ ENERGY LTD.
By: /s/ ROBERT S. HERLIN, SENIOR VICE PRESIDENT
-----------------------------------------------
c/s
By:
-----------------------------------------------
MONTREAL TRUST COMPANY OF CANADA
By: XXX
-----------------------------------------------
c/s
By: /s/ MAUREEN BERGOS
-----------------------------------------------
<PAGE>
SCHEDULE A
to the foregoing indenture made as of April 8, 1998 between Benz Energy Ltd.
and Montreal Trust Corporation of Canada, as Trustee.
1. MATURITY, INTEREST, CURRENCY OF DENOMINATION. The first series of
Notes to be issued, certified and delivered hereunder (the "Special
Notes Series A") shall have the rights, conditions, limitations and
privileges in this Schedule set forth, shall be denominated in U.S.
dollars, shall consist of and be limited to US. $12,500,000 in
principal amount of Notes and shall be designated as Special Notes
Series A, shall mature on August 31, 2003 (the "Maturity Date") and
shall bear interest at 9% per annum from April 7, 1998, payable in
lawful money of the United States after as well as before maturity,
default and judgment, with interest on amounts in default at the same
rate, payable semi-annually in arrears on March 31 and September 30,
in each year, the first of such payments to be made on September 30,
1998.
2. INTEREST ACCRUED. The Special Notes Series A shall cease to bear
interest (i) from their date of redemption unless, upon due
presentation, payment of the principal in respect of the Special Note
Series A is improperly withheld or refused or unless a default is
otherwise made in respect of such payment, in which event interest
shall continue to accrue as provided in the Indenture, or (ii) where
the right to convert the Special Notes Series A shall have been
exercised in accordance with the provisions of the Indenture, from the
date of conversion of the Special Notes Series A.
3. INTEREST FOR LESS THAN ONE YEAR. When interest is required to be
calculated in respect of a period of less than a full year, it shall be
calculated on the basis of the actual number of calendar days in such
year and the number of days elapsed.
4. PAYMENT OF PRINCIPAL, INTEREST. Payment of principal in respect of each
Special Note Series A shall only be made against presentation and
surrender (or, in the case of part payment only, endorsement) of the
relevant Special Note Series A at the principal office of the Trustee in
the city of Calgary. Payments of interest due on the Special Notes Series
A on an interest payment date shall be forwarded or cause to be forwarded
by first class mail, postage prepaid, (or in the event of mail service
interruption by such other means as the Trustee and the Corporation shall
determine to be appropriate) to the Holder at the address appearing on
the appropriate register.
5. PAYMENT ON REDEMPTION. Each Special Note Series A must be presented for
redemption.
6. UNCLAIMED AMOUNTS. All monies paid by the Corporation to the Trustee for
the payment of principal or interest on any Special Note Series A which
remain unclaimed at the end of two years after the principal on such
Special Note Series A will have become due and payable shall be repaid to
the Corporation and the Holder of such Special Note Series A thereafter
shall have only the rights of a creditor of the Corporation as described
in the Indenture or such rights as may be otherwise prescribed by
applicable law.
7. ROUNDING AMOUNTS. When making payments to Holders of Special Notes Series
A, fractions of US$0.01 shall be rounded down to the nearest whole cent.
8. FORM AND DENOMINATION OF NOTES. The Special Notes Series A will be issued
in fully registered form in denominations of US.$1,000 or integral
multiples thereof, serially numbered.
9. CONVERSION:
(a) Each Special Note Series A shall entitle the Holder thereof to
acquire upon conversion thereof the same principal amount of 9%
convertible debentures series 2 of the Corporation ("Convertible
Debentures Series 2") at no additional cost to the Holder.
(b) The Holder of any Special Note Series A may exercise the right
conferred on such holder to acquire the same principal amount of
Convertible Debentures Series 2 by surrendering, after April 8,
1998
<PAGE>
A-2
and on or before 5:00 p.m. (Toronto time) (the "Expiry Time")
on the earlier of (i) the fifth Business Day after the date of
issuance of a receipt for a Prospectus (as hereinafter defined)
from the Securities Commission (as hereinafter defined) in the
last of the Filing Jurisdictions (as hereinafter defined) to issue
such receipt, and (ii) the date that is 18 months after the date
of the Indenture (the "Expiry Date"), to the Trustee the
certificate or certificates representing the Special Note Series A
together with a duly completed and executed exercise form. The
certificate or certificates representing the Special Note Series A
and the duly completed and executed exercise form referred to in
this subsection 9(b) shall be deemed to be surrendered only upon
personal delivery thereof or, if sent by mail or other means of
transmission, upon actual receipt thereof at, in each case, an
Exercise Office.
(c) Any exercise form referred to in subsection 9(b) shall be signed
by the Holder of the Special Notes Series A and shall specify the
principal amount of Convertible Debentures Series 2 which the
Holder thereof wishes to acquire (being not more than the
principal amount which such Holder is entitled to acquire pursuant
to the certificate(s) surrendered). If any of the Convertible
Debentures Series 2 subscribed for are to be issued to a person or
persons other than the Holder of the Special Notes Series A, such
Holder shall pay to the Corporation or the Trustee on behalf of
the Corporation, all applicable transfer or similar taxes and the
Corporation shall not be required to issue or deliver certificates
evidencing Convertible Debentures Series 2 unless or until such
Holder shall have paid to the Corporation, or the Trustee on
behalf of the Corporation, the amount of such tax or shall have
established to the satisfaction of the Corporation that such tax
has been paid or that no tax is due.
(d) Upon the conversion of Special Notes Series A pursuant to this
section 9, and subject to subsections 9(e) and (f), the
Convertible Debentures Series 2 subscribed for or, in the case of
a conversion pursuant to subsection 9(i), all of the Convertible
Debentures Series 2 issuable pursuant to the Special Notes Series
A converted, shall be deemed to have been issued and after the
date the certificate(s) representing Special Notes Series A are
surrendered for exercise or the Expiry Date, as applicable, the
certificate or certificates representing the Special Notes Series
A shall be deemed to represent only the right to receive a
certificate or certificates representing the Convertible
Debentures Series 2 into which such Special Notes Series A are
converted and the Corporation shall have no obligation to make any
payment upon surrender of the certificate or certificates
representing the Special Notes Series A.
(e) The Holder of any Special Notes Series A may exercise such
Holder's right to acquire a principal amount of Convertible
Debentures Series 2 less than the aggregate principal amount which
the Holder is entitled to acquire pursuant to the surrendered
certificate or certificates representing Special Notes Series A.
In the event of any conversion of a principal amount of Special
Notes Series A less than the principal amount which the Holder is
entitled to convert, the Holder of the Special Notes Series A upon
such conversion shall, in addition, be entitled to receive,
without charge therefor, a new certificate or certificates in
respect of the balance of the principal amount of the Special
Notes Series A represented by the surrendered certificate or
certificates and not then converted.
(f) Notwithstanding anything herein contained, the Corporation shall
not be required, upon the conversion of any Special Notes Series
A, to issue Convertible Debentures Series 2 in a principal amount
which is not an integral multiple of US.$1,000 or to distribute
certificates which evidence Convertible Debentures Series 2 in a
principal amount which is not an integral multiple of US.$1,000.
(g) Subject to subsection 9(i), immediately after the Expiry Time, all
rights under any Special Notes Series A not exercised in
accordance with the terms and conditions of this Indenture shall
cease and terminate and such Special Note Series A shall be void
and of no further force or effect.
<PAGE>
A-3
(h) (i) The Trustee shall promptly account to the Corporation with
respect to Special Notes Series A converted. Any securities
or other instruments, from time to time received by the
Trustee shall be received in trust for, and shall be
segregated and kept apart by the Trustee in trust for, the
Corporation.
(ii) The Trustee shall record the particulars of Special Notes
Series A converted, which particulars shall include the
principal amount converted, the date of conversion and the
serial numbers of all certificates surrendered or issued.
The Trustee shall provide such particulars in writing to
the Corporation within five Business Days of any request by
the Corporation therefor.
(i) At the Expiry Time, the rights of all Holders of Special Notes
Series A (other than Special Notes Series A in respect of which
the Holder thereof duly exercises its Retraction Right (as
hereinafter defined) or its right to acquire Convertible
Debentures Series 2 pursuant to subsection 9(a)) to acquire
Convertible Debentures Series 2 shall be exercised by the Trustee
on behalf of such Holders without any further action on the part
of such Holders or the Corporation and the Convertible Debentures
Series 2 issuable thereby shall be deemed to be issued to such
Noteholders at such time. The Corporation shall cause to be
delivered to the principal office of the Trustee in the city of
Calgary (the "Exercise Office") where the certificate or
certificates representing such Special Notes Series A is or are
surrendered, to the Person or Persons specified in the exercise
form a certificate or certificates for the appropriate principal
amount of Convertible Debentures Series 2 upon actual receipt at
the Exercise Office of the certificate or certificates
representing such Special Notes Series A together with any payment
of the nature referred to in subsection 9(c).
(1) Notwithstanding anything herein contained, Convertible Debentures
Series 2 will only be issued pursuant to any conversion of Special
Note Series A in compliance with the securities laws of any
applicable jurisdiction, and without limiting the generality of
the foregoing, in the event that the Special Notes Series A are
converted pursuant to subsection 9(a) or deemed to have been
converted pursuant to subsection 9(i) prior to the issuance of a
receipt for a (final) prospectus regarding the distribution of
Convertible Debentures Series 2 upon the conversion of Special
Notes Series A (the "Prospectus") by the securities commission or
similar securities regulatory authority (a "Securities
Commission") in each of the provinces of British Columbia, Alberta
and Ontario (the "Filing Jurisdictions"), the certificates
representing the Convertible Debentures Series 2 thereby issued
will bear such legend as may, in the opinion of Counsel to the
Corporation, be necessary in order to avoid a violation of any
securities laws of any province in Canada or to comply with the
requirements of any stock exchange on which the Convertible
Debentures Series 2 or the securities of the Corporation into
which the Convertible Debentures Series 2 may be converted (the
"Underlying Securities") are listed, provided that if, at any
time, in the opinion of counsel to the Corporation, such legends
are no longer necessary in order to avoid a violation of any such
laws, or the Holder of any such legended certificate, at the
Holder's expense, provides the Corporation with evidence
satisfactory in form and substance to the Corporation (which may
include an opinion of counsel satisfactory to the Corporation) to
the effect that such holder is entitled to sell or otherwise
transfer such Convertible Debentures Series 2 in a transaction in
which such legends are not required, such legended certificate may
thereafter be surrendered to the Corporation in exchange for a
certificate which does not bear such legend.
(k) The Corporation hereby appoints the Trustee, as trustee, to
receive, hold and deal with the Escrowed Subscription Funds in
accordance with the terms of this Indenture and the Trustee hereby
accepts such appointment and agrees to be bound by the terms of
this Indenture in respect thereof. On the issuance of any Special
Notes Series A, 40% of the aggregate principal amount of Special
Notes Series A issued (the "Escrowed Subscription Funds") shall be
deposited by the Agent with the Trustee. The Trustee shall not
release any Escrowed Subscription Funds, except as provided in
this
<PAGE>
A-4
Section 9. Subject to subsections 9(1), (m), (n) and (o), the
Trustee shall not deliver any of the Escrowed Subscription Funds,
or any interest accrued thereon, unless the Trustee receives:
(i) a notice in writing signed by the Corporation and the Agent
(the "Joint Notice") confirming that a receipt for a
Prospectus has been issued by the Securities Commissions in
each of the Filing Jurisdictions on or prior to 5:00 p.m.
(Toronto time) on that date 120 days after the date of the
Indenture (the "Qualification Deadline"); or
(ii) an opinion of counsel (addressed to the Trustee and the
Agent, in form satisfactory to the Agent, acting
reasonably) that a receipt for a Prospectus has been issued
by the Securities Commissions in each of the Filing
Jurisdictions on or prior to 5:00 p.m. (Toronto time) on
the Qualification Deadline;
in which case the Trustee shall immediately deliver all Escrowed
Subscription Funds, together with all interest accrued thereon, to
or to the order of the Corporation.
(l) If a receipt for a Prospectus has not been obtained on or prior to
5:00 p.m. (Toronto time) on the Qualification Deadline:
(i) from the Securities Commission in a province which is a
Filing Jurisdiction, each Noteholder in such province
holding Special Notes Series A; or
(ii) from the Securities Commission in each of the provinces of
British Columbia and Ontario, each Noteholder holding
Special Notes Series A wherever situate;
shall have the right to elect during the period commencing at the
Qualification Deadline and expiring at 5:00 p.m. (Toronto time) on
the date which is five Business Days following the Qualification
Deadline (the "Election Deadline") to:
(i) receive upon conversion an additional 10% of the Underlying
Securities (the "Additional Underlying Securities") to be
issued on conversion of the Convertible Debentures Series 2
(the "Penalty"),
OR
(ii) require the Corporation to repurchase 40% of the principal
amount of the Special Notes Series A held by the Holder at
the Retraction Price as hereinafter defined (the
"Retraction Right").
If a Holder of Special Notes Series A fails to make an election
prior to the Election Deadline, such Holder shall be deemed to
have elected to receive the Penalty. If a Holder of Special Notes
Series A elects to receive the Penalty or is deemed to have
elected to receive the Penalty, the certificates representing the
Convertible Debentures Series 2 issuable upon conversion of the
Special Notes Series A shall have endorsed thereon a statement to
the effect that upon conversion thereof the Holder shall receive
the Additional Underlying Securities.
The retraction price of the Special Notes Series A (the
"Retraction Price") shall be the principal amount thereof together
with interest equal to the product of the amount of all of the
interest earned by the Trustee upon the Escrowed Subscription
Funds from April 8, 1998 (the "Effective Date") to the date
immediately preceding the date of payment (less any interest paid
out by the Trustee pursuant to this Indenture prior to the date of
payment) multiplied by a fraction of which the numerator is the
principal amount of Special Notes Series A properly tendered to
the Trustee by
<PAGE>
A-5
such Noteholder pursuant to the Retraction Right and the
denominator is 40% of the principal amount of Special Notes
Series A outstanding on the date of payment. Payment of the
Retraction Price from the Escrowed Subscription Funds shall be
made by cheque payable at par in the city of Calgary, together
with delivery of a certificate or certificates for that
principal amount of Convertible Debentures Series 2 equal to
60% of the principal amount Special Notes Series A held by the
Holder, against delivery by Noteholders to the Trustee of
certificates representing the Special Notes Series A held by
the Holder and such certificates shall be immediately cancelled
and shall be void and of no further value or effect.
(m) If, following the payment to Holders of Special Notes Series A in
satisfaction of the Retraction Right, there remain excess Escrowed
Subscription Funds or interest accrued thereon, the Trustee shall
as soon as practicable after the Expiry Date deliver to the
Corporation all of such excess Escrowed Subscription Funds
together with all interest accrued thereon.
(n) If any Holder of Special Notes Series A, at any time prior to the
Expiry Time, elects or is deemed to elect to exercise the
entitlement to acquire Convertible Debentures Series 2 pursuant to
Special Note(s) Series A held by it, the Trustee shall pay to the
Corporation from the Escrowed Subscription Funds the Retraction
Price for each Special Note Series A converted.
(o) All Escrowed Subscription Funds shall be held at or administered
through the principal office of the Trustee in the city of
Calgary. The Trustee shall not be entitled to deal with the
Escrowed Subscription Funds except in accordance with the terms of
this Indenture. In the event that the Trustee determines the
necessity for the approval by the Holders of any matter in
connection with this section 9, an Extraordinary Resolution of the
Holders of Special Notes Series A shall provide sufficient
authority upon which the Trustee may act and the Trustee shall not
be responsible for any loss occasioned by so doing.
10. REDEMPTION. The Special Notes Series A shall be redeemable, in whole or
in part, at the option of the Corporation at any time after March 31,
2002 and prior to maturity at the principal amount thereof to be
redeemed, together with accrued and unpaid interest.
11. CERTIFICATES. The Special Notes Series A and the certificate of the
Trustee to be endorsed on the Special Notes Series A shall respectively
be substantially in the form set out in Exhibit 1 hereto with such
appropriate insertions, omissions, substitutions and variations as may be
approved or permitted under the terms of this Indenture and/or as the
Trustee may approve.
12. LEGENDS. All certificates representing Special Notes Series A (and all
certificates issued in exchange therefor or in substitution thereof)
shall bear the following legend:
THIS SPECIAL NOTE AND THE SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE
NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES. THE HOLDER HEREOF, BY PURCHASING
SUCH SECURITIES, AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY
(A) TO THE CORPORATION OR (B) OUTSIDE OF THE UNITED STATES IN ACCORDANCE
WITH REGULATION S UNDER THE U.S. SECURITIES ACT, IF APPLICABLE (OR SUCH
SUCCESSOR RULE OR REGULATION AS THEN IN EFFECT), (C) INSIDE THE UNITED
STATES (1) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE U.S.
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF APPLICABLE, AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (2) IN A TRANSACTION
THAT DOES NOT REQUIRE REGISTRATION UNDER THE U.S. SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS, AND THE HOLDER HAS PRIOR TO SUCH SALE
FURNISHED TO THE
<PAGE>
A-6
COMPANY AN OPINION OF COUNSEL OF RECOGNIZED STANDING, REASONABLY
SATISFACTORY TO THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD
PERIOD AND MAY NOT BE TRADED IN BRITISH COLUMBIA UNTIL AFTER THE FIRST
ANNIVERSARY OF THE DATE OF ISSUE HEREOF EXCEPT AS PERMITTED BY THE
SECURITIES ACT (BRITISH COLUMBIA) AND RULES MADE THEREUNDER
THIS SPECIAL NOTE 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 COMPLIANCE WITH THE PROSPECTUS AND REGISTRATION
REQUIREMENTS THEREIN OR AVAILABLE EXEMPTIONS THEREFROM.
<PAGE>
A-7
- ------------------------------------------------------------------------------
EXHIBIT 1
FACE OF SPECIAL NOTE SERIES A
- ------------------------------------------------------------------------------
Denomination US $-
Certificate No. -
- ------------------------------------------------------------------------------
BENZ ENERGY LTD.
9% Special Notes, Series A due August 31, 2003
Benz Energy Ltd. (the "Issuer") for value received, hereby promises to pay to
on August 31,2003 on such earlier date as the principal sum hereunder
mentioned may become repayable in accordance with the terms and conditions
endorsed hereon the principal sum of
[US.$1,000 AND INTEGRAL MULTIPLES THEREOF]
together with interest thereon at the rate of 9% per annum from April 7,
1998, payable in lawful money of the United States, after as well as before
maturity, default and judgement, with interest on amounts in default at the
same rate, semi-annually in arrears on March 31 and September 30 in each
year, the first such payment to be made on September 30, 1998. This Special
Note is issued subject to and with the benefits of a note indenture made
April 8, 1998 (the "Indenture") between the Issuer and Montreal Trust Company
of Canada (the "Trustee") and the Terms and Conditions endorsed hereon.
This Special Note Series A shall not be valid or enforceable for any purpose
unless and until this Special Note has been certified by or on behalf of the
Trustee.
IN WITNESS WHEREOF the Issuer has caused this Special Note Series A to be
executed by the facsimile signature of the Senior Vice-President of the
Issuer.
BENZ ENERGY LTD.
By:
-------------------------------
Senior Vice-President
Dated April 8, 1998
Issued in Houston, Texas
<PAGE>
A-8
CERTIFICATE OF TRUSTEE
This is one of the Special Notes Series A described in the Indenture referred
to above.
MONTREAL TRUST COMPANY OF CANADA
By:
--------------------------------
<PAGE>
A-9
- -------------------------------------------------------------------------------
TRANSFER FORM
BENZ ENERGY LTD.
9% Special Notes, Series A due August 31, 2003
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers to_______________________________________[NAME OF TRANSFEREE],
__________________ principal amount of 9% Special Notes, Series A of Benz
Energy Ltd. registered in the name of the undersigned on the records of
Montreal Trust Company of Canada represented by the certificate attached and
irrevocably appoints ___________________ the attorney of the undersigned to
transfer the said securities on the books or register with full power of
substitution.
DATED the ____ day of _____________, 19___.
- -----------------------------------
(Signature of Special Noteholder)
- -----------------------------------
Signature Guaranteed
Instructions:
1. Signature of the Noteholder must be the signature of the person appearing
on the face of this certificate.
2. If the Transfer Form is signed by a trustee, executor, administrator,
curator, guardian, attorney, officer of a corporation or any person
acting in a fiduciary or representative capacity, the certificate must be
accompanied by evidence of authority to sign satisfactory to the Trustee
and the Issuer.
3. The signature on the Transfer Form must be guaranteed by an authorized
officer of a chartered bank, trust company or an investment dealer who is
a member of a recognized stock exchange.
4. SPECIAL NOTES SHALL ONLY BE TRANSFERABLE IN ACCORDANCE WITH APPLICABLE
LAWS. THE TRANSFER OF SPECIAL NOTES TO A PURCHASER NOT RESIDENT IN A
FILING JURISDICTION MAY RESULT IN THE CONVERTIBLE DEBENTURES OBTAINED
UPON THE EXERCISE OF THE SPECIAL NOTES (WHETHER AFTER OR BEFORE OBTAINING
RECEIPTS FOR A FINAL PROSPECTUS RELATING TO THE DISTRIBUTION OF
CONVERTIBLE DEBENTURES UPON EXERCISE OF SPECIAL NOTES) NOT BEING FREELY
TRADEABLE IN THE JURISDICTION WHERE SUCH PURCHASER IS RESIDENT.
<PAGE>
A-10
- -------------------------------------------------------------------------------
CONVERSION FORM
TO: BENZ ENERGY LTD.
MONTREAL TRUST COMPANY OF CANADA
The undersigned holder of the within Note hereby irrevocably elects to convert
such Note in respect of US.$
principal amount thereof to the same principal amount of Convertible Debentures
Series 2 of Benz Energy Ltd. in accordance with the terms of the Indenture
referred to in the Note and directs that the Convertible Debentures Series 2
issuable and deliverable upon the conversion be issued and delivered to the
person indicated below.
* If less than the full principal amount of the within Note is to be
converted, indicate in the space provided the principal amount (which
must be US.$1,000 or integral multiples thereof) to be converted.
Dated:
------------------------------- ------------------------------------
SIGNATURE OF HOLDER
Name:
------------------------------- ------------------------------------
(Address)
<PAGE>
A-11
- -------------------------------------------------------------------------------
TRUSTEE
Montreal Trust Company of Canada
Suite 600 Western Gas Tower
530 - 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
and/or such other or further Trustee and/or specified offices as may from time
to time be appointed by the Issuer.
<PAGE>
A-12
TERMS AND CONDITIONS OF THE SPECIAL NOTES, SERIES A
This Special Note Series A is one of the securities of Benz Energy Ltd. (the
"Issuer") issued or issuable in one or more series pursuant to a note indenture
made April 8, 1998 (the "Indenture") between the Issuer and Montreal Trust
Company of Canada (the "Trustee"), and which includes the form of the Special
Notes Series A. The statements in these Terms and Conditions include summaries
of, and are subject to, the detailed provisions of and definitions in the
Indenture. All capitalized terms used and not otherwise defined herein shall
have the respective meanings set forth in the Indenture. Copies of the Indenture
are available for inspection at the specified offices of the Trustee. The
holders of the Special Notes Series A (the "Noteholders") will be deemed to have
notice of, and will be deemed to have taken such Special Notes Series A subject
to, all of the provisions of the Indenture.
1. FORM, DENOMINATION AND TITLE
The definitive Special Notes Series A are issued in fully registered form,
serially numbered, in denominations of US. $1,000 and integral multiples
thereof.
2. STATUS
The Special Notes Series A are direct, unconditional, unsecured and
unsubordinated obligations of the Issuer and rank and will at all times rank
PARI PASSU amongst themselves and with all other series of Special Notes issued
under the Indenture and at least PARI PASSU with all other unsecured obligations
(other than in respect of statutorily preferred creditors) of the Issuer from
time to time outstanding.
3. MATURITY, INTEREST AND CURRENCY OF DENOMINATION
The Special Notes Series A shall mature on August 31, 2003 (the "Maturity Date")
and shall bear interest at 9% per annum from April 7, 1998, payable in lawful
money of the United States after as well as before maturity, default and
judgment, with interest on amounts in default at the same rate, payable
semi-annually in arrears on March 31 and September 30, in each year, the first
of such payments to be made on September 30, 1998. Interest in respect of a
period of less than one year will be calculated on the basis of the actual
number of calendar days in such year and the number of days elapsed.
4. INTEREST ACCRUED
The Special Notes Series A shall cease to bear interest (i) from their date of
redemption unless, upon due presentation, payment of the principal in respect of
the Special Note Series A is improperly withheld or refused or unless a default
is otherwise made in respect of such payment, in which event interest shall
continue to accrue as provided in the Indenture, or (ii) where the right to
convert the Special Notes Series A shall have been exercised in accordance with
the provisions of the Indenture from the date of conversion of the Special Notes
Series A.
5. PAYMENT OF PRINCIPAL, INTEREST
Payment of principal in respect of each Special Note Series A shall only be made
against presentation and surrender (or, in the case of part payment only,
endorsement) of the relevant Special Note Series A at the specified office of
the Trustee. Payments of interest due on the Special Notes Series A on an
interest payment date shall be forwarded or cause to be forwarded by first class
mail, postage prepaid, (or in the event of mail service interruption by such
other means as the Trustee and the Issuer shall determine to be appropriate) to
the Holder at the address appearing on the appropriate register.
<PAGE>
A-13
6. PAYMENT ON REDEMPTION
Each Special Note Series A must be presented for redemption.
7. UNCLAIMED AMOUNTS
All monies paid by the Issuer to the Trustee for the payment of principal or
interest on any Special Note Series A which remain unclaimed at the end of two
years after the principal on such Special Note Series A will have become due and
payable shall be repaid to the Issuer and the holder of such Special Note Series
A thereafter shall have only the rights of a creditor of the Issuer as described
in the Indenture or such rights as may be otherwise prescribed by applicable
law.
8. ROUNDING AMOUNTS
When making payments to holders of Special Notes Series A, fractions of US $0.01
shall be rounded down to the nearest whole cent.
9. CONVERSION
Each Special Note Series A entitles the holder thereof to acquire the same
principal amount of 9% convertible debentures, Series 2 (the "Convertible
Debentures") of the Issuer, at no additional cost, at any time on or before 5:00
p.m. (Toronto time) (the "Expiry Time") on the earlier of (i) the fifth business
day after the date of issuance of a receipt from the securities commission or
similar securities regulatory authority ("Securities Commission") in the last of
the provinces of Alberta, British Columbia and Ontario (the "Qualifying
Jurisdictions") to issue such receipt for a final prospectus qualifying the
issue of Convertible Debentures to be issued upon the exercise of the Special
Notes (the "Prospectus"); and (ii) the date that is 18 months after the date of
the Indenture (the "Closing Date"). Any Special Notes Series A not exercised
prior to the Expiry Time shall be exercised by the trustee of the Special Notes
and the Convertible Debentures issued to the Noteholders immediately prior to
the Expiry Time without any further action on the part of the holder.
If a receipt for a Prospectus has not been obtained from the Securities
Commission in each of the Qualifying Jurisdictions on or before 5:00 p.m.
(Toronto time) on the date 120 days following the Closing Date (the
"Qualification Deadline"), then each holder of Special Notes Series A in a
Qualifying Jurisdiction in which such receipt has not been so obtained (or each
holder of Special Notes Series A wherever resident if such receipt has not been
so obtained in British Columbia and Ontario) will be entitled to receive, upon
exercise of such holder's conversion rights under the Convertible Debentures,
without payment of additional consideration, 110% of the number of Common Shares
that the principal amount thereof was previously convertible into, subject to
adjustment in certain circumstances, or, at the option of the holder of Special
Notes Series A exercisable on or before 5:00 p.m. (Toronto time) on the dates
business days following the Qualification Deadline, to retract up to 40% of the
principal amount of Special Notes Series A held thereby at the principal amount
thereof plus a pro-rata share of interest earned on 40% of the subscription
proceeds of the issue of the Special Notes Series A to the day prior to the date
of retraction.
The holder of a Special Note Series A desiring to convert such Special Note
Series A in whole or in part into Convertible Debentures shall surrender such
Special Note Series A to the specified office of the Trustee, together with the
Conversion Form on the back of such Special Note Series A or any other written
notice in a form satisfactory to the Trustee, in either case duly executed by
the holder or his executors or administrators or other legal representatives or
his or their attorney duly appointed by an instrument in writing in form and
executed in a manner satisfactory to the Trustee, exercising his right to
convert such Special Note Series A in accordance with the Indenture.
Any part, being US.$1,000 or an integral multiple thereof, of a Special Note
Series A of a denomination in excess of US. $1,000 may be converted.
<PAGE>
A-14
10. REDEMPTION
The Special Notes Series A are redeemable, in whole or in part, at the option of
the Issuer at any time after March 31, 2002 and prior to maturity at the
principal amount thereof to be redeemed, together with accrued and unpaid
interest.
11. MEETINGS OF NOTEHOLDERS AND MODIFICATION
The Indenture provides that modifications and alterations thereto and to the
Special Notes issued thereunder may be made if authorized by an extraordinary
resolution. Such a resolution must be passed by the affirmative vote of the
holders of not less than 66 2/3% of the principal amount of the Notes (or in the
case of a serial meeting, where the rights of the holders of Notes of one or
more series are affected differently than the rights of the holders of any other
series, of the principal amount of the Notes of the series so affected) issued
under the Indenture represented at a meeting at which holders of more than 25%
of the principal amount of the Notes (or Notes of a particular series, in the
case of a serial meeting) then outstanding are present in person or by proxy;
provided, however, that if a meeting or serial meeting is adjourned because not
more than 25% of the principal amount of such Notes is present in person or by
proxy then at the adjourned meeting an extraordinary resolution may be passed by
the affirmative vote of the holders of not less than 662/3% of the principal
amount of the Notes represented at the meeting or serial meeting, as the case
may be. The term extraordinary resolution shall also include an instrument
signed by the holders of not less than 66 2/3% of the outstanding Notes or the
Notes of a particular series, as the case may be. An extraordinary resolution
passed at any meeting of the Noteholders will be binding on all Noteholders,
whether or not they are present at the meeting.
The Indenture also permits the Issuer and the Trustee, without the consent of
holders of Special Notes, to enter into indentures supplemental to the Indenture
for certain purposes, including without limitation (i) making provisions not
inconsistent with the Indenture as may be necessary of desirable with respect to
matters or questions arising under the Indenture which do not affect the
substance thereof and which in the opinion of the Trustee, it may be expedient
to make, provided that the Trustee shall be of the opinion that such provisions
and modifications will not be prejudicial to the interests of the Noteholders,
(ii) providing for the issue, as permitted by the Indenture, of Notes of any one
or more series, (iii) making any modification of any of the provisions of this
Indenture or the Special Notes which is of a formal, minor or technical nature,
(iv) making any additions to, deletions from or alteration of the provisions of
this Indenture which, in the op in ion of the Trustee, are not materially
prejudicial to the interests of the Noteholders and which are necessary or
advisable in order to incorporate, reflect or comply with legislation applicable
to indentures, (v) correcting or rectifying any ambiguities, defective
provisions, errors or omissions in the Indenture, provided that, in the opinion
of the Trustee, the rights of the Trustee and the Noteholders are in no way
prejudiced thereby and (vi) any other purpose not inconsistent with the terms of
this Indenture provided that, in the opinion of the Trustee, the rights of the
Trustee and of the Noteholders are in no way prejudiced thereby.
12. EVENTS OF DEFAULT
If an Event of Default described in clause (a) or (b) below with respect
to Notes of any series at the time outstanding occurs and is continuing,
then in every such case the Trustee or the Holders of not less than 25%
in principal amount of the outstanding Notes of that series may declare
the principal amount of all the Notes of that series to be due and
payable immediately, by a notice in writing to the Issuer (and to the
Trustee if given by Holders), and upon any such declaration such
principal amount (or specified portion thereof) shall become immediately
due and payable. If an Event of Default described in clause (c), (d),
(e), (f), (g), (h) or (i) below occurs and is continuing, then in every
such case the Trustee or the Holders of not less than 25% in principal
amount of all the Notes then outstanding may declare the principal amount
of all the outstanding Notes to be due and payable immediately, by a
notice in writing to the Issuer (and to the Trustee if given by the
Holders) and upon any such declaration such principal amount (or
specified portion thereof) shall become immediately due and payable.
<PAGE>
A-15
"Event of Default" means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation
of and administrative or governmental body):
(a) default in the payment of any interest upon any Note of that
series, or any related Coupon, when such interest or Coupon
becomes due and payable, and continuance of such default for a
period of 7 days; or
(b) default in the payment of the principal of (or premium, if any,
on) any Note of that series as and when it shall become due and
payable at its Maturity, upon redemption, by declaration or
otherwise; or
(c) default in the performance, or breach, of any covenant or warranty
of the Issuer in the Indenture (other than a covenant or warranty
a default in performance of which or breach of which is elsewhere
in this section specifically dealt with or which has expressly
been included in the Indenture solely for the benefit of one or
more series of Notes other than that series), and continuance of
such default or breach for a period of 60 days after there has
been given, by registered or certified mail, to the Issuer by the
Trustee or to the Issuer and the Trustee by the Holders of at
least 25% in principal amount of all outstanding Notes a written
notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default"
hereunder; or
(d) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Issuer or any Material Subsidiary a
bankrupt or insolvent under any bankruptcy, insolvency or
analogous laws or appointing a receiver, liquidator, assignee,
trustee, sequestrator, rehabilitator (or other similar official)
of the Issuer or any Material Subsidiary or of any substantial
part of their respective properties, or ordering the winding up or
liquidation of their respective affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 90
consecutive days; or
(e) the institution by the Issuer or any Material Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the
consent by it to the institution of bankruptcy or insolvency
proceedings against it under any bankruptcy, insolvency or
analogous laws, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator, rehabilitator (or other similar
official) of the Issuer or any Material Subsidiary or of any
substantial part of their respective properties, or the making by
the Issuer or any Material Subsidiary of an assignment for the
benefit of creditors, or the admission by the Issuer or any
Material Subsidiary in writing of its inability to pay its debts
generally as they become due; or
(f) if (i) any other Debt of the Issuer or any Material Subsidiary
becomes due and payable prior to its Stated Maturity by reason of
an event of default (howsoever defined) or (ii) any such Debt of
the Issuer or any Material Subsidiary is not paid when due or, as
the case may be, within any applicable grace period or (iii) the
Issuer or any Material Subsidiary fails to pay when due (or, as
the case may be, within any applicable grace period) any amount
payable by it under any present or future guarantee for, or
indemnity in respect of, any Indebtedness of any Person or (iv)
any security given by the Issuer or any Material Subsidiary for
any Indebtedness of any Person or any guarantee or indemnity of
Debt of any Person by the Issuer or any Material Subsidiary
becomes enforceable by reason of default in relation thereto and
steps are taken to enforce such security save in any such case
where there is a bona fide dispute as to whether the relevant Debt
or any such guarantee or indemnity as aforesaid shall be due and
payable (following any applicable grace period), PROVIDED that in
each such case the Debt exceeds in the aggregate US$1,500,000 and
in each such case such
<PAGE>
A-16
event continues unremedied for a period of 30 calendar days (or
such longer period as the Trustee may in its sole discretion
consent to in writing upon receipt of written notice from the
Issuer); or
(g) if there is any final judgment or judgments for the payment of
money exceeding in the aggregate US$1,500,000 outstanding against
the Issuer or any Material Subsidiary which has been outstanding
for more than 60 calendar days from the date of its entry and
shall not have otherwise been discharged in full or stayed by
appeal, bond or otherwise; or
(h) if the Issuer or any Material Subsidiary shall generally fail to
pay its Debts as such Debts come due (except Debts which the
Issuer or such Material Subsidiary, as the case may be, may
contest in good faith generally) or 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); or
(i) if a warranty, representation, or other statement made by or on
behalf of the Issuer contained in the Indenture, the Notes or any
certificate or other agreement furnished in compliance with such
documents is false in any material respect when made and (except
where the Trustee shall have certified to the Issuer that it
considers such falsity to be incapable of remedy, in which case no
such notice or continuation as is hereinafter mentioned will be
required) such falsity continues for a period of 30 calendar days
(or such longer period as the Trustee may in its absolute
discretion permit) next following the service by the Trustee on
the Issuer of notice requiring the same to be remedied.
13. TAXATION
Payments of interest on the Special Notes Series A will be made subject to the
applicable Canadian withholding tax.
14. REPLACEMENT OF SPECIAL NOTES SERIES A
If any Special Note Series A shall at any time become mutilated, defaced,
destroyed, stolen or lost, it may be replaced at the cost of the claimant at the
specified office of the Trustee upon provision of such evidence, indemnity,
security or otherwise as the Issuer determines satisfactory. Mutilated or
defaced Special Notes Series A must be surrendered before replacements will be
issued.
15. GOVERNING LAW AND JURISDICTION
The Special Notes Series A are governed by, and shall be construed in accordance
with, the laws of the Province of Ontario and the laws of Canada applicable
thereto.
<PAGE>
SCHEDULE B
to the foregoing indenture made as of April 8, 1998 between Benz Energy Ltd. and
Montreal Trust Corporation of Canada, as Trustee.
1. MATURITY, INTEREST, CURRENCY OF DENOMINATION. The second series of Notes
to be issued, certified and delivered hereunder (the "Special Notes
Series B") shall have the rights, conditions, limitations and privileges
in this Schedule set forth, shall be denominated in U.S. dollars, shall
consist of and be limited to US.$12,500,000 in principal amount of Notes
and shall be designated as Special Notes Series B, shall mature on August
31, 2003 (the "Maturity Date") and shall bear interest at 9% per annum
from April 7, 1998, payable in lawful money of the United States after as
well as before maturity, default and judgment, with interest on amounts
in default at the same rate, payable semi-annually in arrears on March 31
and September 30, in each year, the first of such payments to be made on
September 30, 1998.
2. INTEREST ACCRUED. The Special Notes Series B shall cease to bear interest
(i) from their date of redemption unless, upon due presentation, payment
of the principal in respect of the Special Note Series B is improperly
withheld or refused or unless a default is otherwise made in respect of
such payment, in which event interest shall continue to accrue as
provided in the Indenture, or (ii) where the right to convert the Special
Notes Series B shall have been exercised in accordance with the
provisions of the Indenture, from the date of conversion of the Special
Notes Series B.
3. INTEREST FOR LESS THAN ONE YEAR. When interest is required to be
calculated in respect of a period of less than a full year, it shall be
calculated on the basis of the actual number of calendar days in such
year and the number of days elapsed.
4. PAYMENT OF PRINCIPAL, INTEREST. Payment of principal in respect of each
Special Note Series B shall only be made against presentation and
surrender (or, in the case of part payment only, endorsement) of the
relevant Special Note Series B at the principal office of the Trustee in
the city of Calgary. Payments of interest due on the Special Notes Series
B on an interest payment date shall be made forwarded or cause to be
forwarded by first class mail, postage prepaid, (or in the event of mail
service interruption by such other means as the Trustee and the
Corporation shall determine to be appropriate) to the Holder at the
address appearing on the appropriate regsiter.
5. PAYMENT ON REDEMPTION. Each Special Note Series B must be presented for
redemption.
6. UNCLAIMED AMOUNTS. All monies paid by the Corporation to the Trustee for
the payment of principal or interest on any Special Note Series B which
remain unclaimed at the end of two years after the principal on such
Special Note Series B will have become due and payable shall be repaid to
the Corporation and the Holder of such Special Note Series B thereafter
shall have only the rights of a creditor of the Corporation as described
in the Indenture or such rights as may be otherwise prescribed by
applicable law.
7. ROUNDING AMOUNTS. When making payments to Holders of Special Notes Series
B, fractions of US$0.01 shall be rounded down to the nearest whole cent.
8. FORM AND DENOMINATION OF NOTES. The Special Notes Series B will be issued
in fully registered form in denominations of US. $1,000 or integral
multiples thereof, serially numbered.
9. CONVERSION:
(a) Each Special Note Series B shall entitle the Holder thereof to
acquire upon conversion thereof the same principal amount of 9%
convertible debentures series 3 of the Corporation ("Convertible
Debentures Series 3") at no additional cost to the Holder.
(b) The Holder of any Special Note Series B may exercise the right
conferred on such holder to acquire the same principal amount of
Convertible Debentures Series 3 by surrendering, after April 8,
1998
<PAGE>
B-2
and on or before 5:00 p.m. (Toronto time) (the "Expiry Time")
on the earlier of (i) the fifth Business Day after the date of
issuance of a receipt for a Prospectus (as hereinafter defined)
from the Securities Commission (as hereinafter defined) in the
last of the Filing Jurisdictions (as hereinafter defined to issue
such receipt, and (ii) the date that is 120 days following the
date of the Indenture (the "Expiry Date"), to the Trustee the
certificate or certificates representing the Special Note Series B
together with a duly completed and executed exercise form. The
certificate or certificates representing the Special Note Series B
and the duly completed and executed exercise form referred to in
this subsection 9(b) shall be deemed to be surrendered only upon
personal delivery thereof or, if sent by mail or other means of
transmission, upon actual receipt thereof at, in each case, an
Exercise Office.
(c) Any exercise form referred to in subsection 9(b) shall be signed
by the Holder of the Special Notes Series B and shall specify the
principal amount of Convertible Debentures Series 3 which the
Holder thereof wishes to acquire (being not more than the
principal amount which such Holder is entitled to acquire pursuant
to the certificate(s) surrendered). If any of the Convertible
Debentures Series 3 subscribed for are to be issued to a person or
persons other than the Holder of the Special Notes Series B, such
Holder shall pay to the Corporation or the Trustee on behalf of
the Corporation, all applicable transfer or similar taxes and the
Corporation shall not be required to issue or deliver certificates
evidencing Convertible Debentures Series 3 unless or until such
Holder shall have paid to the Corporation, or the Trustee on
behalf of the Corporation, the amount of such tax or shall have
established to the satisfaction of the Corporation that such tax
has been paid or that no tax is due.
(d) Upon the conversion of Special Notes Series B pursuant to this
section 9, and subject to subsections 9(e) and (f), the
Convertible Debentures Series 3 subscribed for or, in the case of
a deemed conversion pursuant to subsection 9(i), all of the
Convertible Debentures Series 3 issuable pursuant to the Special
Notes Series B deemed to be converted, shall be deemed to have
been issued and after the date the certificate(s) representing
Special Notes Series B have been surrendered or the Expiry Date,
as applicable, the certificate or certificates representing the
Special Notes Series B shall be deemed to represent only the right
to receive a certificate or certificates representing the
Convertible Debentures Series 3 into which such Special Notes
Series B are converted and the Corporation shall have no
obligation to make any payment upon surrender of the certificate
or certificates representing the Special Notes Series B.
(e) The Holder of any Special Notes Series B may exercise such
Holder's right to acquire a principal amount of Convertible
Debentures Series 3 less than the aggregate principal amount which
the Holder is entitled to acquire pursuant to the surrendered
certificate or certificates representing Special Notes Series B.
In the event of any conversion of a principal amount of Special
Notes Series B less than the principal amount which the Holder is
entitled to convert, the Holder of the Special Notes Series B upon
such conversion shall, in addition, be entitled to receive,
without charge therefor, a new certificate or certificates in
respect ofthe balance ofthe principal amount ofthe Special Notes
Series B represented by the surrendered certificate or
certificates and not then converted.
(f) Notwithstanding anything herein contained, the Corporation shall
not be required, upon the conversion of any Special Notes Series
B, to issue Convertible Debentures Series 3 in a principal amount
which is not an integral multiple of US.$1,000 or to distribute
certificates which evidence Convertible Debentures Series 3 in a
principal amount which is not an integral multiple of US.$1,000.
(g) Subject to subsection 9(i), immediately after the Expiry Time, all
rights under any Special Notes Series B not exercised in
accordance with the terms and conditions of this Indenture shall
cease and terminate and such Special Note Series B shall be void
and of no further force or effect.
<PAGE>
B-3
(h) (i) The Trustee shall promptly account to the Corporation with
respect to Special Notes Series B converted. Any securities
or other instruments, from time to time received by the
Trustee shall be received in trust for, and shall be
segregated and kept apart by the Trustee in trust for, the
Corporation.
(ii) The Trustee shall record the particulars of Special Notes
Series B converted, which particulars shall include the
principal amount converted, the date ofconversion and the
serial numbers of all certificates surrendered or issued.
The Trustee shall provide such particulars in writing to
the Corporation within five Business Days of any request by
the Corporation therefor.
(i) At the Expiry Time, the rights of all Holders of Special Notes
Series B (other than Special Notes Series B in respect of which
the Holder thereof duly exercises its right to acquire Convertible
Debentures Series 3 pursuant to subsection 9(a)) to acquire
Convertible Debentures Series 3 shall be exercised by the Trustee
on behalf of such Holders without any further action on the part
of such Holders or the Corporation and the Convertible Debentures
Series 3 issuable thereby shall be deemed to be issued to the
Noteholders at such time. The Corporation shall cause to be
delivered to the principal office of the Trustee in the city of
Calgary (the "Exercise Office") where the certificate or
certificates representing such Special Notes Series B is or are
surrendered, to the Person or Persons specified in the exercise
form a certificate or certificates for the appropriate principal
amount of Convertible Debentures Series 3 upon actual receipt at
the Exercise Office of the certificate or certificates
representing such Special Notes Series B together with all
unmatured Coupons together with any payment of the nature referred
to in subsection 9(c).
(j) Notwithstanding anything herein contained, Convertible Debentures
Series 3 will only be issued pursuant to any conversion of Special
Note Series B in compliance with the securities laws of any
applicable jurisdiction, and without limiting the generality of
the foregoing, in the event that the Special Notes Series B are
converted pursuant to subsection 9(a) or deemed to have been
converted pursuant to subsection 9(i) prior to the issuance of a
receipt for a (final) prospectus regarding the distribution of
Convertible Debentures Series 3 upon the conversion of Special
Notes Series B (the "Prospectus") by the securities commission or
similar securities regulatory authority (a "Securities
Commission") in each of the provinces of British Columbia, Alberta
and Ontario (the "Filing Jurisdictions"), the certificates
representing the Convertible Debentures Series 3 thereby issued
will bear such legend as may, in the opinion of Counsel to the
Corporation, be necessary in order to avoid a violation of any
securities laws of any province in Canada or to comply with the
requirements of any stock exchange on which the Convertible
Debentures Series 3 or the securities ofthe Corporation into which
the Convertible Debentures Series 3 may be converted (the
"Underlying Securities") are listed, provided that if, at any
time, in the opinion of counsel to the Corporation, such legends
are no longer necessary in order to avoid a violation of any such
laws, or the Holder of any such legended certificate, at the
Holder's expense, provides the Corporation with evidence
satisfactory in form and substance to the Corporation (which may
include an opinion of counsel satisfactory to the Corporation) to
the effect that such holder is entitled to sell or otherwise
transfer such Convertible Debentures Series 3 in a transaction in
which such legends are not required, such legended certificate may
thereafter be surrendered to the Corporation in exchange for a
certificate which does not bear such legend.
(k) If a receipt for a Prospectus has not been obtained on or prior to
5:00 p.m. (Toronto time) on the date 120 days after the date of
this Indenture (the "Qualification Deadline") from the Securities
Commission in each of the provinces of British Columbia and
Ontario, each Noteholder holding Special Notes Series B wherever
situate shall have the right to receive upon conversion an
additional 10% of the Underlying Securities to be issued on
conversion of the Convertible Debentures Series 3.
<PAGE>
B-4
(l) If a registration statement relating to the Underlying Securities
has not been filed with and declared effective by the United
States Securities and Exchange Commission on or before 5:00 p.m.
(Toronto time) on the date 180 days after the date of this
Indenture (the "Registration Deadline") each Holder of Special
Notes Series B shall have the right to receive upon conversion an
additional 10% of the Underlying Securities to be issued on
conversion of the Convertible Debentures Series 3.
10. REDEMPTION. The Special Notes Series B shall be redeemable, in whole or
in part, at the option of the Corporation at any time after March 31,
2002 and prior to maturity at the principal amount thereof to be
redeemed, together with accrued and unpaid interest.
11. CERTIFICATES. The Special Notes Series B and the certificate of the
Trustee to be endorsed on the Special Notes Series B shall respectively
be substantially in the form set out in Exhibit 2 hereto with such
appropriate insertions, omissions, substitutions and variations as may be
approved or permitted under the terms of this Indenture and/or as the
Trustee may approve.
12. LEGENDS. Until such time as the same no longer required under applicable
requirements of the U.S. Securities Act or applicable state laws, all
certificates representing the Special Notes Series B (and all
certificates issued in exchange therefor or in substitution thereof)
shall bear, in addition to any other legend(s) required by Canadian
securities laws and policies, the following legends:
THIS SPECIAL NOTE AND THE SECURITIES ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.
THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE
BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION OR
(B) OUTSIDE OF THE UNITED STATES IN ACCORDANCE WITH REGULATION S
UNDER THE U.S. SECURITIES ACT, IF APPLICABLE (OR SUCH SUCCESSOR
RULE OR REGULATION AS THEN IN EFFECT), (C) INSIDE THE UNITED
STATES (I) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE
U.S. SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF
APPLICABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS, OR (2) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION
UNDER THE U.S. SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES
LAWS, AND THE HOLDER HAS PRIOR TO SUCH SALE FURNISHED TO THE
COMPANY AN OPINION OF COUNSEL OF RECOGNIZED STANDING, REASONABLY
SATISFACTORY TO THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
HOLD PERIOD AND MAY NOT BE TRADED IN BRITISH COLUMBIA UNTIL AFTER
THE FIRST ANNIVERSARY OF THE DATE OF ISSUE HEREOF EXCEPT AS
PERMITTED BY THE SECURITIES ACT (BRITISH COLUMBIA) AND RULES MADE
THEREUNDER
THIS SPECIAL NOTE 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 COMPLIANCE WITH THE
PROSPECTUS AND REGISTRATION REQUIREMENTS THEREIN OR AVAILABLE
EXEMPTIONS THEREFROM.
<PAGE>
B-5
- --------------------------------------------------------------------------------
EXHIBIT 2
FACE OF SPECIAL NOTE SERIES B
- --------------------------------------------------------------------------------
Denomination US $-
Certificate No. -
- --------------------------------------------------------------------------------
BENZ ENERGY LTD.
9% Special Notes, Series B due August 31, 2003
Benz Energy Ltd. (the "Issuer") for value received, hereby promises to pay to
on August 31, 2003 or on such earlier date as the principal sum hereunder
mentioned may become repayable in accordance with the terms and conditions
endorsed hereon the principal sum of
[US.$1,000 AND INTEGRAL MULTIPLES THEREOF]
together with interest thereon at the rate of 9% per annum from April 7, 1998,
payable in lawful money of the United States, after as well as before maturity,
default and judgement, with interest on amounts in default at the same rate,
semiannually in arrears on March 31 and September 30 in each year, the first
such payment to be made on September 30, 1998. This Special Note is issued
subject to and with the benefits of a note indenture made April 8, 1998 (the
"Indenture") between the Issuer and Montreal Trust Company of Canada (the
"Trustee") and the Terms and Conditions endorsed hereon.
This Special Note Series B shall not be valid or enforceable for any purpose
unless and until this Special Note has been certified by or on behalf of the
Trustee.
IN WITNESS WHEREOF the Issuer has caused this Special Note Series B to be
executed by the facsimile signature of the Senior Vice-President of the Issuer.
BENZ ENERGY LTD.
By:
------------------------------
Senior Vice-President
Dated April 8, 1998
Issued in Houston, Texas
<PAGE>
B-6
CERTIFICATE OF TRUSTEE
This is one of the Special Notes Series B described in the Indenture referred to
above.
MONTREAL TRUST COMPANY OF CANADA
By:
-----------------------------
<PAGE>
B-7
- --------------------------------------------------------------------------------
TRANSFER FORM
BENZ ENERGY LTD.
9% Special Notes, Series A due August 31, 2003
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
to ______________ ______________________________________ [NAME OF TRANSFEREE],
_________________ principal amount of 9% Special Notes, Series B of Benz Energy
Ltd. registered in the name of the undersigned on the records of Montreal Trust
Company of Canada represented by the certificate attached and irrevocably
appoints the attorney of the undersigned to transfer the said securities on the
books or register with full power of substitution.
DATED the ____ day of ________________, 19___.
- -----------------------------------
(Signature of Special Noteholder)
- -----------------------------------
Signature Guaranteed
Instructions:
1. Signature of the Noteholder must be the signature of the person appearing
on the face of this certificate.
2. If the Transfer Form is signed by a trustee, executor, administrator,
curator, guardian, attorney, officer of a corporation or any person
acting in a fiduciary or representative capacity, the certificate must be
accompanied by evidence of authority to sign satisfactory to the Trustee
and the Issuer.
3. The signature on the Transfer Form must be guaranteed by an authorized
officer of a chartered bank, trust company or an investment dealer who is
a member of a recognized stock exchange.
4. SPECIAL NOTES SHALL ONLY BE TRANSFERABLE IN ACCORDANCE WITH APPLICABLE
LAWS. THE TRANSFER OF SPECIAL NOTES TO A PURCHASER NOT RESIDENT IN A
FILING JURISDICTION MAY RESULT IN THE CONVERTIBLE DEBENTURES OBTAINED
UPON THE EXERCISE OF THE SPECIAL NOTES (WHETHER AFTER OR BEFORE OBTAINING
RECEIPTS FOR A FINAL PROSPECTUS RELATING TO THE DISTRIBUTION OF
CONVERTIBLE DEBENTURES UPON EXERCISE OF SPECIAL NOTES) NOT BEING FREELY
TRADEABLE IN THE JURISDICTION WHERE SUCH PURCHASER IS RESIDENT.
<PAGE>
B-8
- --------------------------------------------------------------------------------
CONVERSION FORM
TO: BENZ ENERGY LTD.
MONTREAL TRUST COMPANY OF CANADA
The undersigned holder of the within Note hereby irrevocably elects to convert
such Note in respect of US.$
principal amount thereof to the same principal amount of Convertible Debentures
Series 3 of Benz Energy Ltd. in accordance with the terms of the Indenture
referred to in the Note and directs that the Convertible Debentures Series 3
issuable and deliverable upon the conversion be issued and delivered to the
person indicated below.
* If less than the flill principal amount of the within Note is to
be converted, indicate in the space provided the principal amount
(which must be US.$1,000 or integral multiples thereof) to be
converted.
Dated:
---------------------------- -----------------------------------
SIGNATURE OF HOLDER
Name:
---------------------------- -----------------------------------
(Address)
<PAGE>
B-9
- --------------------------------------------------------------------------------
TRUSTEE
Montreal Trust Company of Canada
Suite 600 Western Gas Tower
530 - 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
and/or such other or further Trustee and/or specified offices as may from
time to time be appointed by the Issuer.
<PAGE>
B-10
TERMS AND CONDITIONS OF THE SPECIAL NOTES, SERIES B
This Special Note Series B is one ofthe securities of Benz Energy Ltd. (the
"Issuer") issued or issuable in one or more series pursuant to a note
indenture made April 8, 1998 (the "Indenture") between the Issuer and
Montreal Trust Company ofCanada (the "Trustee"), and which includes the form
of the Special Notes Series B. The statements in these Terms and Conditions
include summaries of, and are subject to, the detailed provisions of and
definitions in the Indenture. All capitalized terms used and not otherwise
defined herein shall have the respective meanings set forth in the Indenture.
Copies of the Indenture are available for inspection at the specified offices
of the Trustee. The holders of the Special Notes Series B (the "Noteholders")
will be deemed to have notice of, and will be deemed to have taken such
Special Notes Series B subject to, all of the provisions of the Indenture.
1. FORM, DENOMINATION AND TITLE
The definitive Special Notes Series B are issued in fully registered form,
serially numbered, in denominations of US.$1,000 and integral multiples
thereof.
2. STATUS
The Special Notes Series B are direct, unconditional, unsecured and
unsubordinated obligations of the Issuer and rank and will at all times rank
PAN PASSU amongst themselves and with all other series of Special Notes
issued under the Indenture and at least PAN PASSU with all other unsecured
obligations (other than in respect of statutorily preferred creditors) of the
Issuer from time to time outstanding.
3. MATURITY, INTEREST AND CURRENCY OF DENOMINATION
The Special Notes Series B shall mature on August 31, 2003 (the "Maturity
Date") and shall bear interest at 9% per annum from April 7, 1998, payable in
lawful money of the United States after as well as before maturity, default
and judgment, with interest on amounts in default at the same rate, payable
semi-annually in arrears on March 31 and September 30, in each year, the
first of such payments to be made on September 30, 1998. Interest in respect
of a period of less than one year will be calculated on the basis of the
actual number of calendar days in such year and the number of days elapsed.
4. INTEREST ACCRUED
The Special Notes Series B shall cease to bear interest (i) from their date
of redemption unless, upon due presentation, payment of the principal in
respect of the Special Note Series B is improperly withheld or refused or
unless a default is otherwise made in respect of such payment, in which event
interest shall continue to accrue as provided in the Indenture, or (ii) where
the right to convert the Special Notes Series B shall have been exercised in
accordance with the provisions of the Indenture, from the date of conversion
of the Special Notes Series B.
5. PAYMENT OF PRINCIPAL, INTEREST
Payment of principal in respect of each Special Note Series B shall only be
made against presentation and surrender (or, in the case of part payment
only, endorsement) of the relevant Special Note Series B at the specified
office of the Trustee. Payments of interest due on the Special Notes Series B
on an interest payment date shall be forwarded or cause to be forwarded by
first class mail, postage prepaid, (or in the event of mail service
interruption by such other means as the Trustee and the Issuer shall
determine to be appropriate) to the Holder at the address appearing on the
appropriate register.
6. PAYMENT ON REDEMPTION
Each Special Note Series B must be presented for redemption.
<PAGE>
B-11
7. UNCLAIMED AMOUNTS
All monies paid by the Issuer to the Trustee for the payment of principal or
interest on any Special Note Series B which remain unclaimed at the end of two
years after the principal on such Special Note Series B will have become due and
payable shall be repaid to the Issuer and the holder of such Special Note Series
B thereafter shall have only the rights of a creditor of the Issuer as described
in the Indenture or such rights as may be otherwise prescribed by applicable
law.
8. ROUNDING AMOUNTS
When making payments to holders of Special Notes Series B, fractions of US$0.01
shall be rounded down to the nearest whole cent.
9. CONVERSION
Each Special Note entitles the holder thereof to acquire the same principal
amount of 9% convertible debentures, Series 3 (the "Convertible Debentures") of
the Issuer at no additional cost, at any time on or before 5:00 p.m. (Toronto
time) (the "Expiry Time") on the earlier of (i) the fifth business day after the
date of issuance of a receipt from the securities commission or similar
securities regulatory authority in the last of the provinces of Alberta, British
Columbia and Ontario (the "Qualifying Jurisdictions") to issue such receipt for
a final prospectus qualifying the issue of Convertible Debentures to be issued
upon the exercise of the Special Notes (the "Prospectus"); and (ii) the date
that is 120 days following the date of the Indenture (the "Closing Date"). Any
Special Notes Series B not exercised prior to the Expiry Time shall be exercised
by the trustee of the Special Notes Series B and the Convertible Debentures
issued to the Noteholders immediately prior to the Expiry Time without any
further action on the part of the holder.
If a receipt for a Prospectus has not been obtained from the Securities
Commission in each of the provinces of British Columbia and Ontario
Jurisdictions on or before 5:00 p.m. (Toronto time) on the date 120 days
following the Closing Date then each holder of Special Notes Series B will be
entitled to receive, upon exercise of such holder's conversion rights under the
Convertible Debentures, without payment ofadditional consideration, 110% ofthe
number of Common Shares that the principal amount thereof was previously
exercisable for, subject to adjustment in certain circumstances.
If a registration statement relating to the Common Shares issuable upon
conversion of the Convertible Debentures is not filed with and declared
effective by the United States Securities and Exchange Commission on or before
5:00 p.m. (Toronto time) on the date 180 days following the Closing Date, then
each holder of Special Notes Series B will be entitled to receive, upon exercise
of such holder's conversion rights under the Convertible Debentures, without
payment of additional consideration, 110% of the number of Common Shares that
the principal amount thereof was previously exercisable for.
The holder of a Special Note Series B desiring to convert such Special Note
Series B in whole or in part into Convertible Debentures shall surrender such
Special Note Series B to the specified office ofthe Trustee together with the
Conversion Forrn on the back of such Special Note Series B or any other written
notice in a form satisfactory to the Trustee, in either case duly executed by
the holder or his executors or administrators or other legal representatives or
his or their attorney duly appointed by an instrument in writing in form and
executed in a manner satisfactory to the Trustee, exercising his right to
convert such Special Note Series B in accordance with the Indenture.
Any part, being US.$1,000 or an integral multiple thereof, of a Special Note
Series B of a denomination in excess of US.$1,000 may be converted.
10. REDEMPTION
The Special Notes Series B are redeemable, in whole or in part, at the option of
the Issuer at any time after March 31, 2002 and prior to maturity at the
principal amount thereofto be redeemed, together with accrued and unpaid
interest.
<PAGE>
B-12
11. MEETINGS OF NOTEHOLDERS AND MODIFICATION
The Indenture provides that modifications and alterations thereto and to the
Special Notes issued thereunder may be made if authorized by an extraordinary
resolution. Such a resolution must be passed by the affirmative vote of the
holders of not less than 66 2/3% of the principal amount of the Notes (or in the
case of a serial meeting, where the rights of the holders of Notes of one or
more series are affected differently than the rights of the holders of any other
series, of the principal amount of the Notes of the series so affected) issued
under the Indenture represented at a meeting at which holders of more than 25%
of the principal amount of the Notes (or Notes of a particular series, in the
case of a serial meeting) then outstanding are present in person or by proxy;
provided, however, that if a meeting or serial meeting is adjourned because not
more than 25% of the principal amount of such Notes is present in person or by
proxy then at the adjourned meeting an extraordinary resolution may be passed by
the affumative vote of the holders of not less than 66 2/3% of the principal
amount of the Notes represented at the meeting or serial meeting, as the case
may be. The term extraordinary resolution shall also include an instrument
signed by the holders of not less than 66 2/3% of the outstanding Notes or the
Notes of a particular series, as the case may be. An extraordinary resolution
passed at any meeting of the Noteholders will be binding on all Noteholders,
whether or not they are present at a meeting.
The Indenture also permits the Issuer and the Trustee, without the consent of
holders of Special Notes, to enter into indentures supplemental to the Indenture
for certain purposes, including without limitation (i) making provisions not
inconsistent with the Indenture as may be necessary of desirable with respect to
matters or questions arising under the Indenture which do not affect the
substance thereof and which in the opinion of the Trustee, it may be expedient
to make, provided that the Trustee shall be of the opinion that such provisions
and modifications will not be prejudicial to the interests of the Noteholders,
(ii) providing for the issue, as permitted by the Indenture, of Notes of any one
or more series, (iii) making any modification of any of the provisions of this
Indenture or the Special Notes which is of a formal, minor or technical nature,
(iv) making any additions to, deletions from or alteration of the provisions of
this Indenture which, in the opinion of the Trustee, are not materially
prejudicial to the interests of the Noteholders and which are necessary or
advisable in order to incorporate, reflect or comply with legislation applicable
to indentures, (v) correcting or rectifying any ambiguities, defective
provisions, errors or omissions in the Indenture, provided that, in the opinion
of the Trustee, the rights of the Trustee and the Noteholders are in no way
prejudiced thereby and (vi) any other purpose not inconsistent with the terms of
this Indenture provided that, in the opinion of the Trustee, the rights of the
Trustee and of the Noteholders are in no way prejudiced thereby.
12. EVENTS OF DEFAULT
If an Event of Default described in clause (a) or (b) below with respect to
Notes of any series at the time outstanding occurs and is continuing, then in
every such case the Trustee or the Holders of not less than 25% in principal
amount of the outstanding Notes of that series may declare the principal amount
of all the Notes of that series to be due and payable immediately, by a notice
in writing to the Issuer (and to the Trustee if given by Holders), and upon any
such declaration such principal amount (or specified portion thereof) shall
become immediately due and payable. If an Event of Default described in clause
(c), (d), (e), (f), (g), (h) or (i) below occurs and is continuing, then in
every such case the Trustee or the Holders of not less than 25% in principal
amount of all the Notes then outstanding may declare the principal amount of all
the outstanding Notes to be due and payable immediately, by a notice in writing
to the Issuer (and to the Trustee if given by the Holders) and upon any such
declaration such principal amount (or specified portion Thereof) shall become
immediately due and payable.
"Event of Default" means any one of the following events (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of and administrative or governmental
body):
(a) default in the payment of any interest upon any Note of that
series, or any related Coupon, when such interest or Coupon
becomes due and payable, and continuance of such default for a
period of 7 days; or
<PAGE>
B-13
(b) default in the payment of the principal of (or premium, if any,
on) any Note of that series as and when it shall become due and
payable at its Maturity, upon redemption, by declaration or
otherwise; or
(c) default in the performance, or breach, of any covenant or
warranty of the Issuer in the Indenture (other than a covenant
or warranty a default in performance of which or breach of
which is elsewhere in this section specifically dealt with or
which has expressly been included in the Indenture solely for
the benefit of one or more series of Notes other than that
series), and continuance of such default or breach for a period
of 60 days after there has been given, by registered or
certified mail, to the Issuer by the Trustee or to the Issuer
and the Trustee by the Holders of at least 25% in principal
amount of all outstanding Notes a written notice specifying
such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(d) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Issuer or any Material Subsidiary a
bankrupt or insolvent under any bankruptcy, insolvency or
analogous laws or appointing a receiver, liquidator, assignee,
trustee, sequestrator, rehabilitator (or other similar official)
of the Issuer or any Material Subsidiary or of any substantial
part of their respective properties, or ordering the winding up or
liquidation of their respective affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 90
consecutive days; or
(e) the institution by the Issuer or any Material Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the
consent by it to the institution of bankruptcy or insolvency
proceedings against it under any bankruptcy, insolvency or
analogous laws, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator, rehabilitator (or other similar
official) of the Issuer or any Material Subsidiary or of any
substantial part of their respective properties, or the making by
the Issuer or any Material Subsidiary of an assignment for the
benefit of creditors, or the admission by the Issuer or any
Material Subsidiary in writing of its inability to pay its debts
generally as they become due; or
(f) if (i) any other Debt of the Issuer or any Material Subsidiary
becomes due and payable prior to its Stated Maturity by reason of
an event of default (howsoever defined) or (ii) any such Debt of
the Issuer or any Material Subsidiary is not paid when due or, as
the case may be, within any applicable grace period or (iii) the
Issuer or any Material Subsidiary fails to pay when due (or, as
the case may be, within any applicable grace period) any amount
payable by it under any present or future guarantee for, or
indemnity in respect of, any Indebtedness of any Person or (iv)
any security given by the Issuer or any Material Subsidiary for
any Indebtedness of any Person or any guarantee or indemnity of
Debt of any Person by the Issuer or any Material Subsidiary
becomes enforceable by reason of default in relation thereto and
steps are taken to enforce such security save in any such case
where there is a bona fide dispute as to whether the relevant Debt
or any such guarantee or indemnity as aforesaid shall be due and
payable (following any applicable grace period), PROVIDED that in
each such case the Debt exceeds in the aggregate US$1,500,000 and
in each such case such event continues unremedied for a period of
30 calendar days (or such longer period as the Trustee may in its
sole discretion consent to in writing upon receipt of written
notice from the Issuer); or
(g) if there is any final judgment or judgments for the payment of
money exceeding in the aggregate US$1,500,000 outstanding against
the Issuer or any Material Subsidiary which has been outstanding
for more than 60 calendar days from the date of its entry and
shall not have otherwise been discharged in full or stayed by
appeal, bond or otherwise;
(h) if the Issuer or any Material Subsidiary shall generally fail to
pay its Debts as such Debts come due (except Debts which the
Issuer or such Material Subsidiary, as the case may be, may
contest in good faith generally) or 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
<PAGE>
B-14
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); or
(i) if a warranty, representation, or other statement made by or on
behalf of the Issuer contained in the Indenture, the Notes or any
certificate or other agreement furnished in compliance with such
documents is false in any material respect when made and (except
where the Trustee shall have certified to the Issuer that it
considers such falsity to be incapable of remedy, in which case no
such notice or continuation as is hereinafter mentioned will be
required) such falsity continues for a period of 30 calendar days
(or such longer period as the Trustee may in its absolute
discretion permit) next following the service by the Trustee on
the Issuer of notice requiring the same to be remedied.
13. TAXATION
Payments of Interest on the Special Notes Series B will be made subject to the
deduction of applicable Canadian withholding tax.
The Issuer will, subject to certain exceptions and limitations set forth below,
pay, as additional interest, such additional amounts (the "Additional Amounts")
to the holder of any Special Note Series B as may be necessary in order that
every net payment of the principal or interest on such Special Note Series B,
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 Canada (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 Canada (or any political subdivision thereof) otherwise
than by the mere holding of the Special Note Series B or the receipt of payments
made under or with respect to the Special Note Series B AND PROVIDED THAT THE
SUM OF SUCH ADDITIONAL AMOUNTS AND INTEREST OTHERWISE PAYABLE, SHALL NOT EXCEED
(AND FOR GREATER CERTAINTY THE ISSUER WILL NOT BE OBLIGATED TO PAY IN EXCESS OF)
10/9 OF THE AMOUNT OF INTEREST OTHERWISE PAYABLE.
In addition, the Issuer will indemnify and hold harmless each holder of a
Special Note Series B (subject to the exclusion and limitation set forth above)
and will, upon written request of each holder (subject to the exclusion and
limitation 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 Canada and paid by the holder as a result of payments
made under or with respect to the Special Notes Series B. Any payment made
pursuant to this paragraph shall be considered an Additional Amount.
If, at any time, the Trustee is required by law to make any deduction or
withholding from any sum payable by it hereunder (or if thereafter there is any
change in the rates at which or the manner in which such deductions or
withholdings are calculated), the Issuer shall promptly notify the Trustee and
shall deliver to the Trustee, within thirty days after it has made such payment
to the applicable authority, an original receipt (or a certified copy thereof)
issued by such authority evidencing the payment to such authority of all amounts
so required to be deducted or withheld in respect of each Special Note Series B.
If the Issuer becomes generally subject at any time to any taxing jurisdiction
other than or in addition to Canada, references in these Conditions to Canada
shall be read and construed as reference to Canada and/or to such other
jurisdiction.
Any reference in these Conditions to interest in respect of the Special Notes
Series B shall be deemed also to refer to any Additional Amounts which may be
payable under this Condition.
<PAGE>
B-15
14. REPLACEMENT OF SPECIAL NOTES SERIES B
If any Special Note Series B shall at any time become mutilated, defaced,
destroyed, stolen or lost, it may be replaced at the cost of the claimant at the
specified office of the Trustee upon provision of such evidence, indemnity,
security or otherwise as the Issuer determines satisfactory. Mutilated or
defaced Special Notes Series B must be surrendered before replacements will be
issued.
15. GOVERNING LAW AND JURISDICTION
The Special Notes Series B are governed by, and shall be construed in accordance
with, the laws of the Province of Ontario and the laws of Canada applicable
thereto.
<PAGE>
DATED AS OF APRIL 20,1999
BENZ ENERGY LTD.
AND
MONTREAL TRUST COMPANY OF CANADA
TRUSTEE
FIRST SUPPLEMENTAL NOTE INDENTURE
<PAGE>
THIS FIRST SUPPLEMENTAL NOTE INDENTURE made as of the 20th day of April, 1999
BETWEEN:
BENZ ENERGY LTD., a corporation continued under the laws of
the Yukon Territories having its registered office in the City
of Whitehorse in the Yukon Territories
(hereinafter called the "Corporation")
OF THE FIRST PART
-and-
MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated
under the laws of Canada and having an office in the City of
Calgary in the Province of Alberta
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS the Corporation and the Trustee entered into a Note Indenture dated
as of April 8,1998 (the "Note Indenture"); and
WHEREAS the Corporation created and issued Notes as provided under the terms
of the Note Indenture; and
WHEREAS the Corporation desires to become domesticated in the State of
Delaware and in connection therewith has requested that the Note Indenture be
amended in anticipation of such migration; and
WHEREAS the Corporation and the Trustee now desire to amend the Note
Indenture in certain respects to reflect amendments that have been approved
by one or more Extraordinary Resolutions passed by Noteholders in accordance
with the terms of Article 9 of the Note Indenture, those amendments are more
fully set forth below; and
WHEREAS the Corporation and the Trustee now desire to amend the Terms and
Conditions of Special Notes, Series A issued in accordance with the terms of
the Note Indenture in certain respects to reflect amendments that have been
approved by the Series A Noteholders pursuant to an Extraordinary Resolution
passed in accordance with the terms of Article 9 of the Trust Indenture,
those amendments are more fully set forth below.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this FIRST SUPPLEMENTAL NOTE INDENTURE and intending to be
legally bound, the undersigned agree as follows:
<PAGE>
- 2 -
1. AMENDMENT TO NOTE INDENTURE. The Note Indenture shall remain in full
force and effect subject to the following amendments:
1.1 The definition of Affiliate in Article 1.1 of the Note Indenture is
hereby amended by deleting the phrase "BUSINESS CORPORATIONS ACT
(Yukon)" and inserting therefor the following:
"General Corporation Law of the State of Delaware".
1.2 Article 1.1 of the Note Indenture is hereby amended by deleting the
definition of "Counsel" and inserting therefor the following:
"COUNSEL" means a barrister or solicitor or attorney or firm of
barristers and solicitors or firm of attorneys retained by the Trustee
or retained by the Corporation and acceptable to the Trustee;
1.3 Article 1.1 of the Note Indenture is hereby amended by deleting the
definition of "Long Term Debt" and inserting therefor the following:
"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, and shall include any amounts outstanding under the Bank
One Credit Facility and the EnCap Credit Facility plus (ii) the nominal
amount of any preferred stock issued by the Corporation and its
Subsidiaries;
1.4 Article 1.1 of the Note Indenture is hereby amended by deleting the
definition of "Taxes" and inserting therefor the following:
"TAXES" means all taxes of any kind or nature whatsoever including,
without limitation, all federal, provincial, municipal and local taxes,
income taxes, capital taxes, levies, imposts, stamp taxes, royalties,
duties, charges to tax, value added taxes, commodity taxes, goods and
services taxes, excise taxes, business taxes, property taxes and
withholding taxes charged, levied, collected, withheld or assessed by
any relevant authority within any jurisdiction in Canada or in the
United States having power to tax together with any penalties, fines,
additions to tax and interest thereon and any instalments in respect
thereof and, for greater certainty, does not include taxes charged,
levied, collected, withheld or assessed by an authority outside Canada
or the United States;
1.5 Article 5.9 of the Note Indenture is hereby deleted and the following
is inserted therefor:
5.9 LONG TERM DEBT AND TANGIBLE ASSETS
For the Corporation's fiscal years ending December 31,1998 and 1999,
the Corporation will, so long as any Note is outstanding, maintain
Tangible Assets equal to or greater than 100% of Long Term
<PAGE>
- 3 -
Debt at all times including after redemption of any redeemable
preference shares of the Corporation or any Subsidiary. For each of the
Corporation's fiscal years ending after December 31,1999, the
Corporation will, so long as any Note is outstanding, maintain Tangible
Assets equal to or greater than 140% of Long Term Debt at all times
including after redemption of any redeemable preference shares of the
Corporation or any Subsidiary. This ratio shall be calculated no later
than the 135th day following the end of each of the Corporation'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. For purposes of this Article, the
definition of (i) "Long Term Debt" shall not include obligations
related solely to the sale, purchase or delivery of hydrocarbons in
respect of production payments (whether volumetric or dollar
denominated) or net profits interests conveyed in transfers to third
parties; and (ii) "Tangible Assets" shall not include the value of any
hydrocarbons which have been conveyed as part of such production
payment or net profits interest.
1.6 Article 5.10(a) of the Note Indenture is hereby deleted.
1.7 Article 5.16 of the Note Indenture is hereby deleted and the following
is inserted therefor:
5.16 WITHHOLDING AND REPORTING REQUIREMENTS
To the extent permitted by law, the Corporation will provide to the
Trustee, the Paying Agent or to any Noteholder such statements,
certificates or other documentation concerning the organization or
operations of the Corporation as may be reasonably necessary to
establish any exceptions or exemptions from income tax withholding and
reporting requirements of any taxing authority within Canada or the
United States.
1.8 Article 5.17 of the Note Indenture is hereby deleted and the following
is inserted therefor:
5.17 MAINTENANCE OF LISTING FOR COMMON SHARES AND NOTES
While any Note remains outstanding, the Corporation will maintain a
listing for its common shares on a nationally recognized stock exchange
in Canada or the United States. For purposes of this Note Indenture, a
nationally recognized United States stock exchange shall include the
bulletin board maintained by Nasdaq.
1.9 Article 7.3 of the Note Indenture is hereby amended by deleting the
phrase "of Canada" and inserting therefor the following:
"of the United States".
1.10 The first grammatical paragraph of Article 8.1 of the Note Indenture is
hereby deleted and the following in inserted therefor:
<PAGE>
- 4 -
The Corporation shall not enter into any transaction, whether by way of
amalgamation, merger, reconstruction, re-organization, consolidation,
transfer, sale, lease or otherwise, whereby all or substantially all of
its undertaking, property and assets would become the property of any
other Person or, in the case of any such amalgamation, of the
continuing corporation resulting therefrom, but may do so if:
1.11 Article 8.1 of the Note Indenture is hereby amended by deleting
paragraph (a) and inserting therefor the following:
(a) such other Person or continuing corporation is a corporation
(the "Successor Corporation") incorporated under the laws of
Canada or any province thereof or any state of the United
States;
1.12 Article 9.1 of the Note Indenture is hereby amended by deleting the
phrase "Calgary" and inserting therefor the following:
"Houston, Texas".
1.13 Article 10.4 of the Note Indenture is hereby amended by deleting the
first grammatical paragraph and inserting therefor the following:
If the Trustee determines that mail service is or is threatened to be
interrupted at the time when the Trustee is required or elects to give
any notice to the Holder of Registered Notes hereunder, the Trustee
shall, notwithstanding the provisions hereof, give such notice by means
of publication in (i) The Globe and Mail, national edition, or any
other English language daily newspaper or newspapers of general
circulation in Canada; and (ii) in the Houston Chronicle or any
successor newspaper, in all cases once in each of two successive weeks,
and any notice so published shall be deemed to have been given on the
latest date on which the first publication takes place.
1.14 Article 11.8 of the Note Indenture is hereby amended by deleting the
phrase "chartered bank of Canada" and inserting therefor the following:
"Bank chartered in the United States and subject to regulation by the
Federal Deposit Insurance Corporation".
1.15 The Note Indenture is hereby amended by adding the following provision:
"9.19 AMENDMENTS TO TRUST INDENTURE
If this Indenture or the Notes are changed, modified or amended as
permitted in the Indenture, Noteholders shall be deemed to have
approved and consented to, and shall be bound by, any
<PAGE>
- 5 -
corresponding changes, modifications or amendments made to the Trust
Indenture and the Convertible Debentures to which the Notes are
exchangeable into provided such corresponding changes, modifications or
amendments are substantially equivalent to the changes made to this
Indenture and the Notes, with the same effect as if the Noteholders had
exchanged their Notes for Convertible Debentures and approved such
changes, modifications or amendments in their capacity as
Debentureholders under the Trust Indenture."
2. CONDITIONAL AMENDMENT TO THE NOTE INDENTURE.
The amendments to the Note Indenture set forth in Article 1 above are
conditioned upon the receipt by the Corporation and Trustee of
appropriate evidence of approval from the Holders of any other Series
of Notes that is required to approve amendments to the Trust Indenture.
The execution of this Supplement by the Corporation and the Trustee
shall be evidence of the satisfaction of this requirement.
3. COUNTERPARTS AND FORMAL DATE.
This Supplemental Indenture may be executed in several counterparts,
each of which when so executed shall be deemed to be an original, and
such counterparts together shall constitute one and the same instrument
and notwithstanding their date of execution shall be deemed to bear
date as of the 20th day of April, 1999. The execution of this First
Supplemental Note Indenture has been authorized pursuant to the terms
of an Extraordinary Resolution approved by the Holders of the Special
Notes, Series A.
4. GOVERNING LAW.
This Supplemental Indenture shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of
Canada applicable therein and shall be treated in all respects as
Ontario contracts.
5. LANGUAGE OF SUPPLEMENTAL INDENTURE.
The parties hereto have requested that this document be drafted in the
English language.
Les parties ont demande que le present document soit redige' en langue
anglaise.
<PAGE>
- 6 -
IN WITNESS WHEREOF the parties hereto have executed this First
Supplemental Indenture under their respective corporate seals and the hands
of their proper officers duly authorized in that behalf on the date first
hereinabove written.
BENZ ENERGY LTD.
By: /s/ Robert S. Herlin
-------------------------------------
Robert S. Herlin, SVP c/s
-------------------------------------
MONTREAL TRUST COMPANY OF CANADA
By:
-------------------------------------
c/s
By:
-------------------------------------
c/s
<PAGE>
EXHIBIT B
AMENDMENTS TO THE TERMS AND CONDITIONS OF THE 9% CONVERTIBLE DEBENTURES,
SERIES 2
The Terms and Conditions of 9% Convertible Debentures, Series 2 (the
"Series 2 Convertible Debentures") are hereby amended as follows.
1. Article 9(a) of Schedule B to the Trust Indenture (which Article is on
page B-3 of the Trust Indenture) is hereby amended by deleting the
price "Cdn.$1.70" and inserting therefor the price "Cdn.$1.40".
2. Article 10 of Schedule B to the Trust Indenture (which Article is on
page B-3 of the Trust Indenture) is hereby amended by deleting the
phrase "in Canada on which the Common Shares are traded" and inserting
therefor the following:
"on which the Common Shares are traded or if not available, then the
price as quoted on a national or regional quotation service such as the
NASDAQ National Market System or other similar quotation service
maintained by the National Quotation Bureau or any successor thereto".
3. The Transfer Form of Schedule B to the Trust Indenture (which Transfer
Form is on page B-7 of the Trust Indenture) is hereby amended by
deleting the phrase "Special Notes, Series A" and inserting therefor
the following:
"Convertible Debentures, Series 2".
4. The Transfer Form of Schedule B to the Trust Indenture (which Transfer
Form is on page B-7 of the Trust Indenture) is hereby amended by
deleting the phrase "Signature of Special Noteholder" and inserting
therefor the following:
"Signature of Debentureholder".
5. The first grammatical paragraph of Article 9 of the Terms and
Conditions of the Series 2 Convertible Debentures (which Article is on
page B-11 of the Trust Indenture) is hereby amended by deleting the
price "Cdn.$1.70" and inserting therefor the price "Cdn.$1.40".
6. The last grammatical paragraph of Article 9 of the Terms and Conditions
of the Series 2 Convertible Debentures (which Article is on page B-12
of the Trust Indenture) is hereby amended by deleting the phrase "in
Canada on which the Common Shares are traded" and inserting therefor
the following:
"on which the Common Shares are traded or if not available, then the
price as quoted on a national or regional quotation service such as the
NASDAQ National Market System or other similar quotation service
maintained by the National Quotation Bureau or any successor thereto".
1
<PAGE>
7. Article 10 of the Terms and Conditions of the Series 2 Convertible
Debentures (which Article is on page B-12 of the Trust Indenture) is
hereby amended by deleting the phrase "in Canada on which the Common
Shares are traded" and inserting therefor the following:
"on which the Common Shares are traded or if not available, then the
price as quoted on a national or regional quotation service such as the
NASDAQ National Market System or other similar quotation service
maintained by the National Quotation Bureau or any successor thereto".
8. Article 16(a) of the Terms and Conditions of the Series 2 Convertible
Debentures (which Article is on page B-15 of the Trust Indenture) is
hereby deleted and the following is inserted therefor:
For the Issuer's fiscal years ending December 31,1998 and 1999, the
Issuer will, so tong as any Convertible Debenture is outstanding,
maintain Tangible Assets equal to or greater than 100% of Long Term
Debt at all times including after redemption of any redeemable
preference shares of the Issuer or any Subsidiary. For each of the
Issuer's fiscal years ending after December 31, 1999, the Issuer will,
so long as any Convertible Debenture is outstanding, maintain Tangible
Assets equal to or greater than 140% of Long Term Debt at all times
including after redemption of any redeemable preference shares of the
Issuer or any Subsidiary. This ratio shall be calculated no later than
the 135th day following the end of each of the Issuer's fiscal years,
and shall be based upon the Issuer's annual audited financial
statements, as adjusted for Tangible Assets, and the Independent
Reserve Reports. For purposes of this provision, the definition of (i)
"Long Term Debt" shall not include obligations related solely to the
sale, purchase or delivery of hydrocarbons in respect of production
payments (whether volumetric or dollar denominated) or net profits
interests conveyed in transfers to third parties; and (ii) "Tangible
Assets" shall not include the value of any hydrocarbons which have been
conveyed as part of such production payment or net profits interest.
9. Article 16(b)(i) of the Terms and Conditions of the Series 2
Convertible Debentures (which Article is on page B-15 of the Trust
Indenture) is hereby deleted.
The Amendments set forth in this Exhibit B to the Terms and Conditions
of the 9% Convertible Debentures, Series 2 have been accepted and
agreed to by Benz Energy Ltd. effective as of April 20,1999.
BENZ ENERGY LTD.
By:
/s/ Robert S. Herlin
-----------------------------------
Robert S. Herlin, SVP
2
<PAGE>
EXHIBIT C
Amendments to the Terms and Conditions of the 9% Convertible Debentures,
Series 3
The Terms and Conditions of 9% Convertible Debentures, Series 3 (the
"Series 3 Convertible Debentures") are hereby amended as follows:
1. Article 9(a) of Schedule C to the Trust Indenture (which Article is on
page C-2 of the Trust Indenture) is hereby amended by deleting the price
"Cdn.$1.70" and inserting therefor the price "Cdn.$1.40".
2. Article 10 of Schedule C to the Trust Indenture (which Article is on
page C-3 of the Trust Indenture) is hereby amended by deleting the
phrase "in Canada on which the Common Shares are traded" and inserting
therefor the following:
"on which the Common Shares are traded or if not available, then the
price as quoted on a national or regional quotation service such as the
NASDAQ National Market System or other similar quotation service
maintained by the National Quotation Bureau or any successor thereto".
3. The Transfer Form of Schedule C to the Trust Indenture (which Transfer
Form is on page C-7 of the Trust Indenture) is hereby amended by
deleting the phrase "Special Notes, Series A" and inserting the following:
"Convertible Debentures, Series 3"
4. The Transfer Form of Schedule C to the Trust Indenture (which Transfer
Form is on page C-7 of the Trust Indenture) is hereby amended by
deleting the phrase "TRANSFER OF SPECIAL WARRANTS".
5. The Transfer Form of Schedule C to the Trust Indenture (which Transfer
Form is on page C-7 of the Trust Indenture) is hereby amended by deleting
the phrase "Signature of Special Noteholder" and inserting therefor the
following:
"Signature of Debentureholder".
6. The first grammatical paragraph of Article 9 of the Terms and Conditions
of the Series 3 Convertible Debentures (which Article is on page C-11 of
the Trust Indenture) is hereby amended by deleting the price "Cdn.$1.70"
and inserting therefor the price "Cdn.$1.40".
7. The last grammatical paragraph of Article 9 of the Terms and Conditions
of the Series 3 Convertible Debentures (which Article is on page C-12 of
the Trust Indenture) is hereby amended by deleting the phrase "in Canada
on which the Common Shares are traded" and inserting therefor the
following:
"on which the Common Shares are traded or if not available, then the
price as quoted on a national or regional quotation service such as the
NASDAQ National Market System or other similar quotation service
maintained by the National Quotation Bureau or any successor thereto".
8. Article 10 of the Terms and Conditions of the Series 3 Convertible
Debentures (which Article is on page C-12 of the Trust Indenture) is
hereby amended by deleting the phrase "in Canada on which the Common
Shares are traded" and inserting therefor the following:
3
<PAGE>
"on which the Common Shares are traded or if not available, then the
price as quoted on a national or regional quotation service such as the
NASDAQ National Market System or other similar quotation service
maintained by the National Quotation Bureau or any successor thereto".
9. The second, third, and fifth grammatical paragraphs of Article 15 of the
Terms and Conditions of the Series 3 Convertible Debentures (which
Article is on page C-15 of the Trust Indenture) are hereby amended by
deleting the references to "Canada" in each paragraph and inserting
therefor the phrase "Canada or the United States".
10. Article 16(a) of the Terms and Conditions of the Series 3 Convertible
Debentures (which Article in on page C-16 of the Trust Indenture) is
hereby deleted and the following is inserted therefor:
For the Issuer's fiscal years ending December 31, 1998 and 1999, the
Issuer will, so long as any Convertible Debenture is outstanding,
maintain Tangible Assets equal to or greater than 100% of Long Term Debt
at all times including after redemption of any redeemable preference
shares of the Issuer or any Subsidiary. For each of the Issuer's fiscal
years ending after December 31, 1999, the Issuer will, so long as any
Convertible Debenture is outstanding, maintain Tangible Assets equal to
or greater than 140% of Long Term Debt at all times including after
redemption of any redeemable preference shares of the Issuer or any
Subsidiary. This ratio shall be calculated no later than the 135th day
following the end of each of the Issuer's fiscal years, and shall be
based upon the Issuer's annual audited financial statements, as adjusted
for Tangible Assets, and the Independent Reserve Reports. For purposes
of this provision, the definition of (i) "Long Term Debt" shall not
include obligations related solely to the sale, purchase or delivery of
hydrocarbons in respect of production payments (whether volumetric or
dollar denominated) or net profits interests conveyed in transfers to
third parties; and (ii) "Tangible Assets" shall not include the value of
any hydrocarbons which have been conveyed as part of such production
payment or net profits interest.
11. Article 16(b)(i) of the Terms and Conditions of the Series 3 Convertible
Debentures (which Article is on page C-16 of the Trust Indenture) is
hereby deleted.
The Amendments set forth in this Exhibit C to the Terms and Conditions of
the 9% Convertible Debentures, Series 3 have been accepted and agreed to by
Benz Energy Ltd. effective as of April 20, 1999.
BENZ ENERGY LTD.
By: /s/ Robert S. Herlin
------------------------------------
Robert S. Herlin, SVP
4
<PAGE>
[LETTERHEAD]
September 29, 1999
Benz Energy Inc.
1000 Louisiana Street
15th Floor
Houston, Texas 77002
Gentlemen:
We have acted as counsel to Benz Energy Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act
of 1933, as amended, on Form SB-2 file no. 333-83651 (the "Registration
Statement") of the resale by certain selling security holders of (i) 239,701
shares of the Company's Class A, Series II Convertible Preferred Stock, par
value $1.00 per share, 101,407,269 shares of the Company's common stock, par
value $.01 per share, issuable upon conversion of the Class A, Series II
Convertible Preferred Stock, and 4,583,726 shares of the Company's common
stock, par value $.01 per share (collectively the "Issued Shares") and (ii)
3,974,923 shares of the Company's common stock, par value $.01 per share,
issuable upon the exercise of outstanding warrants to purchase common stock
(the "Warrant Shares," and together with the Issued Shares, the "Shares").
The Shares are to be sold from time to time in the over-the-counter market at
prevailing prices or as otherwise described in the Registration Statement.
In connection therewith, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of the Certificate of
Incorporation of the Company, the Bylaws of the Company, the records of
corporate proceedings with respect to the offering of the Shares and such
other documents and instruments as we have deemed necessary or appropriate
for the expression of the opinions expressed herein. We have also examined
the Registration Statement, as amended, covering the resale of the Shares.
We have assumed the authenticity and completeness of all records,
certificates and other instruments submitted to us, the conformity to
original documents of all records, certificates and other instruments
submitted to us as copies and the correctness of all statements of fact
contained in all records, certificates and other instruments we have
examined.
<PAGE>
Benz Energy Inc.
September 29, 1999
Page 2
Based on the foregoing, and having regard for such legal considerations
as we have deemed relevant, we are of the opinion that the Issued Shares are
duly and validly issued, fully paid and nonassessable and the Warrant Shares,
when issued in accordance with the terms of the warrant, will be duly and
validly issued, fully paid and nonassessable.
The opinions expressed herein relate solely to, are based solely upon
and are limited exclusively to the corporate law of the State of Delaware and
the federal laws of the United States of America, to the extent applicable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included as a part of the Registration Statement.
Very truly yours,
/s/ Porter & Hedges, L.L.P.
---------------------------
Porter & Hedges, L.L.P.
2
<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 28, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 1 to Form SB-2 of our report dated July
31, 1998 relating to the Statement of Revenues and Direct Operating Expenses of
the Oak Hill and Lisbon Properties for the period from inception (August 14,
1996) to December 31, 1996 and for the year ended December 31, 1997 acquired by
Benz Energy, Ltd. which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Houston, Texas
September 17, 1999
<PAGE>
[LETTERHEAD]
September 14, 1999
Benz Energy Ltd.
1000 Louisiana, Suite 1500
Houston, Texas 77002
Attention: Mr. Frank Falbo
CONSENT
To Whom It May Concern:
We consent to the references to our report on the Company's proved oil
and gas reserves as of January 1, 1999, that are made throughout the
Prospectus being used in connection with the Form SB-2 Registrations
Statement of Benz Energy, Ltd., and to references to our firm under the
caption "Experts" in the Prospectus.
Very truly yours,
R.A. LENSER AND ASSOCIATES, INC.
/s/ Ronald A. Lenser
---------------------------------------
Ronald A. Lenser
Registered Professional Engineer
PE No. 30558
RAL/gac
Houston, Texas
September 14, 1999